hong kong special report retailers expose the lack of warehouse facilities august 2014

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RETAILERS EXPOSE THE LACK OF

WAREHOUSE FACILITIES

HONG KONG LOGISTICS:

CBRE GLOBAL

RESEARCH AND

CONSULTING



























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Contents

Contents

3 Hong Kong logistics: retailers expose the lack of warehouse facilities

5 Logistics – a forgotten pillar of the Hong Kong economy

10 Supply-demand imbalance exposed

13 Retailers as a rising source of demand for logistics facilities

14 Implications of low warehouse vacancy environment

16 What is needed to facilitate sustainable development of the Hong Kong logistics sector?

19 The way forward – prepare for the metamorphosis



























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3 CBRE GLOBAL RESEARCH AND CONSULTING © CBRE Ltd. 2014

HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES

Hong Kong – the financial center and shopping paradise of Asia – was originally founded on less

glamorous activities when the city’s economy was dominated by the manufacturing sector, particularly

the garment, electronic and toy industries. Whilst most of this manufacturing has shifted across to the

Mainland, Hong Kong has retained its role as a key regional hub, creating significant demand for the

city’s trading and logistics services. These two service sectors account for a quarter of Hong Kong’s

GDP and employ around one-fifth of the city’s working population.

Financial services and tourism are the two other irreplaceable sectors for Hong Kong. They combined

to account for 20% of GDP and take up about 13% of the city’s labour force. The last decade has

seen phenomenal growth in Hong Kong’s retail and tourism sectors which has not only led to sky-

rocketing rents for retail shops but also that of warehouse rentals as the demand for space, much from

retailers directly and indirectly, has far outstripped the supply. Research and industry views on the future

development of the city’s logistics industry have estimated that 70 hectares of land is needed to support

growth over the next 15 years. Unless the border with the mainland is removed completely, replacing

significant amounts of warehouse space in Hong Kong with China to ease the current supply crunch

appears unlikely.

From a government policy perspective, industrial land sales for warehousing have been scarce, which

has led to little new supply in the past decade. In addition, vast amounts of current industrial stock is

being rezoned or revitalized to facilitate residential and commercial developments, further depleting the

available options for industrial occupiers. While the government has been proactive in recent times to

replenish domestic and commercial land supply, the industrial market has been largely left out of the

equation to the detriment of the land community.

The recent slowdown in tourism and retail sales growth does not stop CBRE from believing that Hong

Kong will remain one of the world’s leading shopping destinations in the future. In order to maintain

momentum to further develop Hong Kong’s tourism and retail sectors, the government needs to be

more proactive in facilitating logistics sector growth.

In this paper, we will demonstrate the growing relationship between the retail sector and the logistics

market in Hong Kong over recent years. The warehouse market is currently running on close to full

occupancy with a clear imbalance between occupier demand and supply. It is important to maintain

long-term housing market stability by allocating land resources for residential development. It is also

crucial to upkeep Hong Kong’s financial sector strength by facilitating the development of new office

clusters; however, it will handicap the growth of our retail and logistics sectors – two key pillars of the

Hong Kong economy – if we fail to address the storage needs of the retailers in the city for both their

local and regional distribution needs.

The rise of the Mainland ports and the growing availability of cross-border infrastructure networks may

eventually take further market share from Hong Kong in percentage terms but Hong Kong – a city of

seven million plus people and growing and on the doorstep of the emerging consumption powerhouse

of China – will have a long lasting presence as a regional trading and logistics hub.

Hong Kong logistics:

retailers expose the lack of

warehouse facilities



























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CBRE GLOBAL RESEARCH AND CONSULTING

This report was prepared by CBRE Hong Kong Research Team, which forms part of CBRE Global Research and Consulting—a network of preeminent researchers and

consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate.

© CBRE Ltd. 2014 Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy,

we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness.

This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior

written permission of CBRE.



























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5 © CBRE Ltd. 2014 CBRE GLOBAL RESEARCH AND CONSULTING


The success of Hong Kong’s banking and finance sector has created an illusion that there is more office

than industrial space. In fact, the opposite is true. According to the Rating and Valuation Department,

Hong Kong has approximately 260 mil sq ft of industrial space (internal floor area) as at the end of

2013, more than double the size of the office stock (118 mil sq ft).

The history of being a manufacturing hub between the 1960’s and 1980’s has left Hong Kong with a

large array of flatted factories, which now accounts for over 70% of the city’s industrial stock. These

former light manufacturing buildings are now primarily used either as offices for many small-to-medium

enterprises or storage, with only a limited stock still bearing production functions. As an example, the

last cotton mill in Hong Kong, Tai Hing Cotton Mill in Tuen Mun, has recently closed and it’s 500,000

sq ft of space was swiftly taken up for storage and distribution use. The second largest category of

industrial stock is warehouse (15%) with the balance being filled by specialized factories (12%) and

industrial/office (often referred as ‘I/O’) buildings (2%).

Logistics – a forgotten pillar

of the Hong Kong economy

Chart 1: Hong Kong industrial property stock

Source: Rating and Valuation Department, HKSAR Government,

April 2014.

71%

15%

12%

2%

Flatted Factories Warehouse

Specialized Factories Industrial/Office



























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In an attempt to fast track the transformation of old industrial areas into new office clusters, the

government started to launch a series of policy measures in 2010 to encourage redevelopment and

wholesale conversion of industrial buildings for commercial usage. A total of 126 applications have

been received thus far with 96 approved cases. The initiative has been crucial for facilitating more

commercial space for Hong Kong’s services sector development, however, it has led to a serious

reduction of industrial floor space and helped tighten vacancy rates to their current low levels. The

policy, while fast-tracking the gentrification of older industrial districts, has caused hardship for some

small-to-medium sized tenants who have been occupying these industrial buildings. In many cases, they

have been forced to relocate, to make way for the change of use, into buildings where the rentals are

significantly higher. The changing nature of the usage in these older areas has also led, to a certain

extent, significant additional traffic flow causing congestion and pollution problems.

Table 1: Implementation progress of revitalization measures for industrial buildings

Source: Development Bureau, HKSAR Government, June 2014.

Applications received Wholesale

conversion Redevelopment Total

TOTAL APPLICATIONS 109 17 126

Approved 81 15 96

Executed 55 7 62

Pending execution 7 4 11

Withdraw by applicants after approval 19 4 23

Under processing 12 2 14

Withdraw by applicants during processing 11 0 11

Rejected due to not meeting the eligibility

criteria

5 0 5

The industrial revitalization

policy has led to a serious

reduction of industrial floor

space and helped tighten

vacancy rates to their

current low levels.



























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Policy initiative Building

age Zoning Other conditions

Change of use of

specific unit(s)

within industrial

buildings -

Temporary waiver

N/A • Proposed use must be

always permitted in the

respective zones or planning

permission is obtained

• Standard rates will be charged

for upper floor industrial units

for conversion into office uses,

other than residential and

hotel purposes

• Waiver fee will be charged for

G/F industrial units for

conversion into other uses

subject to individual

assessment

Wholesale

conversion of

industrial

buildings

special waiver -

Nil waiver fees

15 years

or above

• “Industrial”, “Commercial”

and “Other Specified Uses

(Business)” (OU(B)) zones

• Proposed use must be




• Joint application by all owners

• Change of use for the lifetime

of the building or the current

lease period, whichever is

earlier

• No increase in building bulk,

height or GFA of the building

after conversion

• Undertake not to revert to

original industrial use

permitted on the lease during

the waiver period

• Complete conversion works

within 3 years

Compulsory sale

for redevelopment

of industrial

buildings -

May apply under

the Land

Ordinance for

compulsory sale

of the lot

30 years

or above

• Non-industrial zones (e.g.

“OU(B)“, “Residential”,

“Commercial”,

“Comprehensive

Development Area” (CDA))

• Eligible buildings: about 580

• Applicants should own at least

80% of the undivided shares of

the lot

• The lot must be redeveloped

(not for wholesale conversion)

Lease

modification for

redevelopment of

industrial

buildings -

“Pay for what you

build” in respect

of premium for

lease modification

N/A • Non-industrial zones (e.g.

“OU(B)”, “Residential”,

“Commercial”, “CDA”)

• Proposed use must be




• Eligible buildings: about

1,000

• Premium assessed on the basis

of optimal use and the

proposed development

intensity (i.e. GFA)

• Redevelopment to be

completed within 5 years

Source: Development Bureau, HKSAR Government; CBRE, August 2014.

Table 2: Key industrial revitalization policies



























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At the end of 2013, CBRE’s warehouse vacancy rate was 1.1% (decreasing further to 0.4% as of June

2014) although the government number stood at a slightly higher level of 4.6%. The discrepancy

reflects a difference in research methodologies and is also partly due to different stock baskets. The

government also reports a 5.8% vacancy rate for flatted factories at the end of 2013 but CBRE and

many other market participants believe that this figure is very much on the high side. A major reason for

the differential would appear to be the counting of properties which have been left vacant pending a

change of use wherein the tenants have already relocated. Either way, these numbers share a clear and

common fact that the industrial property sector is currently running on a stretched vacancy environment

which is a barrier for the development of Hong Kong’s logistics and retail sectors.

Chart 2: Hong Kong industrial properties vacancy rates

0%

2%

4%

6%

8%

10%

12%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Rating & Valuation Department Warehouse Vacancy Rate Rating & Valuation Department Flatted Factory Vacancy rate

CBRE Warehouse Vacancy Rate

Source: Rating and Valuation Department, HKSAR Government; CBRE, August 2014.

Indeed, stock withdrawal for revitalization is only a recent trend and a small driving force behind the low

vacancy rates. Warehouse stock has only increased from about 36.5 mil sq ft (internal floor area) at

end-2004 to 38.3 mil sq ft at end-2013, growing only by 5% in ten years or a CAGR of 0.5%.

Compared with the already low growth rate of 16% (1.5% CAGR) for retail space and 12% (1.2%

CAGR) for office space, there seems to be a huge lack of land policy support for warehouse

development. The same period saw flatted factories stock reduced from 188 mil sq ft to 184 mil sq ft, a

logical trend given the reduced demand for manufacturing and production plants in Hong Kong. It is

also to be noted that, in recent years, although there has been some ‘new’ industrial properties being

developed on industrial land, these schemes are usually built to Grade B office standards and occupiers

therein are using them for office purposes, masking the amount of new supply from official figures that

is useable for industrialists.

QUOTE:

“At the end of 2013, CBRE’s warehouse vacancy rate was 1.1%, decreasing further to

0.4% as of June 2014”

At the end of 2013, CBRE’s warehouse vacancy rate was

1.1%, decreasing further to 0.4% as of June 2014.



























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0

20

40

60

80

100

120

Residential Commercial Hotel & Mixed-Use Industrial

A major reason behind the slow growth in warehouse stock has been the lack of government land

tender sales for logistics usage. The last decade has seen only seen four industrial sites being sold by

the government, providing a mere 3.7 mil sq ft of logistics GFA, and represents only 6.2% of the

maximum GFA of all government land being auctioned or tendered (140 sites, excluding petrol filing

stations) during the period. This is not even enough to backfill the 6.8 mil sq ft of industrial stock

(factories and warehouses combined) that has been demolished during the period, effectively reducing

options for industrialist occupiers.

Chart 3: Hong Kong real estate stock growth by sector (2004-2013)

Source: Rating and Valuation Department, HKSAR Government; CBRE, August 2014.

Source: Lands Department, HKSAR Government, CBRE estimates 2013.

Chart 4: Hong Kong government land sales by usage (2004-2013)

Source: Lands Department, HKSAR Government; CBRE, August

2014.

No. of sites

4

Table 2: Hong Kong government industrial land sale (2004-2013)

Year District Lot No. Max GFA (sq ft) Purchaser

2008 Kwai Chung KCTL 507 694,272 New World Development

2010 Tsing Yi TYTL 180 1,046,245 Goodear

2012 Tsing Yi TYTL 181 1,033,344 China Merchants Holdings

2013 Tsing Yi TYTL 185 914,940 Mapletree

12 14

110

RETAIL

16%

OFFICE

12%

INDUSTRIAL

5%



























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The shortage in logistics/warehouse supply is in big contrast with the surge in occupier demand in

recent years, which has mainly been driven by Hong Kong’s overwhelming growth in its retail and trade

sectors.

A traditional shopping paradise for tourists from around the world, Hong Kong has long been a key

market for international retailers for the depth and breadth of its consumer market, particularly with the

fast development of its inbound tourism market in recent years. The city started to enjoy a phenomenal

tourist arrival growth when the Individual Visit Scheme (IVS) was first launched in 2003.

Supply-demand imbalance

exposed

Since then, tourist arrivals in Hong Kong have increased from about 15.5 mil a year prior to the

introduction of the Scheme to close to 55 mil last year, representing a CAGR of 13% per annum

between 2003 and 2013. Arrivals from mainland China have seen a particular strong growth of 17%

on a CAGR basis. Today, about 75% of the tourists in Hong Kong are from mainland China, a 1.3-

billion population market that nearly all consumer goods manufacturers and retailers would like to have

a share of.

-10%

0%

10%

20%

30%

40%

50%

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD May

2014

Number of tourists (LHS) Year-on-year growth (RHS)

Chart 5: Hong Kong total tourist arrivals (2000-2014)

Source: Hong Kong Tourism Board; CBRE, August 2014.

No. of tourists (million) Y-o-y growth (%)

About individual visitor scheme (IVS)

The scheme was first introduced in four Guangdong cities on 28 July 2003 as a liberalization measure

under the Closer Economic Partnership Arrangement. Since the implementation, the scheme has

expanded to a total of 49 cities, including Beijing, Shanghai, Shenzhen, and Chengdu. The Scheme

allows residents of the selected cities to visit Hong Kong in their individual capacity, valid for three

months or one year and good for one or two visits to Hong Kong. Eligible applicants may apply for a

new endorsement once the current one has expired or has been used up. There is no quota on the

number of endorsements to be issued.



























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Chart 6: Breakdown of tourist arrivals in Hong Kong by source market - 2013

Source: Hong Kong Tourism Board, Dec 2013.

In the eyes of many mainland Chinese, Hong Kong is an advanced and stylish city. While the expansion

pace of retailers in China has been remarkable in recent years, the city remains an attractive place for

shopping mainly for its lower prices (due to tax and currency advantages), wide product varieties and

the blend-in experience from traveling outside of the mainland without being too far away from home.

As such, international retailers see Hong Kong as a springboard to China, wanting to establish their

brands and test the market there before growing their footprints in the mainland. Even with the recent

slowdown in tourist arrival and retail sales growths, there were still 43 new retailers entered into Hong

Kong in 2013, according to a survey done by CBRE, the majority of which originated from Europe and

the US.

The strong influx of mainland Chinese tourists has contributed significant growth to Hong Kong’s total

retail sales. In the last ten years, total retail sales in Hong Kong has increased by 186% to reach HKD

494 billion in 2013, averaging 11% per annum compared with the 4.7% average annual growth for

the city’s GDP. To many international retailers, this represents unparalleled opportunities over the

sluggish business environment in the West; London, New York and Paris, for instance, have registered

total retail sales growth of 24%, 20% and 27%, respectively over the same period of time.

Chart 7: Total retail sales growth comparison (2000-2013)

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

London (y-o-y growth) Paris (y-o-y growth) New York (y-o-y growth) Hong Kong (y-o-y growth)

Source: Oxford Economics; Census and Statistics Departments, HKSAR Government; CBRE, August 2014.

Start of IVS

MAINLAND CHINA

75%

SOUTHEAST ASIA

6%

TAIWAN

4%

EUROPE

2%

USA & CANADA

3%

AUSTRALIA & NEW ZEALAND

1%

JAPAN

2%

OTHERS

7%



























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The rising presence of international brands in Hong Kong coupled with the organic growth of local

retailers combined to boost retail space demand, resulting in sky-high rents and capital values on the

back of stretched vacancy levels. This has helped to make Hong Kong the most expensive retail market

in the world, according to CBRE’s Global Retail View report. Average rents for high street shops in Tsim

Sha Tsui and Causeway Bay, two of Hong Kong’s most prominent tourist shopping districts, went up

92% and 76%, respectively between end-2008 and end-2013. These growth rates are the strongest

amongst all commercial property sectors.

Chart 8: Hong Kong prime street shops rental index

50

100

150

200

250

300

2008 2009 2010 2011 2012 2013 2014

Overall Tsim Sha Tsui Causeway Bay

Source: CBRE, Q2 2014.

Index (1996=100)

The public has raised serious concerns over rising retail rents as many community and mom & pop

retailers were forced to decentralize and give way to more tourist-oriented trades, thereby affecting

some of their daily consumption patterns and eroding the charm and convenience of traditional

shopfronts, ‘dai pai dongs’ and local shopping malls. While it has captured the attention of both the

government and the media, there is not much the government has done (or can do under a free market

mechanism!) other than imposing heavier stamp duty levies on investment transactions of retail

properties and other commercial real estate assets. However, logistics as a supporting sector hiding

behind Hong Kong’s retail market success has always been left out in the cold. Indeed, many retailers

are frustrated by the insufficient warehouse real estate in Hong Kong for not just their in-store

requirements but also their rapidly growing on-line sales requirements, which to a certain extent has

made warehouses become a secondary retail outlet. The recent take-up of over 100,000 sf of space in

Hong Kong by an international online retailer laid testament to this trend.

Strong retail sales growth has led to a surge in retained imports in Hong Kong, which effectively created

an enormous level of demand for warehouse facilities. In particular, consumer goods retained imports

doubled in terms of value between 2009 and 2013, which far outpaced the average retained import

growth of 59%. The share of retained imports also changed, with consumer goods growing from 20%

to 29% while foodstuffs (which is also a type of consumer good) also saw its share rising by 3

percentage points to 77% over this five-year period. The other categories shrank. In the 10 years to

2013, Hong Kong’s retained imports have increased by a CAGR of 8.7% compared with the 0.5%

growth in warehouse stock. As mentioned earlier in this paper, the Hong Kong warehouse market has

been running on high occupancy levels in recent years with vacancy falling from a year-end average of

5.3% between 2001 and 2006 to 1.4% between 2009 and 2013, and further down to 0.4% as at mid-

2014.



























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66%

16%

5%

4%

2% 7% Logistics

Manufacturing

Retail-related

Information

Technology

Services

Others

55%

4%

14%

15%

3%

9% Logistics

Manufacturing

Retail-related

Information

Technology

Services

Others

While tourist arrivals and retail sales growth have been robust, it is perhaps not as simple to conclude

that the retail sector is by far the most important standalone source of demand for warehouse or

logistics space in Hong Kong. While there are retailers running their own logistics operations and

leasing or owner-occupying warehouse space, many others are choosing to outsource their distribution

requirements to third-party logistics (3PL) operators, thereby providing indirect contributions to

warehouse demand. Nevertheless, warehouse landlords share the view that retailers are becoming an

increasingly important source of demand for space in recent years.

About 60% of the total warehouse stock is taken up by the logistics sector with the balance broadly

occupied by manufacturing, information technology, services, and retail-related sector tenants. With

approximately half of the 3PL business coming from retailers including fashion, electronics, F&B,

cosmetics, the effective contribution of warehouse demand from the retail sector is significant and

growing. From occupying around one-third of the warehousing market in the last decade, retailers have

been expanding rapidly. In 2013, retail sector tenants have grown to directly and indirectly take up

about half of the warehousing space in Hong Kong, showcasing the strength of the retail market. In

fact, retail is the only sector that has registered a positive net take-up in recent years. This is a trend

experienced not only in Hong Kong but also regionally, in line with the urbanization and income and

wealth growth in the emerging economies around Asia, most notably in China.

Retailers as a rising source

of demand for logistics

facilities

Chart 9: Hong Kong warehouse occupancy structure by sector (2009 vs 2013)


2013 2009



























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The tight vacancy environment in Hong Kong’s warehouse market has caused some retailers to start

over-leasing space and subletting excessive space to other users by offering short and flexible lease

terms. This is one of the retailers’ strategies to avoid being handicapped by insufficient warehouse

space in order to cope with their fast business expansion needs. From a corporate real estate strategy

point of view, this is not ideal as it implies that retailers will have to bear the risks as if they were both

landlords and tenants.

Unlike the retail landscape in China where e-commerce has experienced huge growth compared to

traditional offline sales, Hong Kong’s brick and mortar retailers seems to be less vulnerable in that

regard given the small geographical footprint of the market and the consumption patterns of Hong

Kong residents.

Hong Kong is such a small city that people can easily travel between many places in within 30 minutes.

The major shopping districts are usually attached to the key business districts; Central, Causeway Bay,

Tsim Sha Tsui and Mong Kok which combined to have a working population of around 330,000

persons. To these workers, some of the largest shopping malls in town are just a 5-10 minute walk from

their offices. All shopping malls in Hong Kong have long opening hours, typically 10 a.m. to 10 p.m.,

Monday to Sunday; shopping after business hours is therefore highly feasible and popular in Hong

Kong. There are also plenty of neighbourhood and regional malls built as podiums to many big

residential estates; residents generally have access to daily necessities again within a 5-10 minute

walking distance. This convenience and closeness is in contrast to many Chinese cities and other

overseas markets where the geographical footprint is huge and where opening hours of shops are

typically shorter, making online consumption much more popular.

The fact that Hong Kong is small and focused highlights the importance of brick and mortar sales in this

unique consumption market. There is certainly room for e-commerce to grow in Hong Kong but the

convenience of shopping physically in the city and the high intangible marketing value of maintaining a

presence on street front suggests that traditional offline sales will remain as the key mode of retail

transactions in Hong Kong.

As a result, retailers will make-up a growing share of the warehouse occupier market as more new

brands establish their presence in Hong Kong. Interestingly, while there has been a slowdown in retail

sales and visitor arrival growths in recent times, Hong Kong still managed to attract 43 new retailers

into the market in 2013, making it the third most targeted city globally after Paris and Tokyo. As the

number of brands and stock keeping units (SKU’s) grows, the amount of back-end warehouse space

should increase in tandem. However, this has not been the case for Hong Kong, straining the logistics

capacity in the city.

In the next five years, there will continue to be an imbalanced level of supply between retail shops and

warehouses in Hong Kong. CBRE forecasts a total of 4.7 mil sq ft of prime shopping centre space to be

completed between 2014 and 2018, averaging at 0.95 mil sq ft per annum. In contrast, only 3 mil sq ft

of prime warehouse space is scheduled for completion over the same period of time, averaging at only

0.60 mil sq ft per annum. The persistent shortage of new warehouse supply in an already low-vacancy

environment is set to push warehouse rents higher, a concern for Hong Kong’s long-term

competitiveness as a regional logistics hub.

Implications of low warehouse vacancy environment



























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0

1

2

3

2014 2015 2016 2017 2018

Shopping Centre Warehouse

Chart 10: Future shopping centre and warehouse supply


GFA mil (sq ft)

Prime warehouse rents in Hong Kong have climbed 136% between 2003 and 2013, of which the

growth was very much back loaded. In the three years to 2013, rents increased 32% to reach an

average of HKD 9.2 per sq ft per month. The growth rate on its own is perhaps not as problematic

when compared with other commercial property sectors; however, the rental levels are already causing

mounting pressure to many low-margin logistics operators.

50

70

90

110

130

150

170

190

210

230

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Chart 11: Hong Kong warehouse rental index


Index (Q1 2000 = 100)

Over the years, CBRE has seen some low margin tenants unable to secure proper warehouse premises.

Many are forced into flatted factories, not purpose-built for storage, due mainly to rental affordability

reasons. There were also instances where tenants chose to decentralize away from the more expensive

locations or downsize but maintain operations in their original warehouse premise. In some cases,

tenants have even taken the risk of using temporary warehousing on agricultural lands in the New

Territories. Even this option may no longer be feasible as some of these temporary facilities, including

container back-up lands, are earmarked to be part of the new townships as part of the huge

development planned for the North East New Territories.



























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There are many reasons for Hong Kong to retain its status as one of Asia’s most prosperous

logistics/warehouse markets. The import/export sector on its own, with its numerous strengths attached

to Hong Kong’s trading landscape, is set to provide solid fundamental support to the city’s logistics

market. The strong retail market, as discussed throughout this paper, has proved to be and is expected

to remain a key demand driver for warehouse space in Hong Kong; the recent slowdown in growth

momentum will unlikely leave a permanent dent on long-term warehouse demand. Indeed, according

to the Commerce and Economic Development Bureau, Hong Kong is forecasted to receive 70 million

tourists by 2017 and 100 million by 2023 using conservative growth estimates. These numbers sound

reasonable to CBRE as the underlying growth rates are less than half the historical tourist arrival growth

rates between 2003 and 2013. Increasing tourist arrivals should drive retail sales and therefore give

increasing importance for retailers to establish or expand their logistic footprints in Hong Kong. The city

needs more logistics space to support this future growth.

How to facilitate sustainable

development of the Hong

Kong logistics sector?

Table 3: Hong Kong industrial / trade market strengths


Strengths Why?

Free port No taxes are applied on goods entering the city.

Location & access Convenient linkage with Asia’s emerging markets as well as Southern

China, including road, sea and air freights.

Political stability Despite recent minor social and political tensions, the overall environment

has been much more stable than neighboring countries, including those

in South East Asia.

International standard Sophisticated legal framework to help streamline operations and

safeguard intellectual properties.

Safe land Besides occasional typhoons, Hong Kong enjoys a low risk of

catastrophic natural disasters.

Large retail market Hong Kong retail market is large, making it logical for retailers to elect

the city to host their main APAC operations

While the past has been bleak in terms of industrial land sales, one would hope the future may be

brighter. However, this is not the case, at least in the short-term future. There is not even one industrial

site for auction/tender on the 2014/2015 Land Application List. This is unfortunate as there are options

available for release particularly around Tsing Yi, already a logistics hub, which could be fast-tracked.

Longer term, the Hong Kong government has outlined 10 hectares of industrial land in Tuen Mun West,

which can provide up to three mil sq ft GFA of industrial space. However, the Planning and Engineering

Study is currently in progress and will not be completed until May 2015. As such, any new supply from

the area will struggle to come anytime sooner than the end of this decade. Furthermore, the New

Development Area of Hung Shui Kiu and Lantau Logistics Park are the main areas of interests in terms

of new industrial land supply. However, only 7.5% (62 ha) of the future development land in Hung Shui

Kiu is expected to be allocated for industrial-related use, which is a small fraction of the current

industrial land (190 ha) in the area and hence a negative impact rather than a positive. The Lantau

Logistics Park in Siu Ho Wan has been mentioned since the early 2000’s. However, the latest mandate



























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from the government regarding the Lantau Logistics Park is to continue to “identify suitable sites” and

“examine feasibility”. In the other words, nothing is happening for the area and government support for

the logistics market continues to be weak. The development timelines for both Hung Shui Kiu and Siu

Ho Wan are unclear and space from these areas will likely come past this decade.

The need for more warehouses is critical not only to contain spiraling costs but also to ensure that new

supply delivered is of a better quality to keep pace with modern logistics requirements, especially for

high turn-over products and high-value products. As highlighted earlier in this paper, only 3.7 mil sq ft

of logistics/warehouse space in Hong Kong was completed after 2003; the rest of stock was all over

ten years of age with 61% having a building age of over 20 years old. Some of these older buildings

are simply out of the competition, specifications of which are not fit enough for many of today’s modern

logistics operations. To this end, CBRE has recently seen an international e-retailer unable to apply their

modern logistics system due to the smaller floorplate and high-rise nature of the warehouse buildings in

Hong Kong.

In recent years, many sophisticated global logistics developers have been gaining experience by

growing their portfolios across mainland China but all find it very difficult to build new and high-

specification warehouses in Hong Kong due to a lack of land resources and the high cost of

development if land does become available. This has left Hong Kong behind many Chinese cities in

terms of logistics hardware availability. Goodman, for instance, has developed over 13 million sq ft of

new logistics space across mainland China over the last ten years but only managed to build just one

new development in Hong Kong, fetching 2.4 mil sq ft of new space. Interestingly, this was also their

most successful development globally with 99% occupancy on completion, owing to the depth of

demand for new, modern space. Similarly, Mapletree has grown their portfolio size in mainland China

by 13.5 mil sq ft over the same past decade but have only been able to secure one new development

site in Hong Kong, contributing a mere, but badly needed 1.5 mil sq ft to Hong Kong’s logistics stock

when delivered in 2016. The release of more logistics/warehouse sites for sale by the government will

enable these specialized global developers to build and operate more high-specification modern

warehouses here, thereby up keeping Hong Kong’s competitiveness in the global logistics market.

3%

27%

61%

9%

Chart 12: Hong Kong warehouse stock distribution by building age


<10 years old

10-20 years old

21-30 years old

>30 years old



























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The most typical development model in Hong Kong – build to tallest and build to maximize - also

applies to the logistics/warehouse sector. In order to maximize land values, warehouses in Hong Kong

have been traditionally built upwards rather than outwards. A typical floor-plate for a Hong Kong

warehouse is around 50,000 sq ft, compared to some 200,000 sq ft in mainland China and in Hong

Kong they tend to be 10 plus floors whereas in the mainland they are often single-floor or two-floor

design. A major drawback in high-rise warehouses is the need to provide either cargo lifts or ramp

access, either of which will affect floor efficiency in some already small floorplate development schemes.

Combined with low ceiling heights (some warehouse buildings in Hong Kong have ceiling heights as

low as 3.5 metres against the 9 metres standard in China), warehousing in Hong Kong is costly, when

efficiency and extra charges are factored in.

At present rental rates in Shenzhen are typically around 1/3 of that in Hong Kong on a per sq ft basis,

this differential is generally not enough to encourage occupiers to go across the border for local

distribution taking into account the challenging yet improving customs procedures. However, if space

availability in Hong Kong is going to stay limited, retailers and logistics operators will be left with no

choice but to take options outside of Hong Kong.

The strong retail market has

proved to be and is

expected to remain a key

demand driver for

warehouse space in Hong

Kong; the recent slowdown

in growth momentum will

unlikely leave a permanent

dent on long-term

warehouse demand.



























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The next decade will see Hong Kong emerging to become a very important trade and tourism node

within the Greater Pearl River Delta mega-metropolis – a region that has a population of over 65

million inhabitants. There are numerous cross-border infrastructure projects currently under construction

or planning in within this region. Once built, this infrastructure will significantly improve the people and

trade flows between Hong Kong and the leading Pearl River Delta cities including but not limited to

Macau, Zhuhai and Shenzhen. These cities do not lack world-class ports and have no shortage of high-

specification warehouse space. The need for trade-related logistics operators to rely on Hong Kong

facilities is lessening but it does not mean that the city deserves no additional logistics/warehouse space

to maintain its competitiveness while facilitating further growth of its retail consumption market.

Hong Kong should leverage well on the upcoming metamorphosis of the Pearl River Delta economy.

The process will see Hong Kong becoming a centric city connecting tourists from worldwide to various

tourism nodes within the Delta, which is set to become one of Asia’s hot vacation destinations.

Stronger demand for Hong Kong’s hospitality and retail services is therefore expected. Hong Kong

needs to have more shopping malls and hotels but equally important, the city also needs a better

blueprint for its future logistics sector development to complement the growth of its hospitality and retail

industries.

The way forward – prepare

for the metamorphosis

Map 1: Future cross-border and related infrastructure projects

Source: CBRE

HKIA 3rd

Runway

2023+

HKZMB

2016

HK-BCF

2016

TM-CLKL

2018

TM-Western Bypass

2018

GZ-SZ-HK XRL

2017

Kai Tak Cruise Terminal

2013/2014

To

Macau/Zhuhai

To Shenzhen

Infrastructure Projects Cross-border Point Expected

Completion Year

Kai Tak Cruise Terminal (second berth) Worldwide 2014

Hong Kong – Boundary Crossing Facility (HK-BCF) Macau/Zhuhai 2016

Hong Kong – Zhuhai – Macau Bridge (HKZMB) Macau/Zhuhai 2016

Guangzhou – Shenzhen – Hong Kong Express Rail Link (GZ-SZ-HK- XRL) Shenzhen 2017

Tuen Mun – Chek Lap Kok Link (TM-CLKL) N.A. 2018

Tuen Mun – Western Bypass (TM-Western Bypass) N.A. 2018

Hong Kong International Airport – Third Runway (HKIA- 3rd Runway) Worldwide 2023+

Future cross-border and related infrastructure Source: CBRE, August 2014.



























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For more information about this SPECIAL report, please contact:

RESEARCH

Marcos Chan

Head of Research, Hong Kong,

Macau and Taiwan

+852 2820 2886

[email protected]

INDUSTRIAL & LOGISTICS SERVICES

Darren Benson

Executive Director

Industrial & Logistics Services

+852 2989 5173

[email protected]

RETAIL SERVICES

Joe Lin

Executive Director

Retail Services

+852 2820 2860

[email protected]

For more information regarding Global Research and Consulting activity, please contact:

CBRE GLOBAL RESEARCH AND CONSULTING

This report was prepared by CBRE Hong Kong Research Team which forms part of CBRE Global Research and Consulting—a network of preeminent researchers and consultants who

collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe.

All materials presented in this report, unless specifically indicated otherwise, is under copyright and proprietary to CBRE. Information contained herein, including projections, has been

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hong kong special report retailers expose the lack of warehouse facilities august 2014

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