Cold Storage Demand Increasing Cold Storage’S Edge Over Traditional Industrial Assets Offers Investor Opportunity Colliers Radar Industrial | Hong Kong | 20 May 2021

Insights & recommendations 5.4 million sq ft + 49% We see Hong Kong’s cold storage (OrOr 501,700 501,700 sq sq m meters) – Our estimated– The estimated gross Increase of retained imported* frozen food market having strong demand and totalfloor grossarea (GFA) floor ofarea Hong of Hong Kong Kong licensed (by weight) in Hong Kong from 2018 to 2020, limited supply over the next five licensedcold stores cold as stores of February at the 2021end of2. while export growth rebounded 32% YOY in years. For example, the retained February 2021. Q1 20211. imports* of frozen food has grown at a CAGR of 11%1 from 2016 to 2020, despite cold storage space (by sq ft 1 GFA) growing at a CAGR of a mere +Minimal 33% YOY vacancy 20%-25% rental premium 4%2 over the same period. ReboundCurrent cold of Hong storages Kong’s vacancy total is virtually Cold storage enjoys a rental premium of export0% with growth limited in en Q1bloc 2021 cold storage about 20-25% higher than traditional Kwai Chung stands out as one of the buildings and strata-units provided on a warehouses (HKD10-16 per sq ft of GFA most promising sub-markets, demand-driven basis. per month). accounting for 44%2 of the licensed cold stores space that is well- Cold storage, which is a sub-sector of industrial properties to store, pack, and distribute temperature-sensitive and perishable connected via the highway network. products in a controlled environment, has recently emerged as one of the most appealing niche asset classes in Hong Kong†. We recommend investors consider As mentioned in our report, Rising Investment Demand In Hong Kong Industrial Properties, we have seen rising cold storage three strategies to enter this sector: demand from the robust supermarket retail sales performance, e-commerce food delivery, and the pressing need for vaccines and drugs storage. • Built-to-suit, either on bare industrial land or redeveloping In Hong Kong, the term cold stores is an official classification for imported frozen or chilled meat cold storages licensed by the 3 existing industrial buildings. Food and Environmental Hygiene Department . As of February 2021, there are 66 licensed cold stores in Hong Kong. While cold storage is showing positive prospects with higher rents and stable yields compared to traditional industrial assets, • Sale-and-leaseback, purchasing investors interested in this sub-sector should pay attention to opportunities in proximity to Kwai Chung and Sha Tin MTR an existing asset and leasing it stations, where most en bloc licensed cold stores are located and hence presenting the most investment opportunities. back to the original owner.

• Conversion from existing Rosanna Tang Hannah Jeong industrial assets, by adding state Head of Research Head of Valuations and Advisory of the art technology to capture Hong Kong SAR & Greater Bay Area Hong Kong SAR greater investment returns. † This report covers the Hong Kong Special Administrative Region of the People’s Republic of China. Note: 1 Census & Statistics Department 2 Colliers 3 Centre for Food Safety. *Retained imports are the difference between the import and re-export values. 2 Colliers Radar Industrial | Hong Kong | 20 May 2021

Section 1: Cold storage space in Hong Kong Why cold storage is important? Increasing demand for e-commerce Different types of cold storage Online retail sales* value Cold storage is a sub-sector of industrial properties that provides storage spaces for temperature-sensitive products as they move through the supply chain. +63% Accounting for YOY HK$6.3 around 7% of According to Colliers’ recent regional report Asia Pacific: Industrial & Logistics HK$3.6 billion total Property, there are four key types of cold storages in the market: billion retail sales

Q1 2020 Q1 2021

Source: Census & Statistics Department Frozen Cold storage Fresh produce Air-conditioned *Note: e-mails, telephone and facsimiles orders are not counted as online sales. (-16℃ to -26℃) (-1℃ to 4℃) (0℃ to 8℃) (17℃ to 22℃) Growing retained import frozen food in Hong Kong (2018–2020) Rising demand for cold storage in Hong Kong Billion Retained import of frozen food (LHS) YOY% kilograms COVID has triggered rising frozen food consumption and e-commerce demand in YOY Growth (%) (RHS) 2 40% the city. Hong Kong’s retained imported frozen food increased by 49% over the last 25% 20% three years, from 1.1 billion kilograms in 2018 to 1.6 billion kilograms in 20204, with 1 20% growth accelerating over the last two years, recording 25% YOY growth in 2019 and 2% 20% YOY growth in 2020. Meanwhile, the gross merchandise value of groceries from HKTVmall, a popular online retailer, reached HKD2.7 billion (USD0.4 billion) in 0 0% 2018 2019 2020 2020, up 154% YOY from 2019’s HKD1.1 billion (USD0.1 billion)5. Source: Census & Statistics Department

Cold storage in the Asia Pacific market Expansion of APAC cold storage market APAC cold storage (US$ billion) Market research firm Forrester6 forecasted that the adoption of online sales in Compound Annual grocery, the fastest-growing e-commerce segments in APAC, will see a compound Growth Rate annual growth of 30% from 2019 to 2024. Meanwhile, IMARC Group expects the (CAGR) US$255 APAC cold storage segment to grow from USD111 billion in 2020 to USD255 billion 255 US$111 15% billion by 20267. Such trends further strengthen investment demand for cold storage billion111 space. In fact, total APAC cold storage investment reached USD2.0 billion in 2020, 2020 2026 F 8 growing at an average annual rate of 21% since 2011 . Source: IMARC Group 3 Note: 4 Census and Statistics Department 5 HKTV Mall 2020 Annual Result Announcement (P.24) 6 Forrester 7 IMARC Group 8 Real Capital Analytics Colliers Radar Industrial | Hong Kong | 20 May 2021

Section 2: Major market players in Hong Kong Typically, cold storage market players can be categorised into four major types, differentiated by their operating model and scope of expertise. “While the market is changing under the Four types of Cold Storage Players influence of Classification Description & usage Competitive landscape Market players examples globalization, the • Cold storage operators and specialists • Players in this space are based locally • Brilliant Cold Storage Management development of the possess in-depth operational knowledge with expertise in managing the day- Ltd. Cold Storage Greater Bay Area as • Expertise in processing, sorting and to-day operations of a cold storage • Sun Wah Cold Storage Ltd. 1 Operators & facility well as e-commerce, it exporting, particularly for agricultural • The Hong Kong Ice & Cold Storage Specialists goods and food products • The competitive landscape is Company Ltd. has high expectation monopolised by a few local players [for greater demand] on the cold chain • Investors typically involve in asset • Cold storage investors and • Pure investors: Mapletree, HSBC Pure Investors & development, acquisition and positioning conglomerates account for the largest Life, Goodman, SilkRoad logistic service.” Investors with • This category could be further portion of market share (by sq ft) • Investors with subsidiary as 2 Operational subdivided into (1) pure investors; and • Usually, they are the primary owners operators: China Resources Hong Kong Logistics (2) investor with operational subsidiaries of the assets with a long-term (City Super), CITIC (Dah Chong Subsidiaries investment horizon Hong*) Association 9 • 3PLs facilitate goods distribution into • 3PL landlords can typically attain a • Kerry Logistics (HK) and out of the cold storages higher income from their tenants by • Chevalier Logistics (HK) Third-Party • Unlike operators, they focus on acting as a third party for goods distribution • Yusen Logistics (Japan) 3 Logistics (3PL) distribution and delivery services catered towards the end-users • However, 3PLs that are not owners • SF Express (Mainland China) also bear more risk as they are likely committed to a fixed lease term • Occupiers are typically the large grocery • Occupiers are amongst the most • Park’N Shop, Dairy Farm chains, consumer goods chains, and diversified in the group • Nestle (HK), Tung Fong Hung ecommerce are most recently some are • Demand dependent upon underlying • Angliss, Kai Bo, Million Group 4 Occupiers catered towards certain types of vaccines economy, so potentially less stable storage compared to other cold storage • Typically, other small-to-mid sized players occupants.

Note: 9 The Hong Kong Logistic Association *Dah Chong Hong was selected as the Sinovac and BioNTech COVID-19 vaccine distributor. 4 Colliers Radar Industrial | Hong Kong | 20 May 2021

Section 3: Cold storage’s edge in Hong Kong Key Cold Storage Transactions (as of 30 April 2021) Area Price Date Building Buyer (sq ft, GFA) (HKD Mil) “Several reasons that In recent years, cold storage has become an emerging sub-sector in Hong Kong’s industrial market being eyed by investors, and most typically from investment we find the segment Jul-2020 Angliss Hong Kong Food Service Ltd. 61,380 HSBC Life (Property) 325 funds. We have seen three cold storage assets changing hands in the first four Feb-2021 Smile Centre 97,751 SilkRoad 321 interesting. New months of 2021 with a total of HKD2.3 billion (USD0.3 billion)10, all of which were Feb-2021 Seapower Industrial Centre (G/F to 4/F) 103,746 Goodman 570 supply is relatively acquired by institutional investment funds. Mar-2021 Kai Bo Group Centre 291,697 Angelo Gordon 1,435 minimal. Tenants are Source: Real Capital Analytics, Colliers less likely to move out Typical cold storage lease structures Premium in rental and yield for cold storages because of some capex Compared to the typical traditional warehouse leases, cold storage leases usually Traditional warehouses in Hong Kong generally fetch unit rents in a range of or equipment have the following elements in their lease structure: HKD10-16 per sq ft of GFA per month, varying based on the location, vertical invested. The leases Longer lease terms access (ramp/lift access), floor loading and ceiling height. The rental premium for offer stably increasing 1 cold storages is differentiated from traditional warehouses, typically due to their rents over a relatively • Traditional warehouse: 3 years enhanced building specifications, such as higher floor loading and ceiling height long term.” • En bloc cold storage: 3 years + 1st option-to-renew (OTR) for the second (further explained in Section 5) and the relatively limited supply. Whereby, the 3-year term + 2nd OTR for the third 3-year term rental premium is about 20-25% higher than traditional warehouses. The • Strata cold storage: 5-6 years (3 years + 2 or 3 years, with rent review); Kasey Wong, aforementioned premium is likely sustained by the limited cold storage supply, or 3 years + OTR for a further 3 years which creates stiff competition among end-users. - Principal BentalGreenOak Rent review / Triple net Fit out & Apart from their rental level, cold storages have a premium in capitalisation rate 2 Option to 3 basis 4 reinstatement costs* over traditional warehouses. The limited pool of cold storage operators equally renew expenses covers a small pool of market participants and thus, would be deemed riskier as it • Review / renew at • Tenant bears • Tenant bears all costs to keep is difficult to seek suitable tenants for replacement. The sale-and-leaseback† open market rent Government rent, both structural/non-structural arrangement also pushes higher yields, as owner-occupiers would typically raise • Subject to a 15% - Rates and parts in good condition the rental level before the sale to attract buyers in the market. In 2020 and 2021, management fee 18% cap • Tenant bears reinstatement cost we have already seen two en bloc cold storage sale-and-leaseback transactions. • Annual CAPEX to remove all movable equipment Sub-sector Rental Range (HKD) on GFA Cap Rate (%) borne by the • Tenant bears maintenance and landlord repair costs of the cooling Traditional Warehouse 10-16 per sq ft per month 2.9 to 3.1 system during the lease term En bloc: 15-20 per sq ft per month Cold Storage 3.3 to 3.5 *Applicable to strata units only. Strata: 13-19 per sq ft per month 5 Note: 10 Real Capital Analytics, Colliers †Please refer to page 8 for the definition of sale-and-leaseback. Colliers Radar Industrial | Hong Kong | 20 May 2021

Section 4: Existing cold storage in Hong Kong

11 “We are attracted to In Hong Kong, cold stores for frozen or chilled meat are licensed by the Food and Environmental Hygiene Department through the issuing of cold store licence . Currently, there are 66 licensed cold stores in the city, almost double the 34 in 2011. Meanwhile, simple walk-in freezer type cold stores located within industrial buildings could be the sector as there is a covered by a food factory licence12. According to Colliers’ estimation, there are about 5.4 million sq ft GFA of licensed cold stores space in Hong Kong, with over 95% located high demand from in the New Territories. cold storage users, but a relative lack of Percentage of Hong Kong licensed cold stores by district (GFA) buildings that can KwaiKwai Chung Chung Sub-market 44% accommodate their • Kwai Chung is one of the most LantauLantau 17% floor loading and important sub-markets, ShaSha Tin Tin 15% accounting for over 40% of TsingTsing Yi Yi 7% power requirements.” licensed cold stores Tuen Mun • This area is supported by the Tuen Mun 4% proximity to the Kwai Tsing SouthernSouthern 3% Peter Wittendorp Container Terminals and high- SheungSheung Shui Shui 3% quality site access to the airport - CEO YauYau TongTong 2% SilkRoad Property Partners and its central location in Hong Kong YuenYuen Long Long 1% KwunKwun Tong Tong 1% Building age TsuenTsuen Wan Wan 1% • Average building age of the CheungCheung Sha Sha Wan Wan existing licensed cold stores is 32 1% years old FanlingFanling 1% • 27% of the licensed cold stores are KowloonKowloon Bay Bay 1% in buildings 40+ years old TaiTai Po Po 1%

Cumulative percentage of total licensed cold stores space by building age (years) Proportion of en bloc vs strata-titled cold stores 94% 100% 54% 73% By number of cold stores By area (GFA) of cold stores 3% 5% 24%

Building 0 5 10 15 20 25 30 35 40 45 50 age year years years years years years years years years years years en bloc strata-titled en bloc strata-titled Source: Colliers, Centre for Food Safety. 23% 77% 59% 41% Note: 11Centre for Food Safety 12 If the frozen/chilled goods are directly related to onsite food production, a food factory licence is allowed. 6 Colliers Radar Industrial | Hong Kong | 20 May 2021

Limited availability of cold storage space industrial lot as cold storage. In addition to the specifications for built-to-suit cold storage buildings in the table, sufficient loading bays and efficient site access The shortage of vacant cold storage space makes conversion of industrial buildings provisions are important to handle the large volume of traffic. Typically, the built- “Location and a popular alternative. This influences how new operators enter the market, and to-suit pathway can be done in two ways – 1) the development of bare industrial building specifications since 2016, 23 existing cold stores have been licensed with at least 16 of these land, 2) redevelopment of existing industrial assets. are essential in each located in typical industrial buildings. Those located in industrial buildings were The first method is through bare industrial land development, however, the limited [cold storage converted to cold storages by improving the thermal insulation by undergoing new supply under the government land sale programme and the existing investment] case. minor works13 such as thickening the floor slab or erecting a block wall. industrial land available are usually the major hurdles, with only two industrial Overall, scalability and Section 5: How investors enter the market? lands included in the government land sale programme since 2019. Moreover, the technology of the two parcels of industrial land sold, Sha Tin Town Lot No. 613 and Fanling Sheung operator are also Three ways to enter the market Shui Town Lot No. 268, are both modern industrial sites with stipulations allowing important as the uses such as information technology and telecommunications industries. strategy becomes Investors who are interested in entering the cold storage market in Hong Kong can Developers acquiring these modern industrial lands tend to develop data centres 14 programmatic.” explore three ways: (1) development of built-to-suit cold storages, (2) acquire since they could fetch the highest rents among all types of industrial uses. existing owner-occupied cold storages with sale-and-leaseback opportunities and (3) conversion from existing industrial assets. Recent industrial land transactions from public tender Kasey Wong, 1) Development of built-to-suit cold storage building - Principal FSSTL No. 268 BentalGreenOak Date: Jan-2021 Fanling The first way for investors to tap into cold storage demand is to develop built-to- Buyer: Mapletree suit buildings. Built-to-suit cold storages tend to provide superior building Transacted Price: HKD813 million Central MTR specifications, such as higher ceiling height and floor loading, similar to data centre Max. GFA: 216,787 sq ft Station 24 km (20,140 sq m) 15 specifications. A typical industrial government lease has no specific limits on cold Accommodation Value: HKD3,750/sq ft (G) storage use, so no lease modification or waiver letter is required to use an

16 STTL No. 613 Typical specifications for existing built-to-suit cold storage Date: Jul-2020 Sha Tin Item Average Range Buyer: China Mobile Transacted Price: HKD 5.6 billion Central MTR Max. GFA: 938,524 sq ft Slab-to-Slab Ceiling Height (m) 4.8 4.0 - 5.4 Station 11km (87,200 sq m) Floor Loading (kPa) 16.1 11.0 to 20.0 Accommodation Value: HKD5,967/sq ft (G) Both sites will be developed as data centres. Power Supply (kVA/10,000 sq ft) 150 100 to 200 Note: 13 Minor work records from Building Department. 14 A building specifically constructed to meet the Vertical Access within Building Ramp/lift access client’s needs/ specifications upon completion. 15 Land grant document permitting industrial uses on the land. 7 Source: 16 Colliers Colliers Radar Industrial | Hong Kong | 20 May 2021

2) Sale-and-leaseback with cold storage operators 3) Conversion from existing industrial assets

The second way for investors to enter the cold storage market is to explore The third way of entering the market is by conversion or refurbishment of existing “Given HK’s relatively opportunities for the acquisition of existing cold storage. As cold storage operators industrial assets through the installation of chiller and cold storage equipment. For small size and are looking to take asset-light strategies for further expansion in line with the industrial buildings to support cold storage facilities, including the chiller or efficient road growing demand, the investor can seek sale-and-leaseback opportunities to refrigerator plant and equipment, buildings must meet minimum requirements networks, most minimise the leasing risk and enjoy a stable income. Sale-and-leaseback refers to a such as ceiling height and floor loading. We suggest investors look for industrial locations can be transaction where the original owner sells the property and leases it back from the assets fulfilling the minimum required building specification as stipulated in new owner upon completion of the transaction. Section 5. considered ‘last mile’ The challenge is The sale-and-leaseback deal is usually accompanied by a longer lease term longer There are expert service providers capable of undertaking such conversion or finding suitable than 10 years, and higher rent, comparing to the typical leases of the same refurbishment projects covering services ranging from feasibility study, design of buildings at a property type. This is because the arrangement allows the original owner to conversion works, preparation of submissions for approval from government continue its operation without incurring extra relocation and fit-out costs. Hence, departments, project execution and overall project management. The typical range reasonable price.” the original owner is willing to lease back the property at a higher rent. Since 2020, of cost and time required for cold storage conversion projects in existing industrial we have seen two major cold storage sale-and-leaseback transactions where cold buildings are shown in the table below. Peter Wittendorp storage operators (sellers) sold to institutional funds (buyers).

- CEO Typical requirement for cold storage conversion projects SilkRoad Property Partners Item Average

Alterations and Additions (A&A) Conversion Cost18 2,500 (HKD/sq ft on CFA17)

Angliss Hong Kong Food Service Kai Bo Group Centre in Kwai Chung Limited in Kwai Chung Mechanical Equipment Installation Cost18 19 1,000+ Date: Jul-2020 Date: Mar-2021 (HKD/sq ft on CFA ) Buyer: HSBC Life (Property) Buyer: Angelo Gordon Asia Seller: Angliss Seller: Kai Bo Group 10 (typically a Transacted Price: HKD325 million17 Transacted Price: HKD1,435 million17 Typical Conversion Period (months) (USD41.9 million) (USD185 million) range of 9 to 12) GFA: 61,380 sq ft (5,700 sq m) GFA: 291,697 sq ft (27,100 sq m) Unit Price: HKD5,295/sq ft (G) Unit Price: HKD4,919/sq ft (G) Note: 17 Land Registry 18 Colliers 19 CFA = Construction Floor Area 8 Colliers Radar Industrial | Hong Kong | 20 May 2021

Summary & Recommendation

Cold storage as a promising asset type Sale-and-leaseback or conversion as the fast entry We believe the demand for cold storage in Hong Kong will likely route remain strong in the future, supported by the increasing The limited new industrial land supply from the government renders volume of supermarket retail sales, change of consumers’ the development of new built-to-suit cold storage difficult. An efficient shopping habit to favour e-commerce and online F&B, as well way to invest in cold storage in Hong Kong is to look for existing as the increasing vaccine and drug usage. Many cold storage owner-occupied cold storages and propose a sale-and-leaseback deal. operators and end-users have commenced and expanded their Investors should also keep an eye on cold storages operating under cold storage operations since 2019, including Dairy Farm, Fresh food factory licences, as this type of shadow supply can be seen as Del Monte and Meisei Hong Kong. potential stocks for investment. Despite the growing demand, we observed a very limited Apart from sale-and-leaseback opportunities, which are constrained by scheduled new supply of cold storages in the market, making availability, investors should also explore industrial assets with the cold storages in Hong Kong a very niche sector that attracts potential for conversion or refurbishment, especially those assets with increasing appetite from both local and institutional investors, good locations and building specifications suitable for cold storage who are eyeing the higher rental premium of cold storages over operations. typical warehouses. Kwai Chung as the recommended location Potential conversion from logistics centres The location of cold storage is very important due to the thawing Investors should be aware of the opportunity to convert future nature of business, and it is also a critical factor when investors warehouse supply into cold storages. Colliers estimates that determine the value of cold storage buildings. Hence, we see Kwai about 5 million sq ft (464,500 sq m) GFA of new warehouse Chung as the most attractive sub-market, due to its excellent site supply is scheduled from 2021 to 2023, in which 4.1 million sq ft access, proximity to both container terminals and the airport, and (380,000 sq m) GFA will be coming from the logistics centre large existing supply of cold storages. Kwai Chung, being an existing owned by Cainiao located in the South Cargo Precinct of Hong industrial area, incorporates vehicular circulation design and road Kong International Airport (HKIA). In the 2021-22 Budget20, the widths designed for lorries. As cold storage deliveries usually occur at government explicitly mentioned that the Airport Authority will the same time each day, these features allow smooth and efficient actively explore measures to facilitate trans-shipment in the ingress and egress. This is an advantage Kwai Chung has over other city, utilising its capability in managing temperature-controlled sub-markets as building specifications can be enhanced by A&A works, air cargo with a target of maintaining HKIA’s position as the but improving site access is difficult to alter, leading location to be the world’s busiest international freight airport21. utmost important factor. 9 Note: 20 Hong Kong Budget 2021 21 ACI World data reveals COVID-19’s impact on world’s busiest airports. Primary Authors: For further information, please contact:

Rosanna Tang Nigel Smith Hannah Jeong Head of Research | Research | Managing Director | Hong Kong SAR Head of Valuation & Advisory Services | Hong Kong SAR Hong Kong SAR and Greater Bay Area +852 2822 0508 +852 2822 0589 +852 2822 0514 [email protected] [email protected] [email protected] John Davies Pureanae Jang Henry Lam Executive Director | Office Services & Associate Director| Valuation & Advisory | Hong Kong SAR Senior Manager | Research | Industrial Services | Hong Kong SAR +852 2822 0529 Hong Kong SAR +852 2822 0595 [email protected] +852 2822 0578 [email protected] [email protected] Chelsea Yip Assistant Manager | Valuation & Advisory | Hong Kong SAR Anthony Wong +852 2822 0655 Manager | Research | [email protected] Hong Kong SAR +852 2822 0588 [email protected]

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