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