ESR has acquired its second project ever in Hong Kong, having shouldered aside two competing bids to secure a logistics site at the city’s Kwai Chung container port for nearly HK$5.26 billion ($668.7 million), according to an announcement made late on Wednesday.
ESR’s winning bid in a government tender for the site known as Kwai Chung Town Lot No. 531 breached the upper end of market expectations of from HK$4.2 billion to HK$5.2 billion for the site in the world’s eighth busiest container facility and ranks among the priciest industrial tenders ever in the city.
“The HK$5.26 billion consideration for the project is the third highest on record for government sales of industrial land in Hong Kong, trailing only the sale of a Sha Tin data centre site for HK$5.6 billion in July 2020 and a December 2018 sale of a data centre plot in Tseung Kwan O for HK$5.46 billion,” said Eric Chong, director of capital markets research at Savills Hong Kong.
At the announced land premium, ESR is paying the equivalent of HK$3,539 per square foot of accommodation, according to Mingtiandi calculations with the company understood to be establishing a fund with an unnamed investor to to hold the asset, which ESR will operate. Based on estimates by Savills, the yield on cost for the facility will be around 4.6 percent.
Top Developers Compete
With ESR having earlier this week announced a set of five acquisitions around Melbourne, Australia, the Warburg Pincus-backed fund manager bested bids from Aussie competitor Goodman and Singapore’s Mapletree Investments to expand its Hong Kong footprint, setting itself up to develop a logistics facility that could be worth up to HK$11 billion upon completion.
ESR now holds the rights to build a logistics facility measuring up to 1.48 million square feet (138,000 square metres) on the site, according to the terms of the land sale. The plot, which covers about 594,652 square feet of area, is located less than a kilometre from Kwai Chung Container Terminal 7, and within less than a kilometre from the customs house.
The company plans to develop both ambient and cold storage on the site in response to growing demand for refrigerated facilities in Hong Kong.
The site at the intersection of Mei Ching Rd & Container Port Rd South is just around the corner from China Resources Logistics which also has a facility along Mei Ching Road, as does Hutchison Logistics.
The project represents the largest industrial site to be offered for sale by the Hong Kong government since at least 2008, according to Savills, with the accommodation value of HK$3,539 per square foot ranking as the most expensive logistics site to ever change hands through an official tender. The consultancy noted that the supply of logistics warehouse space remains limited in the near to mid-term, with the overall stock of distribution facilities in the city set to decline by 2.7 million square feet as older structures are demolished for conversion to other uses.
Vacancy for modern warehouse facilities in Hong Kong dropped to just over 1 percent in the second quarter of this year, Savills said, with rents rising by an average of 1.7 percent in the same period. Major warehouse leases in the Kwai Chung area were signed at from HK$16 to HK$17 per square foot per month between April and June.
“The positive market response to the tender exercise for Kwai Chung Town Lot No. 531 reflects the trade’s demand for logistics land,” said a spokesperson for the government Transport and Logistics Bureau in the announcement.
The acquisition gives ESR its first logistics facility in Hong Kong to add to its network in mainland China, Japan, South Korea, Singapore, India, Australia, Vietnam and Indonesia.
ESR, which had a portfolio of 15.3 million square feet of properties across Asia Pacific as of 31 December, earlier this month agreed to sell a portfolio of nine mainland China logistics assets to a joint venture it had established with Singapore’s GIC for $730 million, potentially providing it with ready cash for some Hong Kong expansion.
Compared to government tenders for industrial sites in previous years, the Kwai Chung site drew fewer bids, according to Alex Leung, senior director at CHFT Advisory and Appraisal.
In 2018, a plot in the New Territories’ Tuen Mun received a total of five bids before it was acquired by Goodman for HK$2.75 billion. At the time, developers such as Sun Hung Kai Properties and Sino Land Company Limited had also submitted bids, however, given its scale, the tender announced today attracted only the largest regional players.
Kwai Chung Expansion
ESR’s win came as the Hong Kong-listed firm was said to have been granted conditional approval last week to convert an industrial building in the New Territories into a data centre spanning 15 storeys.
The company had acquired the Brilliant Cold Storage Tower 2, also located in Kwai Chung, at 11-19 Wing Yip Street, in May of last year for $230.8 million from the family of the late tycoon Tang Shing Bor as its first asset in the city.
Upon completion, the data centre could yield as much as 352,335 square feet of floor area, according to earlier documents submitted to the Town Planning Board with ESR estimating that the completed project will have a gross asset value of $675 million once completed.
Industrial Picks Up
The Kwai Chung tender had closed last Friday, following an upswing in Hong Kong’s industrial market, with transactions involving warehouses, data centres and manufacturing facilities having leapt 37 percent in the second quarter of 2022, compared to the same period a year earlier, to reach HK$9.2 billion, according to a report published by Colliers this month.
In the first half of this year, investment volumes in Hong Kong totaled HK$28.9 billion, with industrial transactions making up about 47 percent of that amount, said Colliers in the report.
The industrial sector was buoyed by big-ticket deals in the city, including China Resources Logistics purchasing a pair of warehouses – one each in the New Territories’ Shatin area and in Chai Wan on Hong Kong Island – from Kerry Properties for a total consideration of HK$4.62 billion In May.
As a traditional Hong Kong industrial hub, Kwai Chung helped to contribute to the city’s second quarter deal total with fund manager Nuveen acquiring the Cargo Consolidation Complex at 43 Container Port Road in April for a reported HK$2.88 billion.