Mega shed

We have all heard of impressive Asian industrial hubs, but there is no substitute for actually walking one. And so it was that this reporter found herself cruising down the expressway en route to the airport in Hong Kong, where one can find the towering Goodman Interlink logistics warehouse. With its lime green and white exterior, it is a local landmark that can be spotted from afar. Tucked within the industrial and port district on Tsing Yi Island, the 24-story warehouse and distribution centre is spread over a floor area of 2.4 million square feet and is Hong Kong’s fourth largest logistics property.

It also one of the most ambitious development projects undertaken by the Goodman Group, the Sydney-based logistics developer and fund manager, in Hong Kong and China, which together form the second biggest region for the firm globally with close to $5 billion in real estate assets under management.

The scale of Goodman’s operations in the region prompted PERE to take a site tour of Interlink and ATL, the other mega shed owned by the firm (see box), during an interview with Philip Pearce, Goodman’s Hong Kong-based managing director for the Greater China region.

It was early 2008 when the firm acquired the brownfield site for developing Interlink, which earlier served as a marine workshop, via its joint venture partnership with the Macquarie Group. The two firms also operated an open-ended, unlisted real estate vehicle called the Macquarie Goodman Hong Kong Logistics Fund but the site was not acquired via the fund initially given the “higher degree of risk associated with the project than what the fund wanted to undertake,” explained Pearce. The plan was to de-risk and then transfer the project to the fund.

“In terms of the percentage of weightage to one asset, weighting to this asset in terms of the fund’s total assets was above the investment guidelines. If you look at that and also that investors were a little more cautious after the GFC, it was prudent to look for another source of capital. We couldn’t take for granted that fund would want to take that asset,” said Pearce.

Following Goodman’s buyout of Macquarie Capital’s interest in the joint venture for A$200 million (€136 million; $154.64 million) in October 2008, a fresh capital raising exercise for the open-ended vehicle, now called Goodman Hong Kong Logistics Fund (GHLKF), concluded in November, drawing HK$1.6 billion (€181.62 million; $206.38 million) in equity commitments. It was around then that 50 percent of the project was transferred to the fund.

It was also the time when the global financial meltdown was at its peak, making everyone more risk averse. Pearce admitted the challenges, especially since the firm was targeting to secure a prelease for the development project, unlike most other warehouse projects that are undertaken on a speculative basis. At the same time, he added that low construction costs during the slump worked to their advantage.

In 2009, development plans for the project were officially set in motion, with close to 50 percent of the area preleased to two third-party logistic operators, and the firm securing project finance of A$170 million from four banks to fund part of the construction costs. The total cost of the project during the time was estimated to be A$430 million, with plans to deliver a forecast yield on cost of 9 percent, according to a company statement.

The Canadian Pension Plan Investment Board (CPPIB) then went on to acquire a 50 percent interest in the Interlink project in 2011 for HK$2.26 billion, its first direct real estate investment in Hong Kong.

Ever since its completion in 2012, Interlink – the first logistics property of this scale to be developed in Hong Kong in a decade – has gone as per Goodman’s plan. On a busy day, the warehouse sees activity by more than 3,000 container trucks. Each of the 24 floors is mandated to be leased to a single tenant, and at present, all the floors but one are fully leased. Goodman declined to share rental details, but the average per square feet rent of logistics properties in Hong Kong is estimated to be around HK$15, according to a local real estate broker.

“Both investors are extremely happy with the project. For CPPIB, the project has given high-to-mid teen returns on a stabilized basis,” said Pearce. The fund has [also] enjoyed uplift from the original cost, with development profit.”

While it is true that Interlink is only 50 percent owned by the fund, it still comprises a significant percentage of the fund’s total assets. And it isn’t the only one.
In March 2013, Goodman acquired a 25 percent stake in ATL Logistics Centre, the largest logistics building in the world in terms of floor area, for HK$3.5 billion via GHLKF, a landmark deal that further asserted the firm’s regional dominance.

While Pearce agrees that the sheer scale of ATL was one of the reasons why only a quarter share was acquired via the fund in the first place, he isn’t concerned about the overweighting aspect.

He added further: “While the fund has investment guidelines, investors take a top-down approach. They wouldn’t look from a fund’s perspective but from their overall portfolio exposure, and what their exposure to Hong Kong is. What they think of the overall Hong Kong market.”

The fundamentals of Hong Kong’s logistics market have also been in the firm’s favor. With land being scarce, Pearce explained that there has not been much increase in supply over the years, even as demand has continued to increase. Rents have been growing at over 15 percent since the last few years, even though Pearce expects them to eventually drop to normalized levels of around 4 percent, similar to the rental growth in China.

As the fund continues to perform as per expectations, and with ATL now becoming a stabilized asset, Pearce said he would also consider upping Goodman’s interest in the shed, if other shareholders decide to divest their stake.

He is in no hurry to exit Interlink either, adding in passing that if CPPIB were to ever sell its interest, the fund would probably be interested in buying the stake.