I've been in Hong Kong all week and was pleased to see a front page story in yesterday's Wall Street Journal Asia titled "Can Hong Kong uncork trading of wine in China?" My answer is an unequivocal "yes" which is why Vinfolio is launching our own operations here (see earlier post).
Barriers to creating cost-effective wine storage facilities in Hong Kong
But, there is at least one significant obstacle to overcome in realizing Hong Kong's potential. Proper warehousing facilities for fine wine don't really exist. Moreover, the nature of the real estate market is structurally biased against creating them on a cost effective basis. Here's why:
- Given the high cost of land, almost all warehouses are in high-rise buildings.
- The floor loading capacity of these buildings is low relative to the weight of wine which limits efficiencies on using the space (i.e., how high you can stack cases).
- Virtually no warehouses are readily available with appropriate temperature and humidity conditions. This necessitates a capital investment to install equipment (and insulation).
- However, the market's standard lease term is only 2-3 years which reduces amortization periods on your investment (effectively making it more expensive for a given length of time).
- Moreover, the fast-moving real estate market results in industrial spaces being subject to redevelopment into office buildings and residential towers that are more lucrative for landlords. This means any market-rate renewal option you might negotiate could result in dramatic rent increases or, even worse, the landlord can trigger a "sales and redevelopment" clause and force you out of the space in 6 months (i.e., before your already-short lease term is completed).
- Finally, there is little new supply of warehouse space being built which could help moderate rental rates.
One suggestion to support market development
Hong Kong landlords should consider developing specialized "turnkey" facilities for wine storage and just charge higher monthly rents to recover investment costs (although this potentially limits their prospective tenant universe).
P.S. The photo on the upper right is a typical Hong Kong warehouse building.
