Investors are approaching industrial revitalisation in Hong Kong

The Hong Kong government, in its 2018 Policy Address, announced the relaunch of the revitalisation scheme for industrial buildings. Under the new measure, industrial buildings built before 1987 and sitting outside “Residential” zones in Main Urban Areas and New Towns are now eligible for redevelopment with their non-domestic plot ratio relaxed by up to 20%, subject to the approval of the Town Planning Board (TPB). While individuals can file their applications for redevelopment within three years from 10 October 2018, the modified lease should be executed with full land premium paid within three years from town planning approval.

With the potential gain in GFA due to the relaxation of plot ratio, investors are eyeing aged industrial buildings with revitalisation potential. This is evidenced by the investment volume on industrial assets for redevelopment purposes reaching HK$7.1 billion in 2019. The figure accounts for 40% of all significant industrial sale transactions (>HK$20 million). A majority of these transactions are located in the emerging office nodes, such as Kwun Tong, Cheung Sha Wan and Kwai Chung. These districts, transforming from traditional industrial enclaves to business districts, have experienced growing interest from decentralising tenants in the past few years. As a consequence of this investment boost, the capital value for flatted factories in Hong Kong has grown by 3.1% in 2019 (Figure 1), outperforming other commercial property sectors amid the prolonged US-China trade war and domestic economic recession.

So far, the TPB has approved at least 11 applications for redevelopment under the new industrial revitalisation scheme, and more than 20 are pending for approval. Most of the applicants intend to redevelop old buildings into modern industrial or office spaces. However, there are also applications for changing the existing buildings into hotels or data centres. Kowloon East, which includes Kwun Tong, Kowloon Bay and San Po Kong, is the most active submarket for redevelopment and accounts for approximately 42% of all current applications. Investors anticipate the submarket to become the second central business district in Hong Kong, following the redevelopment of the former Kai Tak Airport. The other districts with large numbers of applications include Kwai Chung and Tsuen Wan. If all current applications were approved and executed, it is expected to provide around 3.2 million sq ft of new office spaces and 3.5 million sq ft of modern industrial spaces.

Looking ahead, more applications are predicted for redeveloping existing properties as modern industrial buildings with better specifications and curtain-wall appearances. Provided the potential hefty sum of land premium charged for changing the land use and uncertain time required for land premium negotiations, it may not be preferable for investors to change the land use to office. Moreover, the rental and capital values for non-Grade A office and new industrial buildings in most decentralised locations do not differ significantly. As occupier demand for modern industrial buildings remains robust, investors can save land premium costs and enjoy higher returns from such redevelopment.