20 October 2018
Old industrial buildings can be converted into residential developments if changes are made to the revitalization program. Photo: Savills
Old industrial buildings can be converted into residential developments if changes are made to the revitalization program. Photo: Savills

Rethinking industrial building revitalization

With the government reconsidering its scheme for industrial building revitalization, the time is now to consider how best to tweak the program for optimal results.

If you have marveled at the industrial chic of Ovolo Southside Hotel in Wong Chuk Hang, enjoyed your morning brew at a hidden gem of a coffee shop in Chai Wan, or gone to work in the innovative offices of Kwun Tong, you have the government’s revitalization scheme for old industrial buildings to thank for.

The scheme, which ran from April 2010 to March 2016, was aimed at creating more commercial floor space by redeveloping and converting old industrial buildings scattered primarily across East Kowloon, Cheung Sha Wan, Yau Tong and Kwai Chung in addition to Wong Chuk Hang, which are underutilized because of the SAR’s vanishing manufacturing base.

As of 2016, nearly 12 million gross square feet of industrial space has been approved for conversion into offices, hotels and retailing. The program reduced construction waste and promoted much-needed gentrification — such as at the Kwun Tong promenade.

The concept of industrial regeneration is nearly ideal — it’s working beautifully in London, Melbourne and Boston — though the results in Hong Kong have been decidedly mixed. At the top of the list of challenges are low or slow financial returns. Investors are faced with high design and renovation costs that chip away at yields, and that doesn’t take into consideration the costs associated with bringing the properties up to the current fire code; sprinkler systems for offices and industrial spaces are very different beasts.

In addition, usage is restricted to specific commercial sectors for the time being, and strata titling means management and safety standards — and potentially rental rates — can vary from floor to floor.

The government has been flirting with another round of revitalizations, but that won’t happen unless changes are made to the program. In her inaugural policy address, Chief Executive Carrie Lam said there could be new redevelopment or conversion incentives for owners, title assembly facilitation, and dedication of lower floors for non-industrial purposes. All of these measures have the potential to make a revitalization project more worthwhile for owners.

Industrial building locations are also a factor in their failure to be an instant fix. With the exception of Kwun Tong and Wong Chuk Hang, many are located in districts with few amenities, and though most have strong transit connections, these areas can be ghost towns at night, making security another issue for investors to wrestle with.

While gentrification has pushed rental rates and capital values up in surrounding properties, the rent hikes have also driven away long-term tenants – many of them cultural, who bring much needed social vibrancy to the areas – and forced occupiers to consider new grade B stock instead, where there is greater value in better quality buildings. All that taken together leaves little in the way of incentives for more conversions.

Nonetheless, there is still a commercial space shortfall, as well as a residential one, and the conversions have put pressure on industrial space with the recent rebound in manufacturing in Hong Kong.

The revitalization scheme remains a strong option; it just needs fine-tuning. One of the easiest tweaks, and a sure way to find faster returns for investors, is to broaden the rules of usage. Residential conversion should be considered, particularly for revitalizations near transit links and school networks.

Industrial buildings could also be the source of a new class of luxury property in light of the worldwide popularity of warehouse-style flats and lofts. Investors could also exploit the large floor plates and potentially small homes for geriatric and elderly housing, a sector in short supply in Hong Kong, and where demand is projected to mushroom in the coming years.

Finally, as the government continues to advocate for smaller flats as a solution to the housing crunch, another burgeoning sector – self-storage – is perhaps the ideal tenant for revitalized industrial buildings. Demand for personal storage isn’t going away, and the flexibility to create a product with an immediate need and a future is music to investors’ ears.

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Senior Director and Head of the Kowloon Office, Savills

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