Hong Kong property: Creating opportunity out of adversity

There is a growing concern in Hong Kong’s private sector: The city is facing a crisis of quality office space whilst demand is continuously increasing. Predictions are that the annual average supply of new office space coming online over the next three years will be 50% of the past 15 year annual average, which will force rents upward. Hong Kong already has the most expensive office space globally by a significant margin, causing affordability issues and the latest research is showing that even Wanchai rents are now on par with central London.

One solution put forward by the government focuses largely on the revitalisation of the industrial building stock and the decentralisation of the Central Business District. Industrial stock amounts to 185 million square feet, over 20 million square feet more than the total office stock. Whilst there is only 8 percent (14.8 million square feet) vacancy, 39 percent is believed to be used for purposes other than industrial use and government records show that only 1 percent of those occupants have paid for waivers for a change of use. This creates a significant opportunity to convert or redevelop the stock for office use to achieve greater efficiency, and generates revenue for the government at the same time.

Located in urban areas with available infrastructure and good public transport, all these industrial buildings are suitable for alternative uses and represent a great opportunity for larger corporate occupiers to take the lead in redeveloping ‘forgotten’ areas and having a positive impact on the community. Embarking on the industrial conversion journey can be used as the catalyst for change and drive business transformation in an organisation.
Companies deciding to embrace this vision could, not only realise considerable financial benefits such as total property cost reduction and increased utilisation but also some business impacts such as increased integration, flexibility and transfer of knowledge culminating in greater corporate community that is proven to positively impact staff attrition.

Industrial conversion also presents environmental benefits. Companies can go “green industrial” at a lower cost, especially when Hong Kong Green Building stock is very low and 100 percent full. As industrial buildings are relatively young in Hong Kong, they generally have large open floor plates, high ceilings and good floor loadings. The structure could suit many different industries and with a quality design create something unique and inspiring.

The Hong Kong government has put in place a few measures to facilitate redevelopment by reducing the threshold of existing owner consent to sale from 90 to 80 percent and providing flexibility around land premium payments for conversion of use.

Many industrial areas have been successfully redeveloped across the globe; we can even see good examples in Shanghai where Taikang Road, originally a candy factory, was turned into an International Artist Factory where lots of advertising companies and others are now headquartered. Another example is Suzhou creek and Moganshan Road in Shanghai. This district was a former cotton mill and has now transformed into an art district. The art district covers around 23.65 hectares and it owns 41,000 square meters of industrial buildings that were built in from the 1930s.

The barriers (finding a suitable location, high up front capital cost, etc.) to make the move are many and therein lies the challenge and opportunity for companies who can be innovative and take the lead to gain a competitive advantage. The alternative is to wait for the developers to slowly bring on their buildings and continue to ride the roller coaster Hong Kong market.