Government enforces crackdown on misused industrial buildings

With repercussions on emerging service industries.

The Hong Kong government recently announced it would begin enforcement action against the breach of land use in industrial buildings. The move comes less than a month after serious fires in two industrial buildings in Kowloon Bay and Cheung Sha Wan.

According to a research note from CBRE, the measures will be the first in a series of actions, and focus on industrial buildings with high flows of people due to the illegal use of industrial premises for commercial or other community purposes, and which are also being used for the storage of dangerous goods.

Six industrial buildings have already been identified as falling into the above category. The owners of these buildings are required to rectify the usage of the premises within 14 days from the date of warning letters to be issued on 29 August, or the District Lands Office will commence the procedures to seize the premises from the landlord. The six buildings are: Chung Hing Industrial Mansions; San Po Kong Yuen Fat Industrial Building, Kowloon Bay; Tai Ping Industrial Centre ( Block 1), Tai Po; Tak Lee Industrial Centre, Tuen Mun; Wah Fung Industrial Centre, Kwai Chung; and Shield Industrial Centre, Tsuen Wan.

For those buildings in breach of the lease but without any dangerous goods storage, the Lands Department will continue with its existing arrangement requiring landlords to correct unauthorised usage within 28 days.

Here's more from CBRE:

A total of 209 industrial buildings in Hong Kong have been issued with a Licence for Manufacture and/or Storage of Dangerous Goods, with 19 schemes on Hong Kong Island, 22 in Kowloon and 168 in the New Territories. If developments in industrial estates managed by the Hong Kong Science and Technology Park, purpose-built schemes and warehouses built for self-use are not included in this total, the market is left with 63 buildings that are potentially in breach of their land lease.

Non-compliance in industrial building usage is increasingly common in Hong Kong. A report issued by the Planning Department in 2015 found that 29% of space in industrial buildings is occupied for non-industrial usage (approximately 87 million sq. ft. although they are not necessarily non-compliant) while another 14% of space has unidentified usage. Recent years have seen the rapid growth of emerging service industries in unconventional spaces, with trades such as general retail, restaurants, entertainment facilities and recreational halls expanding into industrial buildings due to their lower occupancy costs and more flexible layout.

The new measures will likely see affected landlords serve lease termination notices to violating tenants in order to avoid authorities from seizing the premises. Such tenants will therefore need to secure alternative space, either in industrial premises with waivers, or other options in commercial buildings. However, the tight vacancy environment will pose an immediate challenge for non-compliant tenants looking for legal space where they can continue their operations in cost-effective buildings.

In many cases, these tenants have been paying rents in industrial buildings in the range of HK$10-15 per sq. ft. per month. However, spaces in commercial buildings typically begin at HK$20 per sq. ft. per month, which will have a serious financial impact on many businesses. It may also limit options for dangerous goods storage operators as portfolio landlords avoid the risk of leasing space to them at the expense of other tenants.

In the longer term, the reduced flexibility in industrial building usage is set to increase vacancy risk in industrial buildings and negatively impact investment values. The likelihood of the government introducing additional measures to further regulate the safety and usage of old industrial buildings will temporarily ensure investors remain on the sidelines. While the new enforcement actions are seen as appropriate to curtail activity in industrial buildings potentially detrimental to public safety, CBRE Research believes the government still needs to urgently address the lack of cost-effective commercial space for the development of emerging service industries.