Revitalisation scheme relaunch could drive industrial property values by up to 149%

Opportunities for redevelopment abound at Kwun Tong, San Po Kong and Kwai Chung.

The relaunch of the industrial revitalisation scheme is set to encourage acquisitions of aged industrial buildings, as capital value growth of selected revitalised properties can range from 44% to 149% over their respective investment periods, which is well beyond those recorded for all other industrial buildings, according to CBRE’s latest research report.

The scheme on “Revitalisation of Industrial Buildings” was first launched by the Hong Kong government between 2010 and 2016 to encourage wholesale conversion and redevelopment of aged industrial buildings.

The government announced in the 2018 Policy Address that it will reactivate the scheme in phases, which will allow industrial buildings to be redeveloped to provide transitional housing. It will also require landlords applying for wholesale conversion to reserve 10% of the converted GFA for occupiers from the arts and cultural, creative, innovation, technology, social services, and sports and recreational sectors, as well as encourage owners to redevelop industrial buildings constructed before 1987 by allowing developers to gain maximum 20% non-domestic plot ratio for redeveloping industrial properties.

According to Marcos Chan, head of research for CBRE Greater Bay Area and Hong Kong, given the potential high return investors can gain from revitalised and redeveloped industrial properties, there has been a significant increase in the acquisition of aged industrial properties in recent years.

“Predominantly, many opportunities are found in traditional industrial areas such as Kwun Tong, San Po Kong, Kwai Chung & Tsuen Wan, Cheung Sha Wan & Lai Chi Kok, and Wong Chuk Hang. The relaunch of the scheme presents an attractive investment case and is set to encourage more transactions of aged industrial buildings,” he highlighted.

CBRE Research also found that converting an industrial building to commercial use typically costs $1,200 to $2,500 per sqft, depending on fit-out and specifications. Rents for revitalised industrial properties used for office or semi-retail purposes can command premiums as high as 60%.

“Considering the relevant capital expenditures (CAPEX), these investments represent an estimated average internal rate of return (IRR) of 16%,” he highlighted.

As the maximum 20% non-domestic plot ratio gain from redeveloping pre-1987 industrial buildings is expected to lead to more en bloc acquisitions of aged industrial buildings, CBRE noted that may help boost capital value growth.

Tom Gaffney, regional managing director for CBRE Greater Bay Area and Hong Kong, added that acquisitions of industrial buildings for redevelopment in 2017 and 2018 totalled $24.5b, representing 49% of industrial investment volume in 2017 and 2018 combined.

“This is a significant increase on the average of 18% recorded in the preceding five years to 2016, highlighting investors’ growing appetite for industrial redevelopment sites,” he explained. “In addition to aged industrial properties, high-specification warehouse buildings are also sought after by third-party logistics (3PLs). Industrial and logistics properties are currently amongst the most popular asset classes in Hong Kong.”

Bullish demand coupled with low vacancy is forecasted to boost industrial property capital values in Hong Kong by up to 5% in 2019.

CBRE noted that an average of nine industrial buildings have been demolished every year since 2010, removing an average of 1.4 million sqft of industrial space per annum. With little new supply scheduled to be completed until 2023, vacancy is set to remain at low single-digit levels in the years to come.

Also read: Forced relocations buoyed industrial transactions in Q1

“Forced relocation will remain a key theme this year, driven by the strong demand for investors to acquire aged industrial buildings for redevelopment or wholesale conversion as a result of the revitalization scheme,” Samuel Lai, senior director for advisory & transaction services – industrial & logistics at CBRE Hong Kong, said in a statement.

Stable demand and low vacancy are expected to translate to up to 5% YoY growth in warehouse rents in 2019.