Retail switch for industrial sites has flaws

PUBLISHED : Wednesday, 01 August, 2012, 12:00am
UPDATED : Wednesday, 15 August, 2012, 10:43pm


Limited retail space for sale and rising land costs have led some shopping mall operators to consider converting industrial buildings to shopping arcades, but property experts question the viability and efficiency of such a strategy.

Charles Chan Chiu-kwok, managing director at Savills Valuation and Professional Services, said developers faced many challenges when seeking to convert an entire industrial building into a shopping mall.

'A mall operator may avoid having to pay a land premium when redeveloping an industrial building to a mall under the government's revitalisation scheme. However, the relief could be restricted to only part of the conversion - for example three storeys from the ground level,' he said.

And where a developer is required to pay a land premium to demolish an industrial building to make way for retail space, the premium could be so high that the developer would find the project unprofitable.

'Also, it's difficult to get an approval from the Town Planning Board, including the need to pass a traffic impact assessment. And Hong Kong's industrial areas are located in some old districts such as Kwun Tong where the traffic can be very bad,' Chan said.

More than 98 per cent of unit holders in The Link Real Estate Investment Trust last week voted at the reit's annual general meeting in favour of a plan to diversify its investment strategy by purchasing industrial buildings and converting them into shopping malls.

The Link Management, which runs the 182 retail and car park properties owned by the reit, said it had been in talks to acquire some factory buildings, since reits were not allowed to buy land sites.

Last year, The Link Reit bought two shopping malls in Hang Hau - Nan Fung Plaza and Maritime Bay - in an effort to dispel the impression it only runs malls on public housing estates. Property agents said vendors of shopping malls responded to the move by raising their asking prices, dragging potential yields on the malls down from 4 to 3 per cent.

'The reit is now looking at industrial properties because it is difficult to buy existing retail properties, as many large shopping malls are owned by big developers,' Chan said. Agents said it was targeting industrial buildings in Kwun Tong.

Sun Hung Kai Properties bought the Luen Tai Industrial Building in Kwai Chung more than a year ago for conversion. It also acquired the Hip Lik Industrial Building in San Po Kong in October, which will be redeveloped into a 23- or 24-storey mall. Both projects are set to be completed in or before 2014.

'There isn't enough retail space in Hong Kong so doing such conversions is the right direction to go in,' property consultancy Knight Frank's executive director, Alnwick Chan Chi-hing, said. But he highlighted the difficulty of finding industrial properties on sites big enough for malls.

'Retail properties need loading bays,' Chan said. 'But [for existing buildings] you can't dig an underground car park and the financial viability will be affected if the loading areas are on the ground levels which are prime for retail.'

Industrial areas in Kowloon Bay and Kwun Tong were better locations for shopping centres, he said, but these areas were not yet mature enough for 'Ginza-style' retail properties, as there were insufficient shoppers in their catchment areas.

Joe Lin, senior director of retail services at CBRE, said the property consultancy had received inquiries about converting industrial buildings. 'Industrial buildings have a higher loading capacity and high ceilings, which are suitable for conversion into shopping centres.'

But the biggest hurdle was to find a suitable location, since most industrial buildings were in industrial districts with few shoppers. 'For example, industrial buildings in Kwai Chung, Tsuen Wan and Fo Tan are not suitable ... But buildings in Kwun Tong and Kowloon Bay have the development potential,' he said.