Developers and landlords of industrial-office (I/O) buildings are bracing themselves for fierce battles as they compete for tenants and buyers with demand dampened by the sluggish economy. The increase in supply this year is expected to put pressure on rents and prices in the composite I/O sector. C.Y. Leung & Co director Francis Li said there was no doubt the prospect for I/O buildings was not promising when all property sectors were suffering. Rents and prices would head downwards but the downside would not be significant, he said. Neither would the I/O sector record sharp appreciations in a market boom. Despite the overall market concerns, Mr Li said good-quality and conveniently located I/O buildings would stand out in the slump, and draw tenants. I/O buildings of quality comparable with office premises and located near a public transport network such as an MTR line would be favoured. Those of inferior quality or similar to ordinary industrial and factory establishments would get poorer responses. According to C.Y. Leung's research, the supply of major I/O buildings this year will mainly be in Kwun Tong and Cheung Sha Wan. It said six new I/O buildings would be completed in Kwun Tong this year, involving 990,000 square feet. For instance, Sino Land was building a 253,000 sq ft property in Hoi Yuen Road and Hung To Road. Four I/O buildings would be completed in Cheung Sha Wan this year, involving 438,300 sq ft, including the 280,566 sq ft Peninsular Tower being built by Sun Hung Kai Properties (SHKP) and a 179,996 sq ft building of Cheung Kong (Holdings) in 682-684 Castle Peak Road. SHKP said marketing for Peninsular Tower began in March and more than 80 per cent of space had been sold or leased. The last phase of spaces had been offered at a starting rent of $11 per sq ft a month. Mr Li said the I/O market in Kwun Tong and Cheung Sha Wan would see a better performance because they were established industrial areas and would provide strong demand from companies in old premises wishing to upgrade. Industrial-related companies are the main target for I/O buildings. Under a new government rule, trading firms requiring storage space of not less than 30 per cent of the total usable area of an I/O building also can move into them. According to the Rating and Valuation Department, the total stock of I/O space amounts to 3.44 million sq ft with a vacancy rate of 25.9 per cent or 893,400 sq ft of unoccupied space. It said about 1.86 million sq ft of I/O space would be completed this year and 516,600 sq ft next year. But Mr Li said no major new supply of I/O buildings would come on to the market next year. Developers and companies that had proposed I/O buildings would slow down or put developments on hold because of the market uncertainties, he said. Analysts expressed concern that demand for quality accommodation from small- and medium-sized manufacturing companies would drop as many ran into financial difficulty in the economic situation. Estate agents said rents of I/O buildings in the New Territories such as Sha Tin had been hit severely by weakened demand, falling as low as $5 to $6 per sq ft. Some agents said the rental gap between I/O buildings and grade-B office properties had narrowed as a result of the sharp correction in the overall office market, which was a further dampener for I/O premises. Mr Li said potential I/O tenants would not necessarily go to grade-B office buildings unless these were in good locations and of good quality. Companies would pick large-scale and quality I/O buildings instead of small grade-B offices in inferior locations. He said average rents in I/O buildings were about $10 per sq ft, but inferior premises would lease at even lower rates. Prospects for conventional industrial and godown premises also were flat, analysts said. Government statistics project that new supply of industrial space will be 581,200 sq ft this year and 1.47 million sq ft next year. The vacancy rate was 10 per cent at the end of last year. Completion of storage and godown space is expected to reach 3.34 million sq ft this year and 1.18 million sq ft next year. Vacancy was 9.4 per cent last year. Kerry Properties has emerged as the most aggressive investor in the industrial sector this year, with the acquisition of three government sites in Kowloon Bay. It bought an I/O site in the area for $238.8 million in May which can provide a gross floor area of 1.62 million sq ft, after paying $112 million for a smaller site in February. It won another site at a government tender with a $46.8 million bid. The mix of properties to be built on the three sites has yet to be finalised. Analysts said the three projects would not be completed for at least three years and could benefit from the upgrading of Kwun Tong and Kowloon Bay areas - in the past predominately industrial-oriented. According to C.Y. Leung, New World Development and Sino Land are expected to complete separate industrial-godown properties in Kwun Tong this year. The district would see the completion of nine major industrial-godown buildings next year with a total of 1.22 million sq ft. They included one being built by Henderson Land in Hung To Road, one by Sino Land in How Ming Street, one by Cheung Kong in Chong Yip Street and one by SHKP in King Yip Street. In 2000, six new industrial-godown buildings would be completed in Kwun Tong, involving 749,000 sq ft. In Cheung Sha Wan, C.Y. Leung expected three I/O buildings with 590,260 sq ft and five industrial-godown buildings with 882,522 sq ft would be completed in 2000. In Kowloon Bay, Nan Fung Development was expected to complete an 845,000 sq ft industrial-godown building in 2000 and Sino Land would finish a 588,000 sq ft godown. Three industrial-godown towers would be ready in San Po Kong in 2000, involving 696,600 sq ft. Two were being built by Henderson Land and one by New World. In Tuen Mun, five projects designated for godown-office developments were expected to be completed in 2000, providing 666,885 sq ft. Three were being developed by Hon Kwok Land and one by K Wah International. Mr Li cast doubt on prospects and demand for mixed godown-office properties and criticised the Government's introduction of such sites. He said godown and office premises were for two different business activities which were not compatible. Mixing them into one development would not suit market demand, especially when office activity was limited in Tuen Mun.