In the global commercial real estate industry, one of the main drivers of occupier and investment markets is the pressing need to enhance the value of properties to ensure they can attract and retain tenants in the post-pandemic world. Dramatic changes in the way people live, work and play have given new impetus to disruptive forces that were effecting the property industry before the virus struck. Traditional sectors such as retail and offices have been badly effected, especially ageing and underperforming assets. The design, performance and location of properties – even those in prime locations – have come under intense scrutiny. In the Asia-Pacific region, “value-added” investments , which seek to generate higher returns by upgrading or repositioning properties, have become the most popular investment strategy, according to the findings of a survey published by CBRE in January. JLL estimates that 50 per cent of properties in prime locations in Asia are more than 20 years old, with US$40 billion of value tied up in ageing or underperforming real estate. While the scope for enhancing the value of real estate assets is huge in all the major markets in the region, Hong Kong presents one of the most compelling opportunities for repositioning and repurposing properties. No other economy in the region entered the pandemic in such a precarious position, having previously experienced a succession of domestic and external shocks. Few sectors in a leading real estate market have suffered more damage than Hong Kong’s retail and hotel industries, with the virus-induced closure of the border with mainland China by far the most severe to befall the city’s property market. Restrictions could hurt Hong Kong retailers more than early stages of pandemic The number of new daily Covid-19 cases in the city is now comparable to levels in Britain and the United States. Having lost control of China’s worst Covid-19 outbreak since the pandemic erupted, Hong Kong is now bracing for some form of lockdown , undermining plans for the restoration of quarantine-free travel with the mainland. According to Bloomberg’s Covid Resilience Ranking, which shows where the pandemic is being handled most effectively with the least amount of upheaval to business and consumers, Hong Kong has plummeted to 52nd place among 53 economies being tracked. The severity of the disruption in the retail and hotel sectors is matched only by the acuteness of the crisis in the housing market . The dearth of suitable land ready for large-scale, high-density residential development has long restricted the supply of decent and affordable homes. This has created an opportunity for investors and operators to repurpose hotel assets . In the past year, there has been a string of deals involving fund managers that have taken advantage of Hong Kong’s depressed hotel valuations to acquire properties that can be converted into co-living schemes. This allows investors to capture the strong demand from young professionals for more affordable, flexible and higher-quality rental accommodation in prime locations. Other, less extreme forms of asset enhancement that have gained traction include technological upgrades to properties, measures to make buildings more energy efficient and the provision of flexible office space to meet tenants’ demands for more agile workplace solutions. Hongkong Land, the largest landlord in Central district, opened its first flexible office space last year, one of the few big landlords in the city to offer such spaces. The scope for enhancing the value of commercial real estate in crisis-battered Hong Kong is huge. Even so, not enough is being done to encourage owners, developers and investors to make the necessary investments to increase the performance and value of properties. Part of the reason is that Hong Kong is to some extent a victim of its own success. Unlike in Australia, where office occupancy rates in Sydney and Melbourne at one point fell to less than 10 per cent of pre-Covid-19 levels because of lockdowns and the relative ease of working from home, occupancy rates in the city were more or less back to pre-pandemic levels by the end of 2020. Andrew Macpherson, the head of asset development, Asia Pacific, at JLL in Hong Kong, said the pandemic put Australian landlords under more pressure to upgrade offices to retain and attract tenants. More importantly, Hong Kong’s government needs to do more to help encourage property owners and investors to reposition and repurpose underperforming real estate. While recent regulatory and tax changes have acted as a catalyst for the redevelopment of older industrial buildings , fuelling a surge in investment in the city’s industrial and logistics sector, policy-induced barriers to redeveloping properties make successful repositioning complex and costly. Although the debate over who should bear the costs of upgrading real estate assets to meet the challenges of sustainability and affordability extends well beyond Hong Kong, it is clear the government and the private sector need to work together to unlock value in the industry. Macpherson said that if asset enhancement initiatives are left up to the market, they “will only go so far”. Given the scale of Hong Kong’s housing crisis and the vast opportunity to reposition property assets to improve liveability and affordability, public-private partnerships are the way forward. Nicholas Spiro is a partner at Lauressa Advisory