Challenges loom in converting industrial buildings into homes

Agents welcome plan to allow redevelopment, but say profits are limited

Paggie Leung

The government's latest plan to allow owners to convert their old private industrial buildings into homes is expected to give a further boost to the industrial property market, but estate agents believe it will only be possible to do a few conversions.

"The new policy is positive news for the market, which will stimulate both transaction volumes and prices, as owners are now given one more option to redevelop their buildings," said Raymond Chu Leung-hang, senior district director at commercial real estate agency Ricacorp (CIR) Properties.

Chief Secretary Carrie Lam Cheng Yuet-ngor said last week the government would relax building and town planning rules to make it possible to convert old private industrial buildings into "transitional accommodation" to help the housing supply. The dwellings, of about 300 square feet each, would be for rent and not for sale for at least 10 years.

There are more than 1,400 industrial buildings in Hong Kong and the changes will allow sites zoned as "other specified uses (business)", on which 700 industrial blocks now stand, to be converted for residential use.

"However, it will be difficult to convert these buildings into residential flats unless an industrial property belongs to one single owner," Ricacorp's Chu said.

Only about 10 per cent of the 700 blocks, or about 70 buildings, belonged to single owners, he said; and if the buildings had large floor areas - for example more than 10,000 sq ft per storey - conversions would be almost impossible because there would not be enough windows. However, despite these challenges, some owners of old industrial buildings had already begun expecting higher prices from buyers.

Prices of industrial properties had been rising steadily before the new policy was announced, and are up about 20 per cent on average so far this year. Prices of en-bloc consolidations have climbed even higher, by up to 30 per cent to 35 per cent.

Pierre Wong Tsz-wa, deputy chairman of commercial realtor Midland IC & I, said the new measure gave market sentiment an immediate boost. However, he cautioned that the policy might only be attractive to owners of poorer quality industrial buildings in less ideal locations, such as Tuen Mun and Tsuen Wan, which lease for less than HK$10 per sq ft a month.

Wong said it was unlikely that prospective tenants of a converted factory building would be willing to pay more than HK$4,000 to HK$5,000 a month to rent a 200 sq ft to 300 sq ft flat, which implied owners could only lease the converted space for about HK$20 per sq ft per month.

Some industrial blocks in better locations including Kowloon East had been turned into office buildings under a previously-announced government revitalisation scheme. These premises commanded a monthly rent of nearly HK$20 per sq ft already, so owners were unlikely to convert them into temporary homes.

"If you turn the space into a hotel, a 300 sq ft room can bring in HK$500 per night, equating to a maximum monthly income of HK$15,000 per room or HK$50 per sq ft," Wong said.

Eddie Li Sau-hung, an industrialist who owns four factory buildings, also agreed earlier that the new provision was "not very attractive" compared with incentives for converting such properties into hotels.

However, property consultancy Knight Frank's executive director, Alnwick Chan Chi-hing believed the policy could help housing supply.

He pointed out that the cost of turning a 100,000 sq ft factory block into homes would be HK$500 per sq ft, totalling HK$50 million. Since the flats would lack facilities, they could not be leased for much more than HK$15 per sq ft, so it would take about three years for an owner to break even on the conversion. But this was still attractive enough to woo owners to convert properties.


This article appeared in the South China Morning Post print edition as: Challenges loom in converting industrial buildings Converting industrial buildings poses test