Returns on Hong Kong industrial buildings 'slowing down'

Conversion of factories to other uses has seen prices skyrocket, says Morgan Stanley veteran

PUBLISHED : Wednesday, 17 October, 2012, 12:00am
UPDATED : Wednesday, 17 October, 2012, 2:39am

Returns on Hong Kong industrial properties have slowed as the prices of factories and warehouses doubled since early 2009, according to Peter Churchouse, former head of property research for Asia at Morgan Stanley.

The average rate of return for funds investing in industrial buildings in Hong Kong had declined to 20 to 25 per cent from almost 70 per cent five years ago, said Churchouse, who now runs Portwood Capital, a closely held investment company he founded in 2009.

Increased demand for commercial space in Hong Kong, the world's most expensive place to rent offices, has prompted factory and warehouse owners to convert properties to accommodate tenants seeking space for marketing showrooms and retail outlets. The average price of factory space has more than doubled since early 2009, to HK$2,708 per sq ft at the end of the first half, according to property broker CBRE Group, the world's top commercial realtor.

"The days of a 70 per cent rate of return are probably over," said Churchouse - who has been investing in Asian properties for 30 years and publishes the Asia Hard Assets Report - in an interview last week. "Pricing is making it tougher. The growth in value of industrial buildings in the last five years has been higher than of any other asset classes in Hong Kong."

Chief Secretary Carrie Lam Cheng Yuet-ngor said last month that the government was working to convert more industrial buildings for residential use as it faced pressure to boost housing supply in the city, where home prices had increased by more than 90 per cent since early 2009.

Rents for industrial space, mostly clustered around districts such as Kowloon East and the New Territories, have risen by about half since early 2009, according to Los Angeles-based CBRE.

Hong Kong's Central business district had the world's highest office occupancy costs, CBRE said in July.

Companies have been moving offices away from the district to less expensive areas, while financial-services firms have been relocating their back offices to cut costs.

"It's the change-of-use factors that have driven valuation in these spaces," said Churchouse, whose funds invest in industrial buildings in the city.

"It's still an attractive investment, but it's quite difficult to sniff out these opportunities."