Occupancy rates fall at converted industrial buildings

Developers who spent a fortune in converting their old industrial buildings into offices have been unable to draw in tenants in the highly competitive market, with some projects encountering high vacancy rates of 62 per cent.

Only a third, or 83 out of the 226 applications have actually been utilised for commercial redevelopment purposes after the Hong Kong government discontinued the six-year long industrial revitalisation scheme in March, according to international property consultant JLL.

The main purpose of the scheme was to reduce commercial property shortage in the city by facilitating the transformation of industrial buildings into offices, hotels and retail space.

Among the 58 cases that came up for office space development, JLL surveyed the performance of the 28 completely converted office projects.

Jacqueline Wong, associate director of valuation advisory services at JLL said the average occupancy rate of the 28 completed converted office buildings were 75 to 80 per cent, which is much lower than the overall office occupancy rate of 85.5 per cent in Kwun Tong, Hong Kong’s oldest industrial district. Wong said four buildings had occupancy rates of 38 per cent to 67 per cent, and three of these were in Kwun Tong.

“The failure to lease these buildings could be due to the quality of the product or the high rent or a combination of both,” she said.

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“Having spent a large amount of money on the reconversion, which could be as much as HK$1,200 to HK$2,000 per square foot , it was expected that the landlords would ask for high rents,” she said.

But due to the low ceiling and smaller office sizes on each floor, the converted offices were unable to attract quality tenants who had the capacity to pay higher rents.

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It would be hard to compete with the purpose built grade-B offices in non-core districts where companies could charge tenants HK$15 to HK$20 per square foot, she said.

Thomas Lam, head of valuation and consultancy at Knight Frank, however, said rents at the converted office spaces have limited upside potential when compared with retail purpose ones.

“Many of these owners prefer to sell their property as the valuation will be enhanced once they get the government green light for redevelopment,” he said. Only cash rich families would fork out substantial amounts of capital to turn the industrial buildings for alternative use given that they could afford longer repayment periods, Lam said.

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One prominent example is Laws Group, which has converted two old industrial buildings into a new mall, D2 Place One and Two, in Lai Chi Kok and offered the same for lease purposes. D2 Place Two, which was offered for lease in March, will carry the themes of arts, music, sport, and food and beverages. It is opposite D2 Place One which was launched three years ago as a specialised shopping mall for fashion designers and fashion-related products.

CBRE, however, believes old industrial buildings that can be converted into self-storage properties could realise three-fold rental incomes for landlords, compared to those for industrial use.

“The self-storage market in Hong Kong remains fundamentally solid,” said Darren Benson, Executive Director, Advisory & Transactions Services - Industrial & Logistics, CBRE Asia, adding that due to the small size of residential flats in Hong Kong, storage demand would go up.

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According to CBRE estimates, self-storage demand in Hong Kong last year was about 3.4 million square feet. Though the existing self-storage stock stood at 3.1 million square feet largely in Kwun Tong, there was still a shortfall of 200,000 square feet in the city.

“In the next few quarters, we expect the self-storage market to expand continuously, but likely at a slower rate, as the weak residential sales market and the uncertain macro conditions have dimmed the short-term outlook. The industrial revitalization scheme resulted in lower industrial stock, which may also create rental pressure for operators,” he said.

While most operators are becoming more cautious with their expansion plans, bigger operators are actively scanning for buying opportunities with expectations that more stock will come on to the market as sellers exit to lock in capital gains achieved over the past few years, he said.