In its 2009-10 Policy Address the government announced an array of new policy measures aimed at optimizing the use of older industrial buildings in the city whilst also addressing the shortage of commercial space in core districts. Among these new policy measures, was the facility for owners to apply for nil waiver fee for change in use of older industrial buildings. As of end-2011, 15 applications had been approved with nine applications (total GFA of about 600,000 sq ft) targeting to office use.
For landlords of industrial buildings, the new measure has provided an opportunity to enhance their asset at relatively lower cost. Currently, the rental value of office-use premises can be 50-70% more than that of industrial-use premises with similar specifications in the same district. Office tenants can also benefit from the new measure because users in revitalised industrial buildings can occupy premises as offices legally and with less restrictions compared with industrial or industrial/office users. Moreover, the rental level of offices in revitalised industrial buildings is only around HKD 8-10 per sq ft, which is only 30% of Grade A office rents or 50% of Grade B office rents, in a similar location. As such, revitalised industrial buildings can be seen as a feasible option for more cost-conscious tenants who want to further reduce their operating expenses without trading off substantially on accommodation quality.
However, I do not see the wholesale conversion (change of use) of older industrial buildings creating much pressure on the Grade A office market. At least, we have yet to observe any notable movement of tenants from the Grade A office market into revitalised industrial buildings. Demand for offices in revitalised industrial buildings has so far been largely restricted to those relocating from industrial buildings nearby. So what is holding back more notable tenants from relocating into this seemingly more cost effective office space? Building specification is one of the major reasons. Although industrial buildings need to conform to an array of technical criteria such as fire safety and lift service systems before they can be subject to wholesale conversion, the revitalised buildings merely remain modernised industrial buildings and are not intended to be direct substitutes for Grade A offices. In reality, not all Grade A occupiers can accept such a down-grade in accommodation quality, as the difference in the quality of office space between industrial buildings and those that have undergone wholesale conversion is generally distinguishable.
In addition, in terms of future supply, there are currently only 50 cases pending approval. Compared with the estimated 1,200 industrial buildings that meet candidate criteria within the territory, the pipeline for revitalised industrial buildings is relatively thin. Most of these premises are small in scale with floor plate sizes typically less than 10,000 sq ft. These are not the typical sizes sought by traditional Grade A office tenants.
In short, while revitalised space may be an option for tenants seeking lower rents, it is not expected to have any significant impact on demand in the Grade A office market.
About the author
Frank Ma is the Manager of Research for Jones Lang LaSalle in Hong Kong.