Rezoning of Hong Kong industrial properties

The latest suggestion of the Planning Department to relax the industrial land usage in CDA can strengthen investment momentum on industrial assets.

March 04, 2022

After the recession in 2019-20, Hong Kong achieved 6.4% GDP growth in 2021, signalling a strong economic recovery. In particular, the industrial property sector has registered an unexpected 9% year-on-year growth in capital value.

Figure 1: Capital value growth for commercial properties in 2020-2021

Source: JLL, February 2022

As the economy recovered, industrial properties have been keenly sought after by both end-users and investors. Supported by the increase in merchandise trade, resurgent domestic consumption and the prevalence of online retail, demand for logistics warehouses was strong in 2021, with the vacancy rate dropping to 1.5% and rents rising by 5.9%. The investment momentum for industrial properties was also robust. There is a growing demand for storage facilities and data centres, given the rise of the new economy, such as the 5G network and cloud computing.

Despite the keen demand for industrial properties, there remain a large number of industrial buildings in relatively run-down conditions, especially those in the Comprehensive Development Area (CDA). Neither have they been listed in the market for sale, nor have any redevelopment/refurbishment plans been announced.

What caused the inertia to act?

Reviewing the background of CDA zoning would help explain it better. A CDA zone is a designated area that replicates the structure of a district with residential and/or other commercial supporting facilities, sometimes including multiple land lots. These lots face the probability of being rezoned if their original land usage does not fit under the framework of CDA. Rezoning intends to facilitate the revitalisation of ageing districts and achieve better land use. Seven industrial areas with 46 buildings have been labelled as CDA to date. The most recent project was the residential redevelopment led by Sun Hung Kai Properties and three other industrial building owners in Tsuen Wan East, offering 1,330 residential flats.

However, the example cited above appears to be an exception rather than the rule. The large number of dilapidated industrial buildings in CDA suggests that the policy to encourage industrial asset redevelopment is not working as smoothly as intended. According to a Report On 2020 Area Assessments on Industrial Land in the Territory survey, the fragmented ownership of the properties and/or land lots within a CDA is a major obstacle in the redevelopment process. Given that a Master Layout Plan for the whole CDA is required to submit a planning application, it will take considerable time and effort for property owners within the same zone to agree on project details. The situation will be further complicated if the buildings are strata-owned, needing the consolidation of ownership. Another obstacle is that the new land usage may not match property owners’ aspirations. Land rezoning may require substantial upfront outlays (e.g., land premiums and development costs) that could be prohibiting for some owners, leaving them no choice but to shelf their redevelopment plans.

Being aware of this issue, the Planning Department offered the owners of industrial buildings in CDA to retain their use for industrial purposes upon their redevelopment. The department also proposed to reduce the size of CDA to minimise complexity in unifying ownership and/or gathering consent. Should the government give a green signal, these industrial assets could release more potential, expediting the pace of urban renewal.

In addition, the government may consider more proactive ways to push forward urban regeneration through CDA. These can be achieved by offering incentives such as discounts on land premiums, lowering the compulsory sale threshold, or co-developing with existing owners. Meanwhile, the increase in supply stock for industrial assets could stimulate the investment momentum while more redeveloped industrial assets would be on stream in near future, resulting in a possible expansion of the local industrial property market.

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