It can increase the plot ratio by 20% and the rent collection by 60%.
The government's policy address in October last year announced the plan to restart the industry building transformation, which was called by the market "Industry Building Transformation Policy 2.0". Hong Kong Wen Wei Po found there have been totally "zero" case of industry building transformation since the new policy came into effect this year, while 19 applications for the transformation of commercial buildings have been submitted to the Urban Planning Board, involving 5.08 million sq ft of floor area modification or reconstruction, quite active. It is worth noting that there are up to 17 reconstruction cases and only 2 applying for whole building modification. The contrast is so large, mainly because the policy is heavily inclined to rebuild. Reconstruction can increase plot ratio by 20% without reserving 10% of floor area to rent to specific industries cheaply.
Hong Kong Wen Wei Po (By Ngan LunLok)
The "Industry Building Transformation Policy 2.0" includes permitting building owners to convert the building into transitional housing, moreover, applying to the Urban Planning Board for the modification or reconstruction of the building into a commercial building within three years from January this year. The first issue of this series has reported there was zero case for transformation into transitional housing. The application conditions for transformation into a commercial building are basically the same as the government's old plan to launch the first round of industry building transformation from 2010 to 2016, while there is an additional condition that the owners must rent 10% of the floor area to specific uses required by the government, including cultural and artistic industries, creative industries, innovative science and technology industries, community service facilities, sports and well-being uses.
Reconstruction cost low and has high potential.
The above newly increased condition is derived from the fact that many non-industrial sectors in the market, such as culture, art, innovation and technology, have already operated in traditional buildings, however, after the first round of industry building transformation policy, there is criticism that the rise in rent after the modification made the above-mentioned small tenants difficult to bear, Then the government proposed last year that owners have to provide 10% of the floor for the government's specific policy-oriented uses including the above-mentioned industries if applying for modification of the whole building, which is a restriction on modification in disguised form.
According to government estimates, 1,160 buildings in Hong Kong are eligible for the above-mentioned modification, and about 330 among belong to single ownership, i.e. they can be started immediately. However, Hong Kong Wen Wei Po found that the number of applications for modification of the whole building in the first eight months of this year was very small, only two, accounting for only about 10% of the total number of applications. Going through the data, during government carrying out the first round of industry building transformation from 2010 to 2016, up to 109 of the 172 applications finally received applied for modification of the whole building, accounting for up to 63%. On the contrary, only 37% of the applications were for the reconstruction of the building at that time, but there were as many as 17 applications in the first eight months of this year, accounting for nearly 90%.
The Senior Director and Director of Evaluation and Consultation Department of Knight Frank LLP, Lam HoMan, who is knowledgeable about industry building transformation, expresses, the key cause to the large increase in the number of applications for reconstruction is new policy allows a 20% easing of the plot ratio, since the great increase in development potential has attracted the attention of the owners of the building and the cost of applying to the City Planning Board is low, so many industry building owners still choose to apply to the City Planning Board to release the property potential even they choose not to rebuild, after then they can choose to rebuild or sell the whole building even it involves land premium, while the value of the building has risen dramatically.
The internal rate of return for industry building transformation is 16%.
According to government data, there are about 1,000 buildings completed before 1987 in Hong Kong, and about 280 among are single ownership, so it is estimated that applications for reconstruction will continue to rise. On the contrary, for modification of the building under new policy, owners have to reserve 10% of the floor area to rent to the designated industries, but this kind of tenants have low tenancy capacity, paying sq ft rent at about HKD10-30 of the most according to Knight Frank LLP's estimate, which means that the rents of this 10% of the floor area are similar before and after the modification. Industry insiders point out that, the new plan has more restrictions on the modification of the whole building, and the qualified buildings had applied earlier in the old plan, so the new plan for modification of the whole building is in vain.
In fact, owners want to modify or rebuild the buildings into commercial buildings mainly because the rental and sale prices of the commercial building are higher than that of the industry building. How much does the value increase? The Head of Research Department in Greater Bay Area and Hong Kong of CBRE, Chen KamPing points out that, it generally requires HKD1,200-2,500 per sq ft to transform an industry building into an office building, a shop or a hotel, and the rent premium could be 60% after the transformation. In the past, some projects were recorded a capital increase of 44% to 149% in the investment period after transformation, so it is obviously that buildings after transformation have a higher capital growth than other industry buildings. Including related capital expenditure, these investment projects can generate an average internal rate of return in 16%.
Due to the rising value of industry buildings under the new policy, investors’ interest in them has increased greatly this year. According to the information provided by the Real Estate Research Department of Ricacorp Properties, there were 24 transactions of industry buildings exceeding HKD100 million in the first eight months of this year, although up only 14% from the same period last year, but for the whole building there were 10 transactions, which is about double of that in the same period last year. It is reflected under the new policy that, the market has a strong interest in the property of the whole building, which is strange in the reverse market this year.