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Industrial Revitalization 2.0 – The Scheme so far…

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It’s been more than a few months since the Industrial Revitalization Scheme 2.0 was announced by Hong Kong’s Chief Executive, which encourages the conversion of old industrial buildings towards other commercial uses, particularly office and retail. But has the scheme so far been a success or has it been a bust?

The reality is that not much has happened within the last six months, as of June 2019, there have been zero special waver applications for the wholesale conversion of a property. Why is that? It’s still too early to say the exact reason, but it’s likely because investors and landlords are not entirely clear on what are the benefits and incentives of the program, as well as what are the exact processes and regulations.

The government’s Land Department has allowed for greater flexibility on terms of how old industrial properties are used, including converting them into data centres, creative industry studio/office, and rental housing for some of the lower podium levels – all which have been proposed as new initiatives. Still the application processes are not all that simple. For example, data centres can be used as buffer floors but only within certain zones, and buffer floors that are already in use as refuge or mechanical floors can’t be turned into data centres if the existing building has already reached the maximum GFA – but this hasn’t been clearly communicated. In addition, despite some zonings for which data centres are always permitted (e.g. R(E)), the conversion to data centre may not be applicable for zonings not specifically mentioned by the Scheme (i.e. only allowed within “Commercial” (C), “Other Specified Uses” annotated “Business” (OU(B)) and “Industrial” (I) zones).

A temporary solution to a long-term problem

Rental housing within this context refers to transitional housing – housing is a major concern in Hong Kong because of the lack of supply and the unaffordability of purchasing a home. The introduction of rental housing into the Revitalization Scheme 2.0 comes from the long waiting times for public housing. It’s a good initiative, but the incentives to convert into housing have not been made clear. Converting industrial buildings to residential units is a substantial investment, requiring renovations, partitions, and retrofits to meet fire safety standards. Landlords don’t know whether the return on investment will be justified at all, especially since they can’t sell them, but only rent the units to household families with limited income that meet certain requirements.

For this initiative to become more of a solution and for more applications to come in, the government needs to come up with real incentives for the landlords. In this case, rentals won’t be market driven, they will be cap driven because they are not serving the market, only a certain income level. The government needs to incentivize landlords by not only waiving the deposit and administration fees, but by subsidizing the CAPEX or rental income as a part of housing policies.

A request to the government

The guidelines and incentives around the Industrial Revitalization Scheme 2.0 have not always been made as clear as they could be. It’s a good initiative, considering the current land supply issues in Hong Kong, but the government needs to provide better guidelines around the rental housing proposal. At this moment there are still some aspects that need more clarity – we’re unsure about the return on investment, or even the current demand for transitional housing which is likely to be managed by an NGO, we are also still unsure how NGOs will work with the landlords to rent and place people.

Are there any successes?

The Mills

Based on the Scheme 1.0, there are actually a few success stories, because more than 50% of the 125 applications that have been submitted have been converted. On top of that, Scheme 1.0 was successful in revitalizing old areas and making places more business oriented. But will the Scheme 2.0 be a success or a bust? It’s still too early to say – applications take time to prepare and submit, there’s a lead time involved. Still, the government should continue to provide more support for the scheme while landlords should think of creative ways to make their return on investment viable, it’s a good program and it would be a shame to see if fail because of lack of clarity and information.

If you would like to know more about the Industrial Revitalization Scheme 2.0, please reach out. I’d be more than happy to go into the what’s, how’s, and why’s of the scheme.

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Hannah Jeong

Head of Valuation & Advisory Services

Valuation & Advisory Services

Hong Kong

Hannah Jeong has extensive valuation & advisory services experience over 15 years including property investment and development projects specialising in valuation, development consultancy, financial analysis and feasibility studies. Project’s geographic coverage span across Asia Pacific and Middle East, in particular Hong Kong, China and Korea. She has started her career with Colliers since 2006 and is now heading our Valuation and Advisory Services - Hong Kong Office with over 40 professionals.

Hannah has strong client coverage on major financial institutions including global real estate funds and private equity firms.

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