Pandemic property investors bet on Hong Kong's old factories

Hong Kong prioritises residential development in order to tame housing prices. PHOTO: REUTERS

HONG KONG (BLOOMBERG) - Hong Kong's property investors are looking beyond the city's skyscrapers to bet on dated factory buildings for better returns.

Industrial property transactions sped up this year, reaching HK$2.7 billion (S$468 million) in the first two months, according to CBRE Group. That represents 73 per cent of the amount for all of last year, the property firm said.

Sales of office and retail properties are weak in comparison. Office transactions stand at HK$1.2 billion so far this year, and only HK$926 million worth of shops have been sold, CBRE data show.

Instead of flipping office floors or street shops, investors have shifted their focus to the industrial buildings that once served as factories making watches, toys and clothing. Industrial properties are the most sought-after real estate in the past few months, after Covid-19 spurred e-commerce that in turn boosted demand for logistics and storage space, said Reeves Yan, head of capital markets in Hong Kong at CBRE.

"It's mainly because demand for businesses including logistics, cold storage and data centers are very strong during the pandemic," said Mr Yan. "These sectors are growing against the market."

Industrial buildings also offer higher rental yield, typically 3.5 per cent compared with office or retail properties' 2.5 per cent, according to Savills. The company expects prices in the sector to rise by as much as 5 per cent in 2021.

Hong Kong is unique for its lack of new supply of logistics property. The city had about 1,800 industrial buildings in 2018 with the majority built between the 1970s and the 1980s, according to the city's Legislative Council.

Hong Kong prioritizes residential development in order to tame housing prices. Of the 24 land plots the government auctioned last year, only two were for industrial use. It isn't selling any industrial sites in the current financial year.

"We really like the supply-demand characteristics where the supply is gradually diminishing. All the buildings are being taken down or converted into something else, whereas the government doesn't bring much land forward for industrial or logistics development," Peter Wittendorp, chief executive officer at Silkroad Property Partners Ltd., said in a phone interview. "Yet at the same time, demand is steadily growing."

The real estate fund manager bought a six-story industrial building in the New Territories for HK$321 million in February. Silkroad is keen on purchasing similar properties in the future with prices in the range of HK$200 million to HK$500 million, Mr Wittendorp added.

A new CBRE survey polling 492 property investors across the Asia-Pacific region found that 23 per cent of the respondents, mainly long-term institutional buyers, were willing to bid above asking prices for logistics real estate.

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