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HONG KONG (Feb 8): Disputes over the valuations placed on old industrial buildings are likely to prove an obstruction to attempts by the Urban Renewal Authority (URA) to redevelop them, analysts say.
Financial Secretary John Tsang Chun-wah, announced last week that the government would invite the URA to redevelop industrial buildings under a pilot scheme. The proposal received the tentative support of from some in the industry.
Most of the problems associated with redevelopment — such as land premiums — would be solved if the URA carried out the redevelopments and then sold the buildings on to developers, said Charles Chan Chiu-kwok, managing director of Savills Valuation and Professional Services.
"The URA project could be excluded from the land-premium levy. Developers would not need to pay the levy to the Lands Department if they bought the redevelopment project from the URA.
"Also, the URA could assume full ownership of the building after the redevelopment by applying the Lands Resumption Ordinance if it was unable to reach agreement on the revised valuation with all owners," Chan said.
However, the major challenge to the proposal will be disputes that are likely to emerge over the value of the redeveloped property.
Currently a developer has to pay a land premium for turning an industrial building into a commercial or office building. The size of the levy will reflect the difference in the value placed on the building based on its former use, and the revised value based on its new use.
Richfield Group project director Elwyn Chan Chi-ling said the difficulty with this approach was that most of Hong Kong's old industrial buildings were no longer limited to industrial use.
"In the meantime they have been converted into retail or office use, sometimes without government approval," Chan said.
For developers this means that if they wish to acquire an old industrial building for redevelopment they must offer a price based on the value attached to its current use, rather than its industrial valuation. And they must pay a land premium to the Lands Department for upgrading the building into offices or apartments.
"This is why most developers hesitate to buy these kinds of buildings for redevelopment," he added.
Under the new proposals from the government, the URA need not pay a land premium to redevelop an industrial building. But neither was it likely to take the illegal use of the building for offices or apartments into account when calculating an acquisition price.
This could lead to disputes with owners that could jeopardise the redevelopment programmes proposed for the URA.
"Another problem that the URA will face is that it will be difficult to merge the industrial sites into a large-scale development site," Chan said.
For example, there are many industrial buildings in Kwun Tong that cover only a small area and have a thin rectangular shape. Separately, those sites are too small to support a quality building of sufficient scale.
The surplus of new office buildings in East Kowloon would also dampen the appetite of developers for old industrial buildings, said Gabriel Cheng, a director in the investment department at Savills.
"The supply of office space in East Kowloon is still greater than demand, and there is the question of whether demand from expansion or relocation will continue," Cheng said.
In 2010, the government cut the minimum number of sales acceptances from unit holders to 80% in order to trigger the compulsory acquisition of all units at industrial and residential buildings.
"More developers were interested in acquiring industrial buildings for redevelopment after that," said Richfield's Chan.
"However, the problems of the land premiums and the aggressive asking prices of vendors have kept developers away. So far, we have sold only one industrial building to Henderson Land." — SCMP
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