Hong Kong industrial fires: a new foe?

August 5, 2016 / By

Recent fires at two older industrial buildings in Hong Kong have drawn the government’s attention to improve fire safety standards of industrial buildings built before 1973, when the installation of sprinkler systems was not mandatory. Following the Garley Building fire in 1996, the Fire Safety Ordinance 502 was introduced in 1997 to empower the Fire Service Department to issue directions on improving fire safety standards in commercial buildings. A similar regulation, the Fire Safety Ordinance 572, was introduced in 2002 but with a focus on mixed residential and commercial buildings. However, industrial buildings were exempt from the new regulations.

In terms of cost, the installation of the sprinkler systems is not excessive; for a 300,000-sq ft industrial building, installation costs typically are less than 2% of building’s market value. Moreover, owners may apply to various government agencies for loans to help finance the installation. So why have sprinklers not been installed in these industrial buildings?

Aside from the regulatory concerns, there is little financial benefit in installing sprinkler systems as they, alone, do not necessarily add value to a building. Tenants are likely to baulk at any increases in rents aimed at offsetting the installation costs, which would make it hard to recuperate costs. More importantly, the installation of the sprinkler system itself is only likely to contribute to a small part of total costs, which would include the loss of rental income associated with the installation process. It is usually difficult (and even impossible) to perform an installation in situ if there are tenants in the building. As a result, buildings usually will need to be vacated before works can commence. Unless the owner can trigger a sale and redevelopment clause, the owner does not have the right to force tenants to leave. Taking into account forgone rental income, total costs could account for 5-7% of the building’s total value.

Moreover, according to the latest audit review on fire protection and prevention work by the Audit Commission in 2013, only 1.3% of the target buildings issued with directions under the Fire Safety Ordinance 572 have complied with all directions. As such, future regulations on industrial buildings may not be well enforced and owners may be tempted not to comply.

If the government decides to review these regulations and forces owners to install sprinkler systems, these additional costs will need to be borne by the owners. Investors could trigger the sale and redevelopment clause to reduce the void time associated with the installation process but they would be wise to also undertake asset enhancement works that could help lift rents and offset some of the installation costs.

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