Supported by tight supply and strong growth in external trade and domestic consumption in 2021, the vacancy rate of Hong Kong’s warehouses hovered at an extremely low level of about 1%. Vacancy rate edged down even further in the first half of 2022, despite a moderation of trade growth and the Shanghai lockdown caused by a renewed COVID-19 outbreak. The persistently low vacancy level reflects the resilience of demand for storage spaces, much of which came from domestic operators since the pandemic. The same is observed in the flatted factories segment that caters to SME tenants, who often prefer flatted factories over prime warehouses for goods storage.

Compared to prime warehouses, units in flatted factories are relatively small. This provides more flexibility and scalability for tenants to expand or consolidate their lease of spaces in tandem with their storage requirements. The other consideration for SME tenants is that many flatted factories are located in or around the city, while prime warehouses are normally near the HK-China border, airports and ports. The urban location allows operators to reduce delivery time and cost to retail stores, restaurants or residences. According to the Hong Kong Government’s Planning Department, warehouse/storage took up 48.8% of the total floor area of industrial buildings in the city, being the most popular usage for industrial space among other purposes, such as offices and food factories.

Notwithstanding the stable demand in flatted factories, the lack of maintenance and the ongoing revitalisation scheme reduced the commercial space available in the market. Over 65% of industrial buildings are built before 1987, and their specifications may not be meet current storage requirement, in terms of floor loading and ceiling height. While most of the flatted factories are in urgent need of refurbishment or repair, only premises located in areas near the port or border will likely be revamped. Those outside the area are more likely to be demolished and redeveloped for residential or commercial usage, leading to the further shrinkage of potential storage spaces for operators.

The current government policy called Revitalisation Scheme 2.0 has accelerated the process. As of today, about 50% of GFA in the flatted factories has been approved to change its use into office. The 29% of the stock that will be redeveloped will likely be built as modern industrial. The building specification of these modern assets will be closer to an office than a warehouse as the former may fetch better rents and, therefore, more attractive returns.

It is expected that the domestic demand for storage in the metro area will continue to grow, given the rise of e-commerce and mini-storage. This comes at a time when flatted factory stock is diminishing. Taking this in consideration, the government needs to strike a balance between redevelopment and preserving the flatted factories. Incentives can be given to premises owners to encourage refurbishment. For example, allowing commercial use for certain floors in refurbished flatted factories with land premium exempted/reduced while the rest of the floors will be kept for storage use. The initiative will allow building owners to get a better return while the storage spaces in the metro area can be maintained.

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