Hong Kong Industrial Property Returns Slowing, Says Churchouse

Returns on Hong Kong industrial properties are slowing after prices of factories and warehouses doubled since early 2009, according to Peter Churchouse, former head of property research for Asia at Morgan Stanley.

The average rate of return for funds investing in industrial buildings in Hong Kong has declined to about 20 percent to 25 percent from almost 70 percent five years ago, said Churchouse, who now runs Portwood Capital Ltd., a closely held investment company he founded in 2009.

Increased demand for commercial space in Hong Kong, the world’s most expensive place to rent offices, has prompted factory and warehouse owners to convert properties to accommodate tenants seeking space for marketing showrooms and retail outlets. The average price of factory space has more than doubled since early 2009 to HK$2,708 ($349) per square foot at the end of the first half, according to property broker CBRE Group Inc., the world’s biggest commercial realtor.

“The days of 70 percent rate of return are probably over,” Churchouse, who has been investing in Asian properties for 30 years and publishes the Asia Hard Assets report, said in an interview Oct. 12. “Pricing is making it tougher. The growth in value of industrial buildings in the last five years has been higher than any other asset classes in Hong Kong.”

Hong Kong’s Chief Secretary Carrie Lam said last month the government is working to convert more industrial buildings into residential use, as it faces pressure to boost housing supply in the city where home prices have gained more than 90 percent since early 2009.

Rents Surge

Rents for industrial space, mostly clustered around districts such as Kowloon East and the New Territories, have risen about 50 percent since early 2009, according to Los Angeles-based CBRE. Hong Kong’s Central business district has the world’s highest office occupancy cost, at $248.83 per square foot a year, CBRE said in July.

Companies have been moving offices away from the district to less expensive areas, while financial services firms have been relocating their back offices to cut costs.

“It’s the change of use factors that have driven valuation in these spaces,” said Churchouse, whose funds invest in industrial buildings in the city. “It’s still an attractive investment, but it’s quite difficult to sniff out these opportunities.”

To contact the reporters on this story: Kelvin Wong in Hong Kong at kwong40@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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