Hongkongers have always been creative when it comes to their living and working spaces. When offices become scarce, people come up with new ideas for creating a workspace in an industrial building. Ditto for when suitable (or what any of us personally considers suitable) homes are hard to come by.

But a pair of recent fires has compelled the government to police the city’s industrial spaces, and that could throw a wrench in many people’s plans.

Under Pressure

A CBRE news release from July stated the Planning Department calculated a full 29% of industrial space was occupied for non-industrial purposes, a total of 87 million square feet (plus an additional 14% listed as unidentified) as of 2015.

So when a fire in a misappropriated industrial space in Kowloon Bay killed a firefighter in June, and then another injured four in Cheung Sha Wan in July, questions of safety and bending building codes emerged.

Inspections started and non-compliant owners were given 14 days to rectify their situations or the government would seize the properties.

With the source of both deadly fires in the summer being illegal mini-storage spaces, the move to eliminate improper storage of dangerous goods is a welcome one.

Like the last election cycle’s clean-up of illegal structures, the fires directly prompted the action, as “People have been living in and using these industrial buildings for unauthorised purposes for years, and there has been very little enforcement action”, remarks Landed author Christopher Dillon.

Enforcement, though, could mean an impact on alternative residential options. CBRE argues increased regulation will have a potentially negative impact on emerging service industries.

“The government has stated its dedication to enforce regulations on industrial building usage to protect public safety. We believe this will be the first in a series of actions by the government, and additional measures will likely be introduced in the future to further regulate the safety and usage of old industrial buildings,” says Marcos Chan, CBRE’s head of research for Hong Kong, Southern China and Taiwan.

“Landlords will tend to terminate leases of violating tenants in order to avoid authorities seizing the premises.”
Those tenants could face increased rental costs in a tight vacancy environment, and as a result, financial pressures. Reduced flexibility will also negatively impact investment values.

“The government still needs to urgently address the lack of cost-effective commercial space available to emerging service industries,” stresses Chan, referring to burgeoning services industries such as fintech, which the government expects to buoy Hong Kong’s economic future.

Working from Home

Like industrial spaces, commercial offices as residences have been a tacitly agreed upon illegality for many years. For small business owners with valid business licences, the line between lawful and not was very blurry. While there is less danger in commercial units, landlords could get nervous the industrial clean-up will extend to them.

For anyone flirting with the idea of moving into an industrial or office space (or tried and given up) the devil is in the details. In the way businesses run from home are subject to special levies come tax time, residential and commercial utility fees can be radically different – and much higher.

PCCW residential fixed lines begin at roughly $110 per month, whereas business lines start at $168. For those convinced the landline is dead, broadband internet begins at $150 per month (depending on provider and location) and can be double that for businesses.

Hongkong Electric’s residential tariff for the first 150 units is 91.8 cents and $1.85 each if you use more than 1,500 units. It’s $130 for the first 500 units under its commercial and industrial tariff.

“I saved money because of a really low rent, but I was getting killed on power,” says Beatrice, who lived in a commercial space in Sheung Wan for two years before she gave it up and moved back into a residentially zoned flat.

“I was in Sheung Wan, so it wasn’t so bad, but even there I wasn’t near a 7-Eleven or a restaurant. I had to take a little walk to find everyday things I needed after office hours.”

Things can be even direr in traditional industrial districts, where amenities such as supermarkets, gyms, convenience stores, dining options and even transit can be few and far between. Also, imagine the daytime noise if a neighbour is a printer.

Though a government crackdown doesn’t help things, Executive Homes’ Annemay Harnett theorises the tide could be turning anyway, with more people like Beatrice giving up – particularly when more rental stock has come on the market in recent months.

“There is a general awareness among the public now which we didn’t see a few years back and [the government enforcement] will most likely have an effect on who is prepared to risk living in a commercially zoned building,” she says.

Dillon partially agrees, reminding us of the market’s penchant for biding its time.

“It’s too early to tell if the crackdown has had an impact. Many potential buyers and renters are waiting to see if the government carries through on its threat to repossess properties owned by people and companies that do not fix violations.”

Of course, getting caught living in an office or industrial space could mean eviction, which could get pricey for residential tenants too.

“A tenant occupying a commercial space can be asked to move out and will incur expenses such as moving costs and agency fees,” Harnett says.

“In case there is a mortgage on the property, no mortgagee’s consent can be obtained.”

Dillon sees the risk as relatively small – but with the emphasis on “relative” – as the current maximum fine is $200,000.

“But the government has said they are considering making this a criminal matter,” he cautions.

There’s also the issue of toxic chemicals from neighbours for those with allergies or small children. Plus: fires. “Anyone thinking of buying or renting one of these units should also consider the risk of being caught in a fire in a building without sprinklers.”