Hong Kong's mid-sized developers seek to create markets in unlikely niches to survive city's worst economic slump on record

By Cheryl Arcibal

/ SCMP |

October 14, 2020 4:38 PM SGT

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SINGAPORE (EDGEPROP) - Hong Kong's real estate developers, particularly mid-sized companies that rely on a narrow segment for their sales, are diversifying their product offerings to find potential revenue in new market niches to help them survive the city's worst recession on record.

Some of them are developing data centres, while others are expanding into industrial facilities and self-storage warehouses, said Maggie Hu, an associate professor of finance and real estate at the Chinese University of Hong Kong. Mid-sized developers are particularly vulnerable to the adverse impact of the business downturn in Hong Kong, giving them a bigger incentive than large, cash-rich companies in adapting to changing needs of the market.

"(They) are often much less diversified in their assets and types of income streams, [so] diversification is more important and imperative for them to navigate through the crisis," Hu said. "Different types of real estate assets are affected by the pandemic in different ways. Self-storage facilities, industrial facilities and data centres have faced much less declines than malls, lodging, hotel and housing."

Hotels and shopping centres are bearing the brunt of Hong Kong's economic slump as the number of tourists in the city began to dwindle last year following the massive street protests that rocked Hong Kong, and further reduced by the Covid-19 pandemic that led to travel restrictions. Falling retail sales caused rental charges to slip, forcing some luxury retailers to shut outlets and drove Russell Street in Causeway Bay off the perch as the world's most expensive retail strip.

Far East Consortium Limited, the biggest operator of three-star hotels in Hong Kong, is going into the business of providing private vaults for customers to store their valuables. The operator of the Dorsett hotels in Wan Chai and Kwun Tong launched 4,500 safe deposit boxes in a private vault measuring 3,000 square feet (279 square metres) at the basement of its Silka Far East Hotel in Tsuen Wan, converting space that previously hosted a foot massage parlour, and a bank vault.

Kowloon Development, a developer of tiny flats in Hong Kong, recently diversified into mass retailing, with the 2,000-sq ft Soda Mall that features a supermarket and a grocery store for health foods.

"We see great potential in this segment, [because] banks are downsizing their operations" offering safe deposit boxes, said Chris Hoong, managing director of Far East. "Generally you have to wait six to seven years to get a safe-deposit box, depending on the location."

The customers aimed for by Far East Vault are the residents living close to the hotel in Tsuen Wan, Hoong said, adding that in Hong Kong, the small flats mean little space for valuable items that are hardly used or worn every day.

"We have some space in our hotel in the basement in Silka ..., and we decided the best way to utilise the space is to put up a safe-deposit box [business]," Hoong said. "Depends on how this one goes, we need a year to observe, at least a year before making a decision whether to start a new one."

So far, the company is getting 20 inquiries a day. With the smallest box available for HK$218 (US$28) a month, Far East expects the private vault business to yield an income that is comparable to revenues coming from a small hotel with 100 rooms.

The business model is responding to an unmet demand in the city, said Lawrence Wan, a senior director of retail advisory and transaction services at CBRE Hong Kong.

"We do see that demand for safe deposit boxes has always been present in Hong Kong, but sadly the supply has never been able to meet the demand," Wan said. "Given the high security and loading specification requirements, as well as larger space required, specifically basement or ground floor areas, suitable space for private vaults and safety deposit boxes is extremely limited."

Locations outside Hong Kong's core business and retail districts are also ideal for a private vault business, Wan said.

"Even now, with the rentals having dropped significantly in core districts, it hasn't reached the point where this business can be sustainable on the high street level," he said. "For residential areas, where the rental decline is rather mild, it remains challenging to find a location that fits the technical requirements and caters to local demand."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

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