Industrial Building Redevelopment in Hong Kong: Pilot Scheme to Charge Standard Rate Premiums - A Closer Look
Introduction
On 5 March 2021, we published a Q&A on the Development Bureau's announcement for a two-year pilot scheme to charge land premiums at standard rates for lease modifications involving industrial building (IB) redevelopment.
On 15 March 2021, the Lands Department (LandsD) issued a Practice Note (Note)1 to provide further guidance on the initiative. This legal update takes a closer look at the operational details of the new scheme and how interested owners may make use of the scheme to plan for IB redevelopment.
Duration
The pilot scheme is an attempt to enhance certainty of the premium for lease modification and in-situ land exchange applications, and in turn expedite redevelopment of pre-1987 IBs. The scheme will run from 15 March 2021 to 14 March 2023.
Key Concepts
The Note sets a couple of important concepts/ criteria to clarify the applicability and scope of the scheme:
| (i) | Industrial Building (IB) |
A building built for industrial and/or godown use on an industrial lot. Excludes:
|
| (ii) | Industrial Lot |
A lot which, under its land grant, shall not be used for any purpose other than for industrial or godown purposes or both Also covers:
|
| (iii) | Pre-1987 IB |
IB which was:
Excludes IBs which completed wholesale conversion under IB revitalisation schemes introduced in 2010 or 2018. |
Option During the Two-Year Period
The scheme runs parallel and as an alternative to the conventional, case-by-case mechanism for premium assessment. Applicants who do not find the standard rates premiums attractive may opt for the existing conventional approach for premium assessment.
Such option may be made during the above two-year period, but has to be made no later than the acceptance of the Provisional Basic Terms Offer (PBTO) for the proposed lease modification or land exchange.
For straightforward cases, LandsD will normally issue a premium offer under the Binding Basic Terms Offer (BBTO) within five weeks from the day it receives an applicant's acceptance of the PBTO.
However, where a premium is offered under the BBTO, no appeal can be made against such offered premium. If the applicant decides not to proceed any further with the application, all application fees already paid will be forfeited.
Standard Rates
Under the scheme, the following set of standard rates has been promulgated for five geographical regions across Hong Kong (as broadly delineated in the plan at Appendix II of the Note) where the relevant lot is situated and three types of uses involved:
| Region | Before use | After use | |
| Industrial/godown | Commercial/modern industrial | Residential | |
| Hong Kong Island | HK$40,000/m2 | HK$75,000/m2 | HK$130,000/m2 |
| Kowloon East | HK$40,000/m2 | HK$65,000/m2 | HK$100,000/m2 |
| Kowloon West | HK$35,000/m2 | HK$60,000/m2 | HK$110,000/m2 |
| New Territories South | HK$35,000/m2 | HK$50,000/m2 | HK$75,000/m2 |
| New Territories North | HK$20,000/m2 | HK$30,000/m2 | HK$55,000/m2 |
One can readily compute the chargeable premium based on a simple yet non-negotiable formula:
Premium = A x B – C x D
Denotations as follows:
| Descriptions | Additional Notes | |
| A | Maximum total gross floor area (GFA) after the application |
|
| B | Applicable standard rate, as per the geographical location of the lot and the use after the application |
|
| C | GFA before the application, in relation to the pre-1987 IBs existing on the lot or existed immediately before the lot became vacant |
|
| D | Applicable industrial/ godown standard rate, as per the geographical location of the lot | - |
We again refer to the quick example cited in our earlier Q&A: the IB is situated in Hong Kong Island, with a GFA of 8,000 m2 for industrial/godown use before lease modification and a GFA of 6,000 m2 for residential use. The applicable premium shall be
A x B – C x D
= 6,000 m2 x HK$130,000/m2 - 8,000 m2 x HK$40,000/m2
= HK$460 million
How to Apply?
Applicants may opt for premiums to be assessed at standard rates by completing and submitting a two-page Option Form at Appendix I of the Note.
Transitional Arrangements and LandsD's Discretion
For on-going lease modification or land exchange applications where the BBTO has yet to be accepted as of 15 March 2021 (the date of the Note), applicants will be invited to opt for premium to be assessed by standard rates by 30 April 2021 once. Applicants will not need to go through the process of re-submitting their applications nor bear the administrative fee once again.
It must be noted that LandsD will consider each and every request to opt for standard rate assessment by its own merits, and in its capacity as a landlord with absolute discretion to determine whether to process or approve the request. Decisions made by LandsD in this regard is final and binding on the applicants.
Conclusion
The new pilot scheme definitely offers greater flexibility and certainty to owners of pre-1987 IBs who are considering redevelopment of their sites and potential investors who are contemplating to acquire such IBs. This will allow them to budget a more accurate amount of capital investment for redevelopment.
However, the clock is ticking: applicants whose lease modification or land exchange application is being processed but wish to opt for premium assessment by standards rates must make necessary submissions by 30 April 2021. Meanwhile, other interested owners of pre-1987 IBs are strongly advised to act swiftly and consult trusted land consultants and legal practitioners to fully explore their options under this special time-limited arrangement.
1 LandsD Lands Administration Office Practice Note No. 1/2021 "Pilot Scheme for Charging Land Premium at Standard Rates on Lease Modifications for Redevelopment of Industrial Buildings" (15 March 2021).
