Fortune favors those who dare in looking for real estate gold
tong lau. Apartments range in size from 960 to 1,320 square feet, including a penthouse with a private rooftop, and monthly rental is offered at HK$48,000 to HK$110,000. Each apartment has two bedrooms, except the first-floor unit, which has just one. The yield is also good — 15 percent based on the cost of purchase and renovation compared to rental levels. That is four times more than the usual market average of 3 percent for mass market units.
The considerable profit reflects the painstaking effort that went into every step of the nine-year project to convert Tung Fat Building into a modern-style residence while preserving its original charm.
The first challenge Allan encountered, as this was her first residential development project, was negotiating with existing tenants in order to acquire total ownership.
With the assistance of an interpreter, the first- time developer managed to talk to every tenant and landlord she could locate and negotiated acquisition and relocation terms.
Some families, especially those with elderly members, were happy to move someplace with an elevator. But for tenants who had not paid rent for a long time and whose respective landlords could not be located either, the team could only resort to the courts for help.
Of all the lengthy negotiations, acquisition talks for the ground floor required the most patience, running for a long five years. The floor had a mechanics’ shop and the operator was unwilling to sell, while other family members were the owners of the space.
Eventually a solution was agreed upon — to find the operator another location with similar facilities and neighborhood. “I think you have to understand what people want. Make sure you address their concerns,” said Allan.
Five years passed
The third phase came when architects from Australian design firm Kerry Phelan
Investors can expect considerable profits from tong lau redevelopment, but the threshold for investing in such property can be fairly high, industry experts warn.
Besides higher acquisition prices and construction fees, buying out at least 80 percent of the building ownership for redevelopment can be quite time consuming, they caution.
However, if negotiations are successful, such projects offer attractive returns.
“If you are able to acquire ownership of the building and redevelop it, the profit will be much higher than the market average, as rigid demand in Hong Kong is still strong,” said Thomas Lam, head of valuation and consultancy at Knight Frank.
But he warned that no matter whether investors plan to acquire the targeted property by applying for compulsory sale — which requires the acquisition of at least 80 percent of the total ownership with certain conditions —or via private agreements with existing landlords. “Don’t be surprised if you have to spend at least three to five years on it.”
According to data from the Hong Kong Institute of Surveyors, as at June 2011, about 4,000 buildings in the city were aged 50 years or older. These buildings have reached the end of their designed working life and usually lack proper repairs and maintenance. Therefore the government has been encouraging the Urban Redevelopment Authority or private builders to redevelop these dilapidated buildings, mostly through compulsory sale.
But related projects have been rare in recent years as property prices are soaring, according to Vincent Cheung, Cushman & Wakefield executive director for valuation and advisory services on the mainland and in Hong Kong, Macao and Taiwan.
Many redevelopment projects are geared toward hotel purposes these days, Cheung pointed out. “There used to be many residential-to-residential redevelopment cases before, but now we’re seeing more of commercial-to-hotel cases,” he said. “Commercial properties usually have higher utilization ratio, which meets the needs of hotel developers.”
At the same time, many office buildings have also been redeveloped for residential purposes, Lam added, as ownerships at such buildings are less separate.
Even Victoria Allan from Habitat Property, a small-scale developer who converted the Tung Fat Building tong lau into a modern low-rise New York loft-style apartment block, admitted that projects of this kind can be hard to spot, even
The ground-floor mechanic’s workshop now houses a Mexican-style fusion restaurant. Eight apartments, one on each floor, were all rented out within less than three months since being launched last December. Only rentals are offered currently.
Around HK$60 million in total, divided nearly equally between purchase and renovation costs, was spent on converting the building.
It took nine long years for the project to officially hit the market, well over Allan’s initial estimate of three to five years. However, she observed the lack of such specially designed buildings nine years ago, and still thinks the same way.
“Bringing more unique products and more quirky conversions to the market is what a small developer would do to differentiate themselves. There was a gap for such kind of ideas and I still see it today,” she said. But such opportunities are dwindling, and it requires a keen nose to be able to sniff out redevelopment potential. Allan mentioned Chai Wan, North Point and Tin Hau as possible destinations for similar conversion projects, where old buildings, colorful neighborhoods and fine Western-style eateries cozily co-exist.
“I think certain kinds of plot ratio bonus or taxation benefits can be implemented for more developers to revitalize old buildings,” said Allan. “But (they should restore) them properly, including finding the right interior design, instead of just keeping the façade.”
Although the time spent on acquiring the building and renovating it was much longer than expected, Allan will not hesitate to plunge right in if a similar project presents itself. She said: “If I find somewhere with the same charm I’ll do it again.” Contact the writer at firstname.lastname@example.org if a market with decent profits lies ahead.
“A lot of developers already own some units or some parts of the building, which makes others really hard to acquire now,” she said. “Pricing in Hong Kong has moved so much that the entry point for developers is far higher.”
Although her project involved converting the tenement building on the basis of its old construction instead of tearing it down, Allan worries that developers may be mistaken on the “right” way to redevelop tong lau.
Victoria Allan, founder of Habitat Property, rejuvenated the iconic Tung Fat Building but kept its original black terrazzo nameplate and gave it a New York loft-style makeover, with larger windows offering panoramic sea views, and color and material synergy creating a sense of tranquil harmony in the eight apartments across as many stories.