Turning the Tide: Lowering Standard Rates for Lease Modifications to Reignite Industrial Redevelopment in Hong Kong

Introduction

Hong Kong's urban landscape is again undergoing a significant transformation with the recent update to the standard rates for lease modifications aimed at redeveloping old industrial buildings. The Lands Department's Practice Note No. 5/2025 (PN 5/2025), which varies and supplements the previous PN 12/2023, lowers the standard rates for calculating premiums on lease modifications for the redevelopment of industrial buildings that promise to invigorate the real estate market, offering new opportunities for developers and stakeholders to facilitate the transformation of outdated industrial spaces into modern, functional properties that meet the evolving needs of Hong Kong's real estate sector. This article explores the implications of these changes and calls for action from both the Lands Department and the development community.

Key Changes in Standard Rates

The updated standard rates, effective from April 1, 2025, are categorised based on geographical regions and the intended use after lease modification. All the rates are lowered (ranging from -7% for Residential on HK Island up to -29% for Modern Industrial in NT North) with reference to current market conditions and reflect a strategic approach to incentivise redevelopment, particularly for northern part of New Territories and in regions where industrial buildings have long been underutilised. In addition, the previously combined 'Commercial/Modern Industrial' classification has been subdivided into distinct 'Commercial' and 'Modern Industrial' categories to better reflect their unique market values and uses.

Table 1: Standard Rates for Use Before Lease Modification


Table 2: Standard Rates for Use After Lease Modification


The standard rates have been dropping since their first adoption in PN 1/2021 on 15 March 2021 to now. This reflects that the government is aware of the change of market conditions and decline of the land price expectation. The standard rates have been reviewed annually and updated if the Lands Department thinks necessary to ensure the rates are realistic and reasonable.

Insights into the Change

1. Opportunities for Real Estate Stakeholders

All real estate stakeholders, including investors, property managers, and urban planners, stand to benefit. The lowering of standard rates for lease modifications can create a more attractive investment environment, encouraging participation in the redevelopment of outdated industrial properties. This change signals the lowered land price expectations associated with lease modifications on land, making relevant redevelopment projects more realistic either by standard rates premium approach or conventional premium assessment. Investors can now undertake projects in plan that were previously constrained by uncertain or high premiums, accelerating the conversion of old industrial building sites into modern industrial, commercial, and residential spaces and leading to enhanced property values, improved infrastructure, and a more dynamic real estate market. This prompt action will unlock the land potentials and enhance the urban fabric of Hong Kong, aligning with the government's urban renewal strategy, optimizing land use and addressing land shortages for housing, modern industrial/logistics or other uses.

That said, when compared to the most recent public residential land sale of STTL 651 in Tai Wai (NT South) which was awarded to Sun Hung Kai Properties at an accommodation value (AV) of HK$3,128 per sq.ft. in January 2025, we note that the new residential “after value” of HK$41,000 per sq.m. (equivalent to HK$3,809 per sq.ft.) appears relatively high. As such, we still consider it to be above the prevailing market level, a condition that may similarly apply to the other new rates listed in the table.

By statistics, there were 8 cases with premium calculated at standard rates among the total number of 10 executed lease modification/exchange cases pursuant to PN 2/2019 from year 2021 to 2024. We do see more investors going through this standard rate route as a more predictable alternative option against the conventional model in a stable market. 

2. Market Alignment

The separation of the "Commercial/Modern Industrial" classification into distinct "Commercial" and "Modern Industrial" categories allows for more precise valuation of land premiums based on the specific intended use of the redeveloped property. This change acknowledges the distinct market dynamics and value propositions associated with commercial and modern industrial uses.

• Commercial Use: Typically involves retail, office spaces, and hospitality sectors. These are often in high-density developments with significant foot traffic and demand for consumer-facing businesses.
• Modern Industrial Use: It includes a full range of uses which are currently permitted in “I” zones in OZPs, such as office in direct support of an industrial operation; information technology and telecommunications industries; research, design and development centre; laboratory (except clinical laboratory), inspection and testing centre; audio-visual recording studio; design and media production; workshop for laundering or dry cleaning, tailoring, repair of goods; vehicle repair workshop, vehicle inspection centre and vehicle testing centre; cargo handling and forwarding facilities; showroom ancillary to factory; motor vehicle showroom on the ground floor; recyclable collection centre, etc. The lease conditions for industrial sites sold in recent years include such “modern industrial uses”, apart from the conventional industrial/godown uses. This move is particularly differentiating the data centre uses (relevant to “information technology and telecommunications industries“) from the commercial use land value when it comes to lease modification for the existing industrial sites. 
  
  

3. Enhanced Certainty for Developers

By providing updated and distinct standard rates, developers gain greater clarity and predictability regarding the financial implications of their projects and can make more informed decisions to align their investments with market demand and potential returns. This can facilitate more accurate financial planning, reducing the risk associated with lease modifications.

Our View with a Call to Action

The publication of PN 5/2025 intends for a boost for Hong Kong’s real estate market, particularly in light of the fact that, according to Lands Department statistics, no applications had been received under the Revitalisation Scheme for Industrial Buildings for 18 consecutive months since October 2023. This prolonged inactivity underscores the urgency and importance of the new measures in reactivating interest and facilitating redevelopment in the sector. By lowering the standard rates for lease modifications, the government has opened the door to a wave of redevelopment projects that can rejuvenate the city's industrial areas. This move not only supports urban renewal but also addresses critical issues such as housing shortages and the need for modern industrial spaces, which are essential to foster community growth and economic activity, thereby enhancing the quality of life and creating new job opportunities.

The Lands Department may need to review and update the rates more frequently in ensuring they are attractive in prevailing investment condition. However, if the reduced rates alone prove insufficient to catalyse private sector participation, further action is warranted. The government should consider introducing complementary incentives or measures, such as:

• ESG-aligned redevelopment credits: Offering bonus plot ratios or expedited approvals for projects that incorporate green building standards, community amenities, or social enterprise spaces.
• Green financing support: Facilitating access to low-interest loans or green bonds for developers who commit to sustainable redevelopment practices.
• Innovation zones or pilot schemes: Designating specific areas for experimental redevelopment models with lower regulatory barriers, more infrastructural support, fast-track approvals for innovative concepts.
  
  

Developers and real estate stakeholders are urged to seize this opportunity, not only to benefit from the revised rates but also to lead the transformation of Hong Kong’s urban fabric in a sustainable and socially responsible way. By embracing both the financial and ESG dimensions of redevelopment, stakeholders can play a pivotal role in shaping a more resilient, inclusive, and future-ready city.