The era of electric mobility drives new frontier for real estate sector

Hong Kong, 3 September 2024 – As the world accelerates towards a sustainable future, the rise of electric vehicles (EVs) presents a transformative opportunity for Hong Kong's real estate sector. The number of EVs in Hong Kong has surged nearly fourfold in the past three years, leading to a rapidly escalating need for EV charging infrastructure – a need that is expected to be largely underserved, according to JLL’s latest Driving Change: Transforming Real Estate for the EV Era report. The anticipated gap presents a lucrative opportunity for property owners and investors to capitalise on the growing demand by retrofitting existing assets to accommodate EV charging needs, potentially achieving yields of up to 20 per cent. This strategy not only generates new revenue streams but also drives property values.

Robust demand for charging infrastructure creates new business opportunities

As of April 2024, Hong Kong had 93,361 EVs in total, a substantial increase of 376% from the 19,610 registered EVs in March 2021. JLL projects that the number of private EVs in the city will surge to over 150,000 by the end of 2027, reflecting an annual growth rate of approximately 15.1%. Driven by active government promotion of commercial EV adoption, the e-taxi sector is also poised for a remarkable expansion of 203.5%, with the government targeting 3,000 e-taxis by 2027.

Despite the rapid growth of the EV market, the availability of commercial EV charging infrastructure lags significantly. As at the end of June 2024, a total of 5,234 medium chargers and 1,511 quick chargers were accessible for public use across 18 districts. While government subsidies and incentives are expected to drive a surge in private charging spots to over 150,000 by 2025 and likely meeting private EV demand, commercial EVs, particularly e-taxis, are anticipated to face a power shortfall. The power demand from e-taxis is expected to represent approximately 33% of the total power consumption by EVs by 2027, and JLL estimates that a power deficit is likely to emerge as early as the third quarter of 2026, which could reach approximately 22 million kWh by the end of 2027.

Oscar Chan, Head of Capital Markets at JLL in Hong Kong, said: "Considering a scenario with a six-hour charging period for e-taxis, approximately 439 extra 120kW chargers will be required to support the commercial EV market. This represents a significant opportunity for site owners at prime, high-traffic locations, such as commercial buildings, shopping malls, and multi-storey carparks. By taking the initiative to upgrade their parking facilities, these owners can capitalise on the growing demand for commercial EV charging. This shift may potentially reshape the existing business models in the sector. For example, designating preferential parking spaces equipped with various charging solutions for commercial EVs can unlock new revenue streams, while increasing the attractiveness and value of the property through increased footfall."

Case Study: Upgrading parking facilities for significant yield potential

The research report highlights the significant profit potential of upgrading an existing car park to support EV charging. Taking a large-scale car park structure of 1,000 normal parking spaces situated within a mixed-use development as an example, our case study assumes the conversion of 70 parking spaces into EV charging stations, including 10 120kW fast chargers and 60 7kW medium chargers, supported by the property's spare power capacity, the adoption of competitive charging rates, and a partnership with a taxi fleet or logistic operator. EV chargers and equipment installation fixed costs are expected to total HK$14.4million for the upgrade. The costs would cover the power transformer and cables, fire safety system installation, and charger units.

Prior to the upgrade, the car park is estimated to generate an annual revenue of HKD37 million. After deducting operating expenses (OPEX) of HKD1 million, the net operating income (NOI) was approximately HKD36 million, resulting in a yield of approximately 4.8% p.a. Following the upgrade, the projected annual revenue increases drastically to HKD83 million, and the NOI notably jumps to HKD55 million, despite the OPEX rising to HKD28 million due to the increased power supply. This translates into an improved yield of 6.6% p.a., an increase of 180 bps over the pre-upgrade yield, or a 38% increase to the NOI.

The case shows that the conversion can optimise the asset's financial performance by effectively enhancing the overall revenue per sq ft. This not only brings significant economic benefits to landlords, but also increases the value of the property and attracts more tenants and customers. If we apply this exact business case to a smaller carpark complex (i.e. a carpark structure consisting of 100 carpark spaces), instead of the previous 1000 carpark case, one can expect that the proportion of carpark spaces being converted would be substantially higher, thus representing a greater return.

From self-funded to a win-win co-funded model

As the financial potential of EV charging investment becomes evident, major landlords in Hong Kong are diversifying and enhancing their carpark portfolios by increasing the proportion of EV-enabled parking spaces. Simultaneously, charge point operators (CPOs) are actively seeking out attractive locations to expand their charging networks, thus a shift in the operational model is noticeable. Landlords moving from self-investing to co-investing with CPOs emerges as the upcoming trend. This collaborative approach allows landlords to mitigate the high installation costs associated with charging infrastructure, while simultaneously providing service operators with access to prime locations, resulting in a mutually beneficial arrangement.

Compelling opportunities in showrooms and logistics centres

Lured by government incentives and heightened market competition in Mainland China, an influx of Chinese EV manufacturers is set to enter the Hong Kong market within the next two to three years. This projected surge is expected to unleash a wave of demand for showrooms in the local market, particularly in prime retail locations. The demand is expected to be further amplified by an optimistic shift among distributors towards experiential showrooms to create immersive and engaging experiences for potential EV buyers. Conservative estimates project a substantial increase in the total showroom areas over the next three years.

While high rental costs in Hong Kong are also driving some local EV manufacturers towards temporary and pop-up showrooms, this trend presents a unique opportunity for retail real estate landlords, especially owners of new and premium shopping malls, to capitalise on the surging demand for showroom space from EV manufacturers. By providing suitable spaces and flexible leasing options, not only can these owners secure attractive rental yields, but also attract renowned EV brands to enhance their property portfolios, increase footfall, benefit adjacent businesses, enhance the customer experience, and diversify the tenant mix, ultimately boosting the mall's appeal and competitiveness.

On a separate note, investment opportunities are also emerging in the logistic centre sector. As the transition towards sustainable transportation gains momentum, the landscape of logistic centres is similarly undergoing transformation. With an increasing number of companies prioritising sustainability, the switch to EV fleets to minimise carbon emissions is forecast to become common practice. In this context, logistic centres equipped with well-established charging facilities are poised to gain a competitive edge, making them highly attractive to environmentally conscious corporate tenants.

Collaboration and innovation to shape the future market landscape

Looking forward, the Hong Kong EV market is teeming with opportunities, but there are also roadblocks ahead presented by grid capacity constraints of buildings, necessitating additions or alterations to the existing power networks, underscoring the need for collaboration between private and public entities. Additionally, the EV market is poised to witness more cross-industry collaborations and partnerships involving various entities such as automakers, CPOs, asset owners, and investors. Confronted with burgeoning charging demands, continuous innovation and advancements in charging technology could be a new way out in addressing this pressing need. For example, the introduction of portable EV chargers, are expected to offer EV owners increased flexibility and convenience.

Wendy Chan, GBA Growth Director of Value and Risk Advisory at JLL in Greater China, said: "The surging demand for EV charging infrastructure, driven by the increasing adoption of EVs, underscores the critical need for accurate valuation of both the charging assets and the underlying real estate. Robust valuations not only facilitate investment, financing, and transaction activities, but also provide a reliable benchmark for the industry as a whole. Our comprehensive valuation framework integrates key factors such as project feasibility, power capacity, and charging speed to accurately reflect the impact of charging infrastructure on property value, providing investors and the market with greater transparency and a more accurate basis for decision making."

Oscar Chan added: "The government's proactive approach to promoting the EV industry in recent years, through initiatives such as extending the first registration tax concession for electric vehicles by two years and encouraging the conversion of petrol stations into quick charging stations or combined petrol-cum-charging stations, is creating a positive outlook for the local EV market. There are currently untapped niche markets within the EV sector, where upgrading existing properties to meet EV charging needs could generate significant returns. Property owners and investors should take an early mover advantage and accelerate conversions and upgrades to unlock the growth opportunities in the commercial EV charging market, enabling a rapid and profitable transition from investment to income generation."