What price Hong Kong Government's Land Policy?
Mr Nicholas Brooke, Chairman of Professional Property Services Ltd and Chairman of Hong Kong Science & Technology Parks Corporation, was the Foundation's guest speaker on 10 June 2010. This was what he said.
Good afternoon everybody, I'm delighted to be with you, it is nice to be with friends. What I would like today is to talk from my perspective about the impact the Government's land policy has had on Hong Kong. When I say, "What price" land policy, obviously I was talking about the dollar sign because it's an obvious consideration. But I think we have paid a number of "prices", if I may put it that way - in terms of the quality of life, the environment, and the quality of our housing. I will show you some housing statistics which I think will shock you as they do me. So, I will be talking about "price" in the wider context, but I will talk about the dollar sign as well.
Public auction of land is a familiar sight in Hong Kong. A couple of days ago, HK$10.9 billion was raised at auction for the Homantin site. This is the traditional way the government auctions land, selling "virgin" land; but they also raise revenue in a number of other ways. In terms of greenfield sites, this is how they traditionally do it - you go to auction, you're given a paddle and you bid until you have had enough.
Land revenue, history and demographics
Over the last ten years, this is what the government has collected from land-related transactions. From land premium, it generated HK$303 billion and from property tax, stamp duty, rates and government rents, HK$304 billion. When I talk about land premium, it would include not just land sales, but also modifying leases, as modification premiums also contribute significantly to land revenue. So in total, over the last ten years, government received HK$607 billion from land-related transactions. For tax payers, that is quite good news because you're not paying tax in other ways. But land revenue is obviously a very significant number.
The land premium breakdown is like this:
- Sales by auction/tender : HK$119.8 billion
- Private treaty grants: HK$72.0 billon
- Lease modifications, exchanges & extensions: HK$94.0 billion
- Interest, waivers fees: HK$2.9 billion.
Land revenue received through the MTR Corporation, the Urban Renewal Authority (URA) would be described at Private Treaty Grants. A lot was received from developers who would like to enhance the value of their land, and this would be described as lease modifications, for which they have to pay a premium. And then, there is a relatively small amount generated by interest, waivers fees, etc.
Just remind you about the size of the turf, we have a total land area 1,098 square kilometers. 67% of land mass is Country Park or Green Belt. So we have not got a lot of land to play with in reality, when it comes to developing land for residential and other purposes. To date, about 18% of the land mass has been developed. So that 18% is out of government hands and is in private hands so far. The population is approximately 7 million, but if you strip out migration, our population is basically flat at the moment. There is very little growth in population and that obviously has to be put into consideration in future. About half of the population lives in the urban area -- that is in on Hong Kong Island and on the Kowloon peninsular.
First land sales and land tenure in Hong Kong up to 1984 Joint Declaration
Just very quickly, a bit of history, as I think context is important. We have been in land sales mode ever since "Day One". - As soon as the British arrived here in 1841, they started selling land on long lease. And this long leasehold system has continued right through to today. So it is not as if the model was changed or has been adapted, this is how it started and this is how it has continued and gone on.
The first land sale in Hong Kong was on 14th June 1841: 35 Marine Lots, each having 100ft frontage to Queen's Road. The Upset Price was ￡10, and successful bids ranged from ￡20 - ￡265 depending on location and site depth. This is where the Hong Kong Bank and Standard Chartered Bank are today. Those are the first ever land sales in Hong Kong and Hongkong Bank, I think, is lot number three. That is how it all started. No sooner than the British got here, they started selling.
We have also gone through some evolution in terms of the length of the lease. When the British first arrived, they were generous and granted 999 year leases, which in effect is perpetuity. Over time, they realised that they did not need to grant that length of tenure and granted 99 years, and even less, such as 75 years. That was the position up to the Joint Declaration and today we have 50 years. So we have gone from 999 to 50 years. And within that term, developers can still get their costs back and make a significant profit, probably twice or three times over. In the New Territories, it was treated differently as leases were designed to terminate three days before 30th June 1997 but now extended to June 2047. The only difference from today was, in those days the government having charged a lump sum for the land, used to charge a nominal rent - 100 Pounds or maybe up to 1,000 Pounds a year by way of ground rents.
Post Joint-Declaration, we moved to a 50 year pattern. What is interesting is that today we are granting 50 years, which takes us beyond 2047. So within the land tenure systems, it is assumed that life will go on beyond 2047. If your lease expires between now and 2047, it is automatically extended to 2047. This is the only major difference now, government charges a lump sum and but it also charges you 3% of Ratable Value by the way of a ground rent. Ratable value is the rental value of the accommodation on the site, and it can be a significant figure. Otherwise, essentially, since 1997 it has been business as usual in so far as the property market is concerned.
Current ownership pattern and land disposal system
In terms of ownership pattern, Hong Kong is quite unique. We also have this animal called strata title (Americans call it 'condominium title') which makes land more expensive. Essentially, we have the capability to chop the lease into bits. It is a major business, involving chopping apartment, retail units and offices into bits and selling them off in undivided shares. We have one building that we manage which has 700 owners and we have one floor with a multinational tenant that has 13 landlords. And then the other thing that creates the value that we see is the relative short lease period. This creates the opportunity to increase rent, and it obviously has an effect on the capital value.
The Government is very transparent in the primary market, and quite rightly so. Any new land for redevelopment is offered for sale by auction or by tender, and the lease conditions are pre-defined so everybody knows what they're bidding for, what the conditions of the site are, and what they can do with it. They pay everything upfront, which is what I am going to talk about later on. There is another model that we can look at in future, without impacting on existing values. So today, you pay everything upfront.
Until four to five years ago, the Government used to tell us what land would be sold and we would get two or three lots coming onto the market every two or three months and the list was published at the beginning of the financial year. It came under a lot of criticism in terms of how would the government know what the developers wanted in terms of sites for development. So the Government moved on to the current Application List system which largely prevails today. There is an application list which comprises 50 to 60 lots for all types of use. Potential developers can write to the Government saying, we would like you to release this site, but the Government will only release the site if the developer would underwrite the minimum price. And minimum price is 80% of what the Government believes the site can bring. The Government then puts the site up for auction: the applicant has to bid with the rest of the market and very often the developer who wrote in to request release of the site is not successful. But this is how the process is triggered.
Most recently of course, because government has concerns about the residential side of the market, we have seen government intervention and the Government has now decided that certain sites should be put forward by auction. We now have a blend of Application List and some intervention by government.
The other major source of income, which is worth touching on, is the lease modification process where the existing land owner does not bid against a competitive market. In this situation, an owner who wants to enhance the land use value of a site sits at the table with the Lands Department in a one-on-one discussion. The opportunity for the developer to "finesse" the situation is quite great. If a developer has a choice they might prefer to use this method rather than an open auction. A lot of time is spent on lease modification; for example buying a piece of land that has industrial use and then converting it into residential or commercial use. Converting industrial land or agricultural land to building land is something people at Henderson and New World are very sophisticated at. There is a need to pay the difference between "before" and "after" values as land premium, but there is an allowance for developer's profit. That allowance is currently 25%. So there is not only an opportunity to "finesse" the situation, there is also an opportunity for "discount", "allowance" or "profit" or whatever you call it. There is another way: by "Surrender and Re-grant", that means a land exchange.
Residential housing
If we were to critique what the government could do better, perhaps it is on the public housing side. An impressive record on social housing is the track record of the Government to date - 30% of the population still lives in subsidised rental housing.
However I want to move back into "pricing", because this is the ultimate price that we pay because of very high land value and the element that land comprises in development costs.
If we analyse our residential housing, Class A -- 350,000 units, 33% of our total private housing stock is under 40 square meters. Class B, 48% are between 40 and 70 square meters, and only 2% of our stock, Class E, is 150 meters and above. And this, I think is a direct result of affordability which in turn is directly linked to the high value of land in Hong Kong. Because of the cost of land, developers build smaller and smaller units. One of the sad things is, if you look at how we progressed in the last 10 to 15 years, the size of units have gone down. Just to give you a feeling of the market: if you see all those headlines about the Homantin sales, they do not reflect the average person's experience. Last year the average price of units sold was less than HK$3 million and the average size of unit sold was 47 square meters. That is the world most people live in, not the world some of us are associated with.
To put things into context - only 2% of our stock is over 150 square meters or what you might describe as Homantin property, luxury property; and there are only 24,000 units - that's a very small proportion. Jake van der Kamp (of Jake's view in South China Morning Post) was quite right: Homantin is not a reflection of the market at large, yet this sale received all the headlines and attention. That I think is the real price we pay for the present land policy.
But things are changing and we have, as you know, a community which cares, we are now more involved, we are looking for much more community-based planning. There is a whole range of issues there - many of them are functions of the land and planning policy that we have at the moment.
Issues
All the issues that have surfaced have a land component to them, and we have to deal with them as the community is very concerned. For example, things not acceptable include "Wall-like" buildings and air ventilation challenges, "Tall buildings" by the harbour front. Undesirable visual impact driven by cost and the need to maximise plot ratio - this is certainly not acceptable today. Then there is the urban renewal issue - the existing model is to remove people who are there. It is not regeneration, it is not revitalisation: it is renewal. Those are issues the Government has been revisiting. And what you get in place of some very good older buildings are towers - often office rather than residential. "Urban Heat Island" is another issue. Infrared photography shows that on a winter night the temperature in central urban areas is five degrees higher than as you move out. And this is totally driven by the density of development.
I say openly to my developer friends that they are being very irresponsible. And they still do not, in my mind, embrace the need to be responsible. This I think, groups like the HKDF should certainly be taking up. The developers ought to have a much wider responsibility than they're currently prepared to take.
In terms of the situation we are facing - there is this perception that we are facing a limited supply and prices will keep going up. The Government is now faced with a dilemma. On the one hand the Government is the trustee of the land on behalf of the community, and therefore its job is to maximise land sales value. On the other hand, the trustee has a wider responsibility and has to take care of the wider good of the community. But the government certainly holds the purse strings and the supply is very tight.
The Government has not recently been very active in terms of the public/affordable housing sector. You have probably seen this debate of whether we should or should not go back to building HOS (Home Ownership Scheme) flats, to underpin the bottom end of the residential market. I tend to favour other solutions, however.
There are serious affordability issues as we move forward. At the moment, you can borrow at between 2-3%. And if interest rate were to go up - another 2-3% over the next two or three years, we can move from an affordability-ratio of between 40-50% of income to a situation where 70-80% might have to be spent on repayment. So people are taking on commitments which in future they may regret.
When I was talking about limited supply, in the early 2000s we were building 50,000-60,000 units a year. We have drifted down and we are now building 12,000 to 14,000 units a year. So if you are a first-time buy or an up-grader - the bulk of the market - you will feel that you have to make a move to buy. You see you choice not only limited, but being reduced. The perception and reality is that new supply is getting tighter.
As a result, we now see increased intervention by the Government. We have had three land auctions recently. The one in Yuen Long and the one in Tung Chung were fairly lacklustre. But at Homantin at the beginning of this week we achieved these remarkable prices - equivalent to a land of around HK$12,500 per square foot of development. The developer will have to sell at HK$20,000 per square foot after adding on costs and profit, HK$20,000 per square foot in Homantin? - You have to wonder.
Towards reform
How to bring about change? which is what we really want to talk about today. We have to bring about change, but we also have to preserve the value that is there. There is no way that changes can bring about a decrease in the value of flats of 20-30%. And that is obviously the dilemma for the Chief Executive. Therefore we have to come up with a model that brings changes, but does not erode the current value of flats. We also have to take the volatility out of the market, I think.
There are also intangibles and quality of life issues - the question of a better balance among public realm and open space and private ownership is not factored into the equation at all. And I think we need to look at a holistic approach to value, and the community needs to think what they're going to do.
How are we going to achieve this? Well, I am pleased to say that Carrie Lam, Secretary for Development, is already on board. We are seeing reductions in plot ratio, in building bulk, and a requirement for setbacks. There is a big exercise going on in streetscapes. Formerly, developers used to build to 100% of the site area and the podium was occupied by an ugly car park. Now the thinking is that the building will only occupy less of the site area, which will give a circulation of at least 10% around it; and the car parks will be "taxed" so that they're driven underground. So you're likely to see some shops on the ground floor and there'll be some interesting streetscapes. Sustainability should now be the norm. This is a mindset issue.
And of course at some stage, we have got to tackle the "Village House" issue, with 150,000 people in the queue with the right to build a village house. Their rights will have to be monetized. A line must be drawn, we have the money, but who's brave enough to do it?
There is a model to replace land premium, which you could think of as the Nick Brooke suggestion. I think it is possible, over time, to move from a capital value payment system to a rental system. And as long as in NPV (Net Present Value) terms, Government is not worse off, then it should not undermine values. And from the Government viewpoint, I think it is much more attractive as you get a much more certain income stream as you go forward. There is less of this chunky, lumpy situation you get now, doing well on the rise and poorly on the dip - the feast or famine situation that we have today.
Mathematically, you can make this work. In many cities in the world - London, New York and Paris - they have a leasehold system where you pay a ground rent rather than a capital sum. That ground rent can be made inflation-proof if you like, linked to CPI or to a percentage of the rent generated from the building on the site. This is doable, with the right mindset.
With this system of paying ground rent, rather than a large sum upfront, it would enable more players to enter the fray. Government will say, How am I sure I will be paid in 20-30 years time? That would be the response. But it has worked elsewhere: governments get guarantees, and the model is there and I think we should be looking at it very closely. We should also supplement the move to ground rent, as they do in Singapore now, requiring design concepts when developers bid for an important/sensitive site. It is not just about money. And developers should be judged on the combination of the two.
Obviously we need design parameters for the waterfront and many of the sensitive sites in Hong Kong. We need a complete review of building regulations. The reason we have cruciform shaped towers is a direct result of building regulations. And finally, we need to look at the heritage properties in Hong Kong; there is no use in applying modern regulations in terms of how they're upgraded. We need to look at some performance-based regulations for that particular family of properties.
Hong Kong has a large stock of industrial buildings, which are no longer needed for industrial purposes. However, only about 6% of this space is not being used; the space has been filled by users whether legally or in some grey area. So the issue is for the Government to recognise these uses - to grant an amnesty, as it were - and bring these buildings back into the fold of full legality.
Much food for thought but I hope that you find my presentation to be of interest. Thank you very much.
The above does not necessarily represent the views of the Foundation.
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