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Sunday, May 26, 2024

The government must break its habit of relying on property developers

The government must break its habit of relying on property developers

Government must rethink the balance of approaching private developers to fund mega projects, or it will never break the property hegemony nor free Hongkongers from the yoke of high land prices.
The Hong Kong government has always denied that it has a high land price policy. Following the withdrawal from sale in January of a large, valuable residential plot in Stanley after all four tenders failed to meet the reserve price, Financial Secretary Paul Chan Mo-po reiterated that the government would not sell land on the cheap.

The government stuck to its guns despite ratcheting up a cumulative financial deficit of HK$183.2 billion (US$23 billion) at the end of last year. Since 2019, the government, Urban Renewal Authority and MTR Corporation have withdrawn at least eight plots of land from public sale.

The government can be forgiven for shoring up land prices while sparing no effort to produce developed land. Land is Hong Kong’s most valuable commodity and land revenue a major source of revenue. But can the government wean itself off its reliance on land revenue and collaboration with the property sector to speed up development?

The government has raked in billions from the sale or transfer of properties since the introduction of more stamp duties – a special stamp duty, a flat rate of 15 per cent of the transaction or market value of the property (except for first-time homebuyers), and an extra 15 per cent buyer’s stamp duty for non-Hong Kong permanent residents – from November 2011.

Also, premiums from public land sales and lease modifications, land exchanges and extensions have buoyed government receipts significantly. In 2018, when the government registered a record fiscal surplus of HK$148.9 billion, land premiums of HK$164.8 billion accounted for 26.6 per cent of total revenue. Even in the 2022-23 financial year, in which a hefty deficit is expected, land premiums are estimated to constitute 16.7 per cent of total revenue.

The government has a stellar history of partnering with developers to jump-start Hong Kong’s development, the prime example being the City One project at Sha Tin in the late 1970s.

With limited reserves to spend on new town development at that time, the construction of City One, still the largest private residential development in Sha Tin, was agreed between the government and four leading developers practically on the back of an envelope. The developers agreed to pay for the costs of reclaiming 56 hectares of land at the mouth of the Shing Mun River in exchange for development rights for private residential development.

With help from the private sector, the cash-strapped government was able to pay for the construction of subsidised public housing accommodating about 400,000 residents from public revenue. The government also managed to build factories in the Fo Tan area to provide space for manufacturing.

If a public-private partnership had been struck up for the West Kowloon Cultural District, it might have been completed much earlier and more efficiently. Developers would have used proceeds from residential, commercial, dining and entertainment development to finance the construction of bespoke cultural facilities, which are rarely self-financing.

Under pressure over lawmakers’ accusations of collusion with the property sector, the government decided to finance the development of the entire cultural district, comprising 40 hectares and a wide gamut of world-class cultural facilities, from public coffers. In 2008, the Legislative Council approved funding of HK$21.6 billion for the development.

Fifteen years on, plagued by frequent senior staff changes, poor execution, litigation with contractors and inadequate funding for the development of top-notch cultural facilities which are not self-sustainable, the West Kowloon Cultural District Authority has managed to complete some major facilities, such as the M+ and Palace Museum but struggles to finance the rest. In 2020-21, it registered a deficit of HK$491 million.

To help balance the budget, in 2017, the government granted the authority the development rights of the hotel, office and residential portion of the district in conjunction with private-sector partners – in other words, back to private partnership.

Understandably, the government is re-examining the possibility of a public-private partnership for the proposed Northern Metropolis and artificial islands east of Lantau, which come with a preliminary, “guesstimated” price tag of HK$580 billion.

As President Xi Jinping urged in his July 1 speech in Hong Kong, there is much to be said for a proactive government to leverage efficient markets to produce better outcomes.

Yet if, as the government claimed, developed land sales of the reclaimed islands would pay for the costs of reclamation and all the related infrastructural facilities, the government would have to rely on high land prices to pay for development, as it has done with the rail-plus-property model to finance railway construction.

Given what are likely to be the high costs of residential and commercial facilities on the islands, the developed land would probably not be cheap.

The Northern Metropolis is a cluster of new development areas and a planned technology park, which will be expanded to enhance connectivity with mainland China and energise Hong Kong’s technological development.

If a public-private partnership is adopted, cash-rich developers with large land holdings in the northwest New Territories could end up being rewarded with sizeable residential-commercial developmental rights in the Northern Metropolis, further entrenching their hold on development in Hong Kong.

These are early days for the government to work out financing plans for the two mega projects. Officials are well-advised to harness the mighty market power of the private sector to minimise costs, but risks and rewards must be carefully balanced. Otherwise, Hong Kong people will never be able to break free of the yoke of high land prices, nor will the government have any chance of ending the property hegemony.
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