Developers' loss of appetite for land may end in buyer starvation

PUBLISHED : Wednesday, 17 August, 2005, 12:00am
UPDATED : Wednesday, 17 August, 2005, 12:00am

'There have been suggestions developers are colluding in an attempt to bring prices down.'


SCMP


August 14


NO, DON'T BE SILLY. The story is not that they are colluding to bring down the prices you pay them for the flats they sell but colluding to bring down the prices they pay the public purse for the land on which they build those flats.


The reason for these suggestions of collusion is that the government has had no luck since October in selling residential sites off its application list. This coincides with frequent protest by developers that the application list system does not work as it gives them no clue to the benchmark prices that the government wants.


Let us backtrack here. The system used to be that the government would simply auction new sites when it wanted to release them. Our government officials became unhappy with this system, however, as they believed it gave away too much to developers.


Under the amended application list system now adopted, land is released for auction only if a developer first makes a bid that exceeds 80 per cent of the government's minimum price and the government does not reveal what that minimum price is.


But have developers now colluded to make no bids at all so that they can force the government to return to the old system? You will find plenty of people who consider this a distinct possibility. Developers are easily accused of market rigging tricks and occasionally with justice. If they do not like the aspersions cast on them, they sometimes have only themselves to blame.


Let us take a different tack here, however. A good number of the sites available on the application list are not particularly attractive. They are small and in out of the way locations when developers would rather have larger sites in more central locations.


What is more, when developers buy at auction they must pay for the entire site immediately and then run the risk over several years of seeing their anticipated profits wiped out by adverse market movements and financing costs.


It would be far better for them if they could go to the public land bank for access to large sites with excellent transport links and, at the same time, not have to pay all the land cost immediately.


And this is exactly what they can do at the moment. We have come to a practice of not selling our best land directly through auction but instead funnelling it through the MTR Corp and KCRC in order to defray their costs and keep fares on our rail systems down.


This means that many developers have enough on their plates in projects undertaken with the two railways. These are sites directly above stations on the railway lines, they are invariably big and the arrangements made with the two railway lines allow them to stagger acquisition and construction costs.


Thus if our government officials are scratching their heads as to why there has been so little response to the application list system, it is in part because they have themselves subverted it.


There is more to consider here, however. Our town has many old buildings that could sorely do with redevelopment. If developers find the application list system too difficult for them, it only means that they are pushed more to buying out existing owners in older buildings and redeveloping those buildings.


This is, in fact, increasingly happening and it has to be a welcome trend. Why continue to bring on more new development sites at the periphery when there are existing good sites in the core?


Our government could actually accelerate the trend by reconsidering its lease conversion premium system for redevelopment. It is one of the big obstructions to redevelopment of older sites although constraints of space do not allow me here to go into all the reasons why it is so.


There is good reason, however, to worry about one recent trend in development of new homes. As the chart shows, authorisations to commence work on new domestic premises are now running at only 6,000 a year, barely a tenth of the figure eight years ago. We could soon be looking at a severe shortfall in supply relative to demand.


But I doubt that blame for it can be ascribed only to collusion among developers.