Land of plenty

PUBLISHED : Friday, 23 October, 2009, 12:00am
UPDATED : Friday, 23 October, 2009, 12:00am

Hong Kong certainly needs a critical assessment of its land use policy. In his policy address last week, the chief executive acknowledged the need to respond promptly to changing circumstances. The problem is our officials are often unable to act in a timely manner.

The struggle over what to do with Central is a case in point. The public has pushed for minimising harbour reclamation and using reclaimed land wisely to create a harbourfront that the city can be proud of. Yet, it has taken more than a decade to change government's mind on these matters. The same goes for heritage building preservation. So, it is positive that the government is now beginning to see Central in a more holistic fashion although it has yet to provide us with a visionary replanning of the district as a whole, and not just around a number of buildings.

Another problem is the city's land-use mismatch. Hong Kong has 17.4 million square metres of industrial-building floor space. This is about 70 per cent more space than the existing stock of office and commercial space. With our economic activities mostly in services, this is a major disparity. The relocation of Hong Kong's manufacturing industries to the mainland started from the 1980s, and by the time of the handover in 1997, many of the city's industrial buildings were empty. Yet, commercial space has been in short supply. Building owners began to rent industrial space essentially for commercial uses at comparatively lower rent in view of the lack of appropriate facilities and amenities for commercial tenancies. Government turned a blind eye. Retrofitting or redeveloping these buildings to fit their new purpose requires major investment, which owners will not make unless there is a clear policy for the conversion and redevelopment of industrial land to commercial or even residential use.

Only now is the government willing to address the problem. To convert or redevelop industrial buildings for other uses require owners to pay land premiums to the government. This is, in effect, a land-development or change-of-use tax. What is special in Hong Kong is this tax is calculated on the basis of the value post-conversion or post-redevelopment. Moreover, the tax has to be paid up front. In other words, a landowner needs to have a lot of cash available to pay the government before conversion or redevelopment, which is a longstanding barrier to change. The government proposes to deal with this by essentially relaxing when the tax has to be paid. Rather than demand payment in advance based on a redevelopment plan, calculations can be based on what is actually built.

Moreover, the tax can also be paid by instalments rather than in one go even before redevelopment work begins. In the case of a whole building being converted, the government is even willing to exempt owners from having to pay the land premium.

No doubt the devil is in the details. What is curious is these measures will only be effective for three years from April 2010. Officials may argue they want to test what interest there is in the market, but that is not really a sufficient answer. The problem is how the government taxes land, and how the existing system is in fact a deterrent to redevelopment and conversion because of the enormous financial resources for landowners to not only pay for the necessary work but to also pay the hefty up-front tax. The problem is not dealt with directly in the policy address.

Indeed, the government has always been reluctant to discuss how it gets a major part of its revenue. Land sales and land premiums have always formed a substantial chunk of government income. These sums are then put into the Capital Works Reserve Fund, and not into general revenue. As its name implies, the money there is used exclusively for capital works - that is, physical infrastructure development.

It's time the government addressed the whole issue of land taxation directly and discussed its impact on land and property prices, as well as on the economy as a whole. That is the sort of critical assessment Hong Kong needs.

Christine Loh Kung-wai is chief executive of the think-tank Civic Exchange