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  • Nov 1, 2014
  • Updated: 7:40am

Empires on the cheap

PUBLISHED : Wednesday, 08 June, 2011, 12:00am
UPDATED : Wednesday, 08 June, 2011, 12:00am

Hong Kong developers have built their multibillion-dollar empires on extraordinarily cheap land obtained through the city's opaque process of land exchanges, a South China Morning Post investigation finds.

Since the early 1980s, 30 major properties developed by Cheung Kong (Holdings)/Hutchison Whampoa, Henderson Land and Sun Hung Kai Properties were converted from farmland or old industrial sites through a government land exchange mechanism.

In 17 of these land exchange deals, developers paid a land premium of less than 15 per cent of the retail property price. The easy terms were in sharp contrast to the cost of land in public auctions, which is about half the retail price nowadays. Or, put another way, more than two-thirds of the total development cost.

In one extreme case, Cheung Kong paid a nominal lump-sum land premium of HK$2,000 in 1986 to 1987 for a couple of old factory lots in Tsuen Wan. The lots had no user restrictions, and the developer built Belvedere Garden offering 6,040 flats.

In an even better deal, Henderson Land didn't have to pay a penny in 2005 for the redevelopment of old oil tanks at To Kwa Wan. It replaced the tanks with the five-tower Grand Waterfront, an apartment project that eventually brought in an estimated HK$2 billion in revenue

Cheung Kong and Hutchison Whampoa have a long record of sourcing cheap land. In 1984, the companies controlled by Li Ka-shing paid a land premium of only HK$390 million, or an average of HK$51 per sq ft for a dockyard in Hung Hom Bay. They turned that into Whampoa Garden with 10,286 flats - this, at a time when the residential retail price exceeded HK$600 per sq ft.

Across the harbour, another sea-view project, South Horizons, cost the developer a land premium of HK$623 million to build 8.1 million sq ft of residential properties, or an average of HK$77 per sq ft in 1988, when buyers on average were paying HK$1,228 per sq ft.

The details of these land purchases have been hidden for years. The Lands Department's minutes on meetings with developers concerning discussions about land premiums are confidential and never open for public inspection. Old correspondence between the Lands Department and developers are not found in the Government Records Service.

The Post searched land registry records of 50 projects across the city over the last few decades - mid- to large-scale projects, each over 1 million sq ft of gross floor area.

The investigation found 30 projects were built on sites converted from agricultural or industrial lots that required a land-lease modification or a land exchange.

In 17 of those cases, the land premium was just zero to 14 per cent of residential prices at that time.

Land exchange is one of the core land practices in Hong Kong. It has played a key role in providing the big estates, most of which have risen from farmland or old industrial sites.

In a land exchange, developers have to surrender an old lot, or a series of old lots, as well as their leases to the government. In exchange, they get a bigger piece of land on the same spot and a new lease with amended terms, after paying the government a certain amount of land premium.

The Post's findings surprised scholars of real estate. Dr Li Ling Hin, associate professor of the Department of Real Estate and Construction at the University of Hong Kong, said the Whampoa Garden project should have cost the developer a land premium of about HK$300 per sq ft, not HK$51. 'The value of industrial land is roughly about half the value of residential land,' Li said. 'If the average retail residential price in Kowloon at that time was over HK$600, the land premium would have been about HK$300 per sq ft for rebuilding a dockyard into flats.'

Li estimated the land premium for converting an oil tank site at Ap Lei Chau into South Horizons would be HK$600 to HK$700 per sq ft, instead of just HK$77, given that the average retail price on the island side was HK$1,228.

Li, the author of Development Appraisal of Land in Hong Kong, said Hutchison Whampoa's payments for land premiums for these gigantic projects 'sound really cheap to me'.

'The government, if possible, should explain to the public how it came up with these figures,' Li said. 'Was it because the developer had to build a public bus terminal or other public facilities for the government?' He referred to the fact that bus terminals are found at these two estates.

Dr Eddie Hui, a professor at the Department of Building and Real Estate at Polytechnic University, was astonished at the low land premium for Whampoa Garden and South Horizons. 'Fifty and seventy dollars was really cheap compared to price levels at that time. It is not easy to understand,' Hui said. 'Is there anything the government has not disclosed?'

Asked to comment on the Post findings, a Lands Department spokeswoman only said that the premium for lease modification and land exchange cases was based on enhancement in land value - that is, the difference between the value of the land under the previous conditions ('before value') and the value of the land under the modified/exchanged conditions ('after value').

'Each case is assessed by our professional estate surveyors, taking into account the prevailing market conditions and the relevant considerations such as development costs,' she said.

Land exchanges have had a huge impact. The city's four big developers - Cheung Kong, Henderson Land, SHKP and New World - now hold a total of nearly 100 million sq ft of farmland awaiting land exchange.

This agricultural land bank is about 22 times what the government can put on the block for sale this fiscal year. The 43 residential sites on the Land Department's application list, available for developers' bids in land auctions until March next year, can supply only a total site area of 4.6 million sq ft.

Cheung Kong and its subsidiary Hutchison Whampoa built all their mega projects in the 1980s through these land exchanges. SKHP developed Park Island at Ma Wan and Sea Crest Villa near Sham Tseng through land exchanges as well - and did very nicely.

How the system works

To rezone old factories, farmland, or fish ponds into residential sites, developers have to seek approval from the Town Planning Board or Planning Department, and then file an application with the Lands Department for a lease modification or a grant of new land lease. Because the new use will enhance land value, the Lands Department will charge a land premium calculated by the 'before and after' approach.

That is, it will compare the expected value after changing the land use with the present market value, and make the developer pay the difference. In theory, the equation is straightforward. In reality, loopholes abound.

In the case of Cheung Kong's Belvedere Garden and Henderson's Grand Waterfront, the old land leases did not specify a land use. Thus developers were not charged on the difference in land value.

As a result, Cheung Kong needed to pay only a nominal HK$2,000 in merging a few old building lots into Belvedere Garden phase one and two. Henderson Land did not have to pay any land premium at all.

Even when developers have to apply for a change of land use and land lease, there can be variables - such as the cost of infrastructure - that can be manipulated to affect the land premium calculation.

It requires time and patience to assemble farmland and to go through the complicated application process for a land exchange application. But developers go to the trouble because it is much cheaper than bidding for sites at a land auction.

It has always been unclear how the Lands Department actually negotiates land premiums with developers.

The secretive process has produced some results that are hard to understand.

In May 1994, Henderson Land acquired a lot at No3 Ma Sik Road, Fanling, in the New Territories for HK$2 billion, an average of HK$1,883 per sq ft. Five months later, Henderson obtained another piece of New Territories land at Fu Tei, Tuen Mun, through a land exchange for HK$356 million, or HK$327 per sq ft.

The Fu Tei site is about the same size as the Fanling site and Henderson was allowed to build a 1 million sq ft scheme on each of them. But for the Fu Tei site, it had to pay just one-sixth as much in land premium as it did in Fanling

A retired real estate professional who has been involved in various land exchange deals, but refused to be named, said that only a handful of senior Lands Department officials had the power to finalise land premiums.

Keith Siu, director of RHL Surveyors and a specialist in land exchange applications, said each land exchange or lease modification case was first processed by district lands officers who then co-ordinated with other government departments in determining and drafting a new land lease. 'Price discussion will fall into the hands of the Lands Department headquarters at a later stage,' Siu said.

A private practice surveyor who once worked in the Lands Department said the meeting notes of land premium negotiations were highly confidential. 'Even district land officers are not supposed to have access to these notes,' he said.

Real estate scholars say the government should be more open.

Hui, the PolyU professor, said it was understandable that the government would hold closed-door meetings with developers to discuss land premiums because it involved private land ownership. Even so, 'the authority could explain to us afterwards on what grounds the land premium has been valued on', he said.

HKU's Li said: 'Land valuation by nature is very technical and subjective as it involves a series of interrelated variables and thus it needs a lot of effort to make it clear to the public. Nevertheless, in a modern society the emphasis is on transparency. It's time for the government to improve its system.'

Laguna City, Kwun Tong

In the late 1980s, Hutchison Whampoa swapped its dockyard site in Tsing Yi with Asiatic Petroleum's oil tank site in Kwun Tong.

The company then applied to the Lands Department to convert the Kwun Tong oil installation into a residential site. The Lands Department approved the application in January 1988 for a lump sum land premium of HK$360 million.

Hutchison then developed Laguna City Phase 1, 2 and 4 on the 8.84-hectare site.

According to the database of Centaline Property Agency, there are a total of 6,567 flats in these three phases of Laguna City with a total floor area of 5.06 million sq ft. In other words, the land premium per sq ft was only HK$71.

At the time, the average property price in Kowloon was HK$1,042 per sq ft in the first quarter of 1988, based on statistics from the Rating and Valuation Department.

Park Island

Thanks to the lack of transparency in the land exchange mechanism, developers were able to secure cheap land even during a property boom.

In June 1997, when hot money was flooding into Hong Kong's property market before the handover, Sun Hung Kai Properties applied to build Park Island on 1.02 million sq ft of agricultural lots at Ma Wan, an outlying island located between Tsing Yi and Lantau.

At that time, the Lands Department valued the land premium of the site at HK$6.2 billion. Because the developer had to build a public theme park and was responsible for the infrastructure on the island, the Lands Department deducted from the land premium the HK$804 million cost of the theme park and the HK$1.7 billion cost of infrastructure.

As a result, SHKP only had to pay HK$3.7 billion for a new land lease allowing it to build 2.9 million sq ft in gross floor area. The average land premium cost per floor area was HK$1,267.

At that time, the second-hand market price of Sea Crest, a benchmark estate in the neighbourhood, had climbed to an average of HK$7,800 per sq ft.

The agreement between SHKP and the Lands Department stipulated that the developer would have to pay back the difference to the government if it spent less than expected for the Ma Wan theme park and the infrastructure.

From 2003 to 2006, SHKP gradually abandoned its plan to build a theme park, deciding instead to put in recreational facilities with the theme 'Naturally Hong Kong'. The developer eventually built Nature Garden, which is free to the public, as well as Noah's Ark, which charges HK$100 admission.

Despite dropping the Ma Wan theme park in favour of those inexpensive options, SHKP was not billed for an additional premium. SHKP sold most of its 5,225 flats on Park Island for a total HK$13.1 billion between 2002-2011, statistics from Centaline Property Agency show.

Advocating reform

As it is not uncommon for lands officials to join private developers after their retirement, Li suggested the Lands Department expand its valuation team to include more estate surveyors to decide land premiums in order to prevent sensitive land information being monopolised by a few people.

Responding to Post inquiries, a spokeswoman for the Development Bureau, which oversees the Lands Department, said the Valuation Section in the Lands Department was headed by a chief estate surveyor supported by 13 professional estate surveyors.

The spokeswoman did not reply to questions on how many Lands Department officials with the grade of chief estate surveyor or above had joined private developers.

Wendy Tong Barnes, chief corporate affairs officer of Cheung Kong, said the company did not currently have any employees who were retirees from the Lands Department. 'We have young job applicants in their 20s who have completed the Lands Department graduate trainee surveyor's two-year contracts and approached us for job openings. We have hired them on the strength of their ability.'

Sun Hung Kai Properties and Henderson Land did not respond to the Post's repeated inquiries.

Roger Nissim, a former assistant director of lands who joined Sun Hung Kai Properties after retiring from the government, said the ultimate solution to reforming Hong Kong land administration was to resume regular land auctions as soon as possible.

Nissim said the government had strangled land supply by not having regular land auctions since 2004, after the property market was hit hard by the severe acute respiratory syndrome (Sars) crisis. Only 43.5 hectares of land were sold at public land auction in the six years from 2004 to last year, Nissim said - less than what the former colonial government sold each year before 1997. He recalled that an average of 52 hectares of land was sold each year from 1985 to 1997.

'If you have more land auctions, you have more of a benchmark for land premium assessment,' Nissim said. 'More land auctions will do everyone and the whole industry a big favour.'

'If there is no land auction, the only possible land supply will be from the private sector. That will give developers too much power.'

HOW IT IS DONE

1 Developer acquires old industrial sites or rural land from the market.

2 Developer submits application to Town Planning Board for land to be rezoned, or classified as being for a different use.

3 Developer submits application to Lands Department to modify old lease conditions that have restricted the land?s use. Developer may also want to combine several old sites into one new site. In such a case, a process of land exchange is required.

4 District Lands Office circulates developer?s proposal to other relevant government departments, such as transport and environmental protection, for comments, and begins consultation with residents in the district.

5 District Lands Office holds meetings with relevant departments and developer to discuss plot ratio, maximum gross floor area, height limit, and other details of the new lease.

6 District Lands Office and developer agree on basic terms of new land lease except premium. The case, together with a suggested land premium, goes to the Lands Department?s headquarters to determine the premium.

The 'big four' developers' agricultural land banks

Land area (million sq ft)

Henderson Land: 40.1

Sun Hung Kai Properties: 26

New World Development: 20.1

Cheung Kong: 13.4

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