Lease conversion leaves Tsang stuck

PUBLISHED : Thursday, 09 February, 2012, 12:00am
UPDATED : Thursday, 09 February, 2012, 12:00am


Plan for old factories faces hurdles.

SCMP headline, Feb. 8

Correction: That should be hurdle, not hurdles. There is really only one hurdle, the lease conversion premium. The rest of these supposed hurdles are just slight undulations in the track.

What happened here is that, in his budget speech last week, John Whiskers finally decided it was time to do something about one of the great anomalies of land supply. With rising protests about high home prices we still officially have 185 million square feet of floor space in flatted factories and very little manufacturing industry left to use it.

Why not tear down these moribund industrial buildings and redevelop the sites as homes for Hongkongers?

Good idea. But why didn't it already happen long ago? Hong Kong developers are no slouches at finding redevelopment projects. Why haven't they long spotted this opportunity and exploited it?

The difficulty lies in a rule that anyone wishing to convert the lease terms for a piece of property from industrial to high-rise residential must first pay the government a premium equal to the increase in value that such a conversion would confer on the site.

It's entirely fair. The price that the owners originally paid the government for the site reflected its lower use value. If they now want a higher use value they should pay for it. We don't give it to them for free.

The problem with this reasoning, however, is that if we take out all of the uplift in value as a lease conversion premium, we don't leave the owners much incentive to redevelop the site. They get nothing for doing it.

Thus these lease conversion premiums always allow a developer's profit and sometimes a little more when, for instance, the Lands Department is negotiating a premium with the Modern Town Redevelopment Company (MTRC), a government corporation.

But industrial property owners seem still not to be attracted by their allowed profits. They have not sought redevelopment in any number despite the fact that officially their buildings must be empty if only industrial tenants are permitted.

There is a dirty little secret here, of course. Since the turnaround in the property market in 2003, flatted factory space has risen faster in price than other property categories.

The secret is that the industrial space is increasingly occupied by non-industrial tenants. This is entirely illegal. The Court of Final Appeal (CFA) made a very clear ruling 10 years ago that it is not to happen.

It has happened nonetheless. Flatted factory buildings in Hong Kong are the equivalent of big box stores in America - ideally suited to furniture shops and other retailers of bulky goods. But retail uses have expanded far past that point and a good deal of the space is now also used for offices and even homes.

The users are also not worried that they will soon be ordered out. There is safety in numbers and their landlords are some of Hong Kong's biggest tycoons.

So what is John Whiskers to do? He cannot offer these landlords lease conversion terms that recognise illegal uses, particularly with a firm CFA ruling against illegal use. This means he cannot really make it worth their while to redevelop.

He also cannot offend the tycoons quite so much as evicting them all would do. Evicting them all would, in any case, upset Hong Kong's retail economy, which would likely produce grass-roots protest.

He is stuck. The only thing he can do is duck, and duck he did in his budget by turning his quandary over to the Urban Redevelopment Authority. The URA, however, not only has less authority than he does, but moves slower than an overfed snail in a frost.

Oh, well done, John. When confronted by a hurdle, stop in your tracks and look the other way.

Now just why does this seem in character?