Let's cut plot sizes to a minimum

With half of the city's new flats supplied by a few major developers, small to medium-sized property companies want more small plots auctioned off to help them compete against their bigger rivals.

SCMP, October 3

The difficulty with the plots offered for sale is not their sizes but their prices. Our government demands all the development value of the land it sells up front and only developers with seriously big pockets can meet this demand. We need a change in our land use policies.

In fact, even small plots can pose a serious financial danger to small developers. Most of these small plots are for the luxury end of the residential market, which is a tiny segment of the whole and increasingly dominated by speculative interests from the mainland.

Let something go wrong in the mainland economy and prices in this segment would crash. There is very thin trading in it even when times are good. A small developer can bankrupt himself as easily on one of these small plots as on a large one.

But the big reason that he doesn't get a chance at the big plots is that he cannot easily raise the financing for one on terms anywhere near what bankers are comfortable in offering to big developers. All developers require financing. Even the biggest doesn't carry billions in ready cash to pay the auctioneer. If he did, he would sorely need advice on treasury management.

I don't fault the banks for looking askance at a small player. It's my money they are advancing and I expect them to be prudent with it.

When they advance it to the big players, the risk is spread over a number of developments in progress. They are well aware a small developer would likely put all those eggs in one basket.

The problem is peculiarly one that affects former British colonies because, as a longstanding matter of policy (blame the original Boston tea party), they were required to raise their own money for their upkeep. Nothing suits the purpose better than putting all land on a leasehold basis and selling the leases.

This system can work reasonably when prices are low and land in plentiful supply. It starts to break down when sale or conversion of leases costs more than HK$1 billion a pop with up to three years of construction work required before the money can be recouped from home buyers. Only a handful of bigger companies can afford this.

And it won't do to call for these big plots to be broken up into smaller plots, as our report quoted smaller developers suggesting. The plots are already quite small by comparison abroad. To reduce them from small to tiny would diminish their sales prospects. It's the public purse that makes the money from these sales. That's my money. Let's not cut plot sizes further.

The solution, and I have mentioned this one on several occasions recently, is for the government to derive its land revenues in part from a continuing land use tax rather than only from auctions and lease conversions.

What we will do is establish a new annual property tax assessed on the basis of what each taxable piece of land would be worth if developed to the maximum permitted under its lease conditions.

This would have several beneficial results. In the first place, for our purposes here, it would reduce land prices at auction. The value would no longer be realised up front in one lump sum payment but annually over the entire term of a lease. Smaller players would immediately find room for themselves this way.

Moreover, it would stabilise the government's land revenues. The present up and down cycle of income from land disposals would be smoothed out.

It would also allow government to control development more tightly. Developers would no longer find it easy to sit idle on unused plots, waiting for the top of the market to develop and sell.

They would be stung every year by a full development tax and a decided incentive to build at an early date. The government could use lease conditions as a fine-tuned planning tool. And the very rich could never escape this tax as they do our salaries tax, not unless they live in hovels. But it won't happen. It's too big a change. Government doesn't like change.

jake.vanderkamp@scmp.com