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Discount disputes with developers in wake of weak auction threaten Government's expected income of $27.35b

Sophia Wong

Developers are looking for larger land premium discounts following last week's poor auction results, and more than five million square feet of projects are hanging in the balance.

Analysts said prolonged negotiations and lower premiums would further dent the government's hopes of realising HK$27.35 billion this financial year.

Henderson Land Development chairman Lee Shau-kee said the company had been in talks with the Lands Department on two or three lease-modification residential projects and he expected that the premium would be reduced.

'The projects are mainly in the New Territories and I think the premium would be around HK$500 to HK$550 [per sq ft],' he said after considering the average value of HK$545 per sq ft for a Yuen Long residential site bought by Sino Land at last week's government auction.

Far East Consortium project manager Eddie Leung Yu-cheung said the company had two smaller sites in Yuen Long for which it would seek lower premiums after the poor auction results.

'Our estimation would be about HK$400 per sq ft because the sites are not near the town centre and the selling price of flats could be below HK$2,000 per sq ft,' he said.

Lam Sing-tai, general manager of SEA Holdings, said its joint venture with Henderson Land in Sheung Shui would lodge an appeal for a larger premium discount.

The agricultural site covering more than 90,000 sq ft would provide about 480,000 sq ft of residential space after lease modifications, he said.

Sources at the Lands Department said some of the district offices were prepared to review the land premium value because of low prices at the latest land auction.

With the latest blow to land values and the sluggish property market, analysts said land revenues would fall far short of the government forecast. So far this financial year, total revenues were estimated at HK$3.43 billion.

Sales by auction and tender generated HK$1.36 billion, compared with the Government's target of HK$11.3 billion. Lease modifications and exchanges realised about HK$2.07 billion, against the projected HK$10 billion.

A further HK$6.05 billion was expected to come from private-treaty land grants, mainly projects along the Mass Transit Railway's Tseung Kwan O extension.

No project had been granted yet.

One surveyor said the opening bid of the Hunghom commercial site auctioned last week was low, at HK$900 million, representing an average value of below HK$800 per sq ft. The Government's acceptance of such a low price implied that developers could ask for lower premiums.

Soon after the auction, a shipyard owner in Lai Chi Kok turned down the offered premium of about HK$1,200 per sq ft for modifying the lease of an industrial site to residential use, the surveyor said.

Pang Shiu-kee, managing director of S K Pang Surveyors, said revenues from land lease-modifications would have to be reduced, subject to market momentum in coming months.

The low prices for three sites - in Hunghom, Yuen Long and Sai Kung - at last week's auction would inevitably become immediate references for land premium offers, he said.

Anthony Wu, analyst at Lehman Brothers, said the opening bids at the auction were really low, which showed a relatively low bottom-line for land value accepted by the Government.

'Developers would find it easier to negotiate for a lower premium,' he said.

Analysts said the Government, faced with pressure to generate revenues in a tough market, could be more willing to accept lower land prices.

The Lands Department recently made premium offers for two larger-scale projects but met resistance from developers.

They included Cheung Kong (Holdings) and Hutchison Whampoa's 1.67 million sq ft hotel-residential joint venture in Tsing Yi, and Sun Hung Kai Properties' (SHKP) 1.1 million sq ft residential project at Olympic Station phase three development. Another main lease modification project is SHKP's 1.18 million sq ft residential-commercial development near the future West Rail Yuen Long Station.

The MTR Corp is also seeking further discounts in premium offers for a 1.03 million sq ft residential-commercial development in Area 55b of the proposed Tseung Kwan O Station and a 312,000 sq ft residential venture on neighbouring site Area 57a.

SHKP and Shun Tak Holdings also refused to accept a proposed HK$245 million land premium for converting two hotel blocks to residential use in their Cheung Sha Wan shipyard redevelopment.

Graphic: land22gwz

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