As lucrative development in Hong Kong has been put on hold for the rail firm, it must look elsewhere for its growth Most cities struggle to find adequate funding for their subway systems: digging tunnels is always a lot more costly than laying a road. That Hong Kong's Mass Transit Railway Corp (MTRC) has managed to build a top-tier rail network, earn consistent profits and list its shares have long marked it as a global oddity. The reality, however, is that those profits came not from its rail operations but through a more valuable commodity - commercial and residential development rights atop its stations. Now, however, the government has placed a moratorium on the MTRC and its cousin, the Kowloon Canton Railway Corp (KCRC), from building new property projects. It hopes that postponing projects such as the MTRC's 'Dream City' development at Tsuen Kwan O can stabilise the property market. So with its core passenger business looking lacklustre and fare hikes being politically untenable, the MTRC has embarked on the well-trodden route of expanding its operations across the border. Its six billion yuan investment in extending the subway of Hong Kong's neighbouring city breaks new ground. The MTRC gets to wholly own the new 21km rail extension link for 30 years under a build-operate-transfer arrangement. After that, it can cut its stake to 51 per cent. Shenzhen officials appear to be shrewd negotiators. Rather than employing any guaranteed return formula they have borrowed Hong Kong's model, where the high up-front costs of the project are compensated through property development rights. In Hong Kong these proved to be gold-plated due to the virtuous circle formed when building new transport links - the value of adjacent property is, as a consequence, boosted. Replicating a Hong Kong model that is already showing signs of breakdown in Shenzhen, however, is another matter. While the allotted 2.9 million square feet of development rights is enough upon which to build 26,000 flats, profits depend on rising prices. Should they not increase markedly above the current $300 to $500 per square foot in many areas of Shenzhen, earning a decent margin will be hard. This price represents about one-third of that in Hong Kong's cheapest areas. The government in Shenzhen has still to borrow the ploy of controlling land supply from its more sophisticated neighbour. Funding this foray across the border should not be too difficult. The MTRC this week issued a US$600 million bond and while its gearing is above 60 per cent, the firm's core train business generates operating cash of about $4 billion a year. It will take a few years to see whether this investment in Shenzhen proves profitable. But the MTRC is badly in need of new avenues of growth should the policy deadlock in Hong Kong persist. At home, the MTRC's fortunes are inextricably tied to the government's transport and property policies - both of which appear to be ideas in constant flux and subject to derailment by public opinion. From a longer-term planning perspective, it makes sense to combine Hong Kong's new West and East rail links with Shenzhen's network. This could boost economic integration and might even help find buyers for future property developments on the West Rail link, as well as for projects in Shenzhen. The MTRC would surely be reluctant to invest in infrastructure that would primarily improve traffic flow to its competitor, the KCRC. But this again will be a moot point if the government goes ahead with the merger of the two, as has been proposed. If future rail funding depends on a sustained Hong Kong property revival, however, perhaps taking a chance in Shenzhen is worthwhile.