A redevelopment of part of Kowloon City is likely to be put on hold until what defines a house is determined. Photo: May Tse

Tall problems force developers to put projects on hold

Redevelopments hit by court ruling on what is a house and its meaning for land premiums

This is shaping up to be one of the worst years ever for Hong Kong developers.

The rules of the game in the property market have changed with the government's cooling measures running headlong into the market forces of demand and supply.

The Residential Properties (First-hand Sales) Ordinance, aimed at protecting buyers from dishonest sales practices, took effect on April 29. Any developers deemed to have misled buyers may face criminal charges.

The latest blow to developers involves the payment of a land premium if a high-rise building is planned for a redevelopment site that has a land-lease restriction stipulating that "not more than one house" may be built on the land.

This is because the Court of Final Appeal ruled last week that a high-rise is not a house.

As a result of the ruling, small developer Fully Profit (Asia) must pay a land premium to build a 26-storey residential building on a Kowloon City site. Each of the site's five lots has the "not more than one house" restriction in its land lease.

Otherwise, the court said, the developer could build only one five-storey Chinese-style house on each lot.

In the past, the Lands Department would permit the building of residential towers in such cases without charging a land premium.

The ruling is a developer's nightmare.

Richfield Group has announced that two projects in Kowloon City may be affected by the judgment, as may projects in Sham Shui Po from Hong Kong Ferry and Henderson Land Development.

Many developers have been aggressive in acquiring old buildings over the last few years and most of these sites are in older districts, where many are subject to the restriction.

So how much will developers now pay?

Let's examine the Kowloon City case. The development plot ratio for a five-storey building is about five, meaning the maximum gross floor area (GFA) for a new building is five times the area of the plot of land it is to be built on.

However, the plot ratio could be raised to nine times if a high-rise is built on the land. Under the ruling, the developer would have to pay land premium for the increase.

A surveyor estimated the land premium would cost at least HK$5,000 per square foot of GFA for a redevelopment project in an urban area.

On the 5,000 sq ft site in question, the developer would have to pay land premium on an extra 20,000 sq ft. Based on the surveyor's estimate, the high-rise would cost the developer another HK$100 million.

The court's ruling means all projects will be put on hold until the Lands Department defines "house", which will affect the calculation of the land premium.

Developers have been eyeing the extra floor area they can generate from redeveloping old buildings. If a land premium is now payable for the extra, their enthusiasm for redeveloping old buildings may wane.

With the property market's uncertain outlook, developers can no longer count on selling flats at ever higher prices. After factoring in land premium on many redevelopment sites, they will make lower offers for flats in old buildings. Faced with lower prices, flat owners will be less willing to sell, increasing the time it takes for developers to buy such buildings.

The result may hinder the government's policy of increasing home supply.

The buying of old buildings for redevelopment has become a key source of land-bank replenishment for developers over the last few years, and the government should consider this in light of the court's ruling.

It should speed up the calculation of the land premium in such cases and set a reasonable levy.

This article appeared in the South China Morning Post print edition as: Tall problems force developers to put projects on hold