Jake's View

Put this on the to-do list: Replace Hong Kong’s outdated land lease system

PUBLISHED : Wednesday, 02 August, 2017, 2:25pm
UPDATED : Wednesday, 02 August, 2017, 11:09pm

Renovation of old buildings should be top priority in HK

-- Headline, Property Post, August 2

I call it the fault of the American colonies. When asked to contribute to the cost of their own defence in 1776 they refused, justified themselves with fake news, committed acts of terrorism against the security forces of their government, and thus established their independence.

This left British bureaucrats in London with a difficulty.

“How in the future can we contrive to make our colonies pay their own way instead of dunning our taxpayers at home with the cost of colonial upkeep and security?” they asked.

They quickly found the way. It was to make all land in a colony a crown possession and then offer it in leases for specific purposes, further charging a premium if a lessee wished to put his land to a more lucrative use than the original lease granted him.

The system was not adopted everywhere, but it worked well where it was adopted, and Hong Kong is a classic example. Although our government now has other sources of revenue, land lease is still a fiscal underpinning and we retain it unchanged 20 years after China’s resumption of sovereignty.

It does, however, have its drawbacks. For one, it tends to concentrate property development in the hands of a few big companies. Small ones cannot easily raise the billions needed to buy a good lease at a land auction when payback is three years away.

It also encourages developers to hold land idle for years in the hope of an opportune time to pay low lease conversion premiums and it encourages government to maximise premiums by opting for higher density developments than needed.

But one of its most obvious characteristics is the curious nature of our urban geography. Hong Kong has new buildings in its core districts, older buildings in the next ring on the map and then new buildings again at its periphery.

Read: Back to 1997? Why Chinese yuan and Hong Kong property prices may go down by a fifth next year

We now have some 30,000 buildings aged 50 years or more, most of them residential and most of them located between the new core and the new periphery.

Would it not make sense to redevelop these into safer, more congenial residential districts? Should it not be a top priority?

The obvious answer is that, yes, it would and should. But there is a problem. Almost all of these buildings have been sold to the individual homeowners who live in them and who have little incentive to redevelop.

Not only are many of these buildings already of the maximum floor area permitted by lease or zoning restrictions, but the lease system dictates that any increase in value from redevelopment be taken by the government in lease modification premiums.

The authorities have tried to get around this by reducing the percentage of ownership that can force redevelopment of an entire building. It is now 80 per cent.

But this is difficult to enforce on people who are happy to live where they are or, who do not foresee much improvement in their living circumstances from the change and who often cannot even be located. Mong Kok and Tai Kok Tsui therefore remain what they are.

I think the time has finally come after 240 years to reconsider the old colonial system. It worked well in its time but this is no longer the eighteenth century.

Better than a one-time lease payment would be an annual lease charge, based on use of the land and assessed on it whether or not the developer had built anything on it.

Not only would this encourage immediate use of idle land, but it would allow smaller developers to participate in larger building projects and it would bring a much needed stability to volatile government land revenues.

Admittedly this alone may not immediately result in large scale renovation of older districts. The solution there probably has also to involve forgiveness of lease conversion premiums. This would not be a difficult matter for a government at present running a fiscal surplus of HK$185 billion (US$23.7 billion) a year on cash accounts.

Overall, it is a change that is now long overdue and much needed in a 21st century city that has ambitions to modernity.

But I am a realist. It will remain at the top of the (next year) priority list for many years yet to come.