Here’s how transferable development rights outweigh Lantau reclamation plan in ending Hong Kong housing crisis
- A stalemate in process to convert land to high-density residential uses has cost Hong Kong dearly, with most struggling to purchase a decent home
- Transferable development rights or TDRs can end dickering between land owners and developers and resolve the city’s housing crisis
In particular, Hong Kong contains 1,414 hectares (3,494 acres) of brownfield sites and another 1,200 hectares of country development land reserved for indigenous villagers of the New Territories that is all suitable for high-density residential construction.
Why reclaim new land at such high cost when existing land is just sitting there ready for new construction? The problem is the absence of an efficient bargaining process, by which low-value uses can be converted into uses that everyone would value much more highly.
For decades, developers, indigenous villagers, and the government have been locked in endless dickering over how to divide the gains from converting land, with the result that nothing gets done while everyone endlessly haggle to increase their share of the gains from conversion.
By requiring developers and indigenous villagers to purchase those TDRs from the general population in order to build high-density housing, the government could give the entire population a stake in moving land from low-value to high-value uses, while simultaneously providing ample compensation to existing stakeholders.
To understand the appeal of TDRs, one must first consider how a bad bargaining framework prevents housing that everyone wants from getting built. Developers and indigenous villagers each hold the right to use land for low-values uses.
Developers can use brownfields for warehouses, while indigenous villagers are entitled to use country development land for three-floor small houses, with each floor no larger than 700 sq ft. Both groups would like to convert their current use rights into much more valuable high-density housing, but the mechanism for such conversion leads to endless haggling.
For decades, developers and the Hong Kong government have dickered over converting those warehouses into high-density residential use. Rezoning land is time-consuming, especially because each side naturally disagrees about the premium that developers should pay to convert warehouses to housing.
The same dynamic afflicts bargaining over villagers’ traditional ding rights to build and occupy three-floor small houses. It is evident that villagers would gladly trade these rights for the value of high-density housing. Developers have repeatedly colluded with indigenous villagers to purchase ding rights and develop large buildings, despite the dubious legality of these transactions.
Villagers, on the other hand, have incentives to oppose higher-density housing as a strategy to preserve and even enlarge their housing entitlement.
This stalemate in the bargaining process to convert land to high-density residential uses has cost Hong Kong dearly, with most Hongkongers struggling to purchase a decent home. Even for Hongkongers who have successfully “gotten on the bus” and became a homeowner, the average liveable area per person in Hong Kong is about 215 sq ft, much smaller than that in New York, Shanghai and Shenzhen.
For public housing, it often takes many years (on average 5.7 years according to government data at the end of 2020) to obtain one, and even after that, the size (about 140 sq ft per person) and the condition is not something any resident would relish for a home.
How can TDRs help? Originating in New York to compensate owners of land-marked buildings for their loss of air rights, TDRs are simply any right to sell building rights to the owner of a “receiving site.”
By purchasing the TDR from a “sending” owner, the owner of the receiving site can build taller or bulkier than would otherwise be permitted. The sending owner gets some share of that extra value in the form of a purchase price paid for the TDR.
The Chinese central government, based on long-term experimentation in Zhejiang, Sichuan, Chongqing and other places, has created a nationwide market of TDRs, or land use permits, in 2018 to promote equitable development. That is exactly what Hong Kong needs most at this stage, across different regions and different socio-economic classes, between which and whom development rights are transferred.
In an abstract way, this market of TDRs is similar to carbon emission trading, utilising market mechanisms instead of regulation, to align business incentives with social welfare.
Under our proposal, both developers and indigenous villagers would be entitled to develop their land for high-density residential uses to the extent that they purchased TDRs from their fellow citizens. Armed with these TDRs, developers, indigenous villagers in the New Territories and property owners – like those who opposed Tung Chee-hwa’s public housing plan – would have a shared incentive to promote housing development in the city.
To consolidate TDRs holders’ incentives to lobby for housing development, payment for TDRs would be suspended until the completion of a corresponding real estate project for which TDRs are used.
The Hong Kong colonial government issued land exchange entitlements commonly known as Letters A and B, which were essentially TDRs, to landowners in New Territories between 1960 and 1983, and promoted development there. Our proposal is more encompassing and more inclusive than this historical practice.
The essential function of these TDRs would be to promote social consensus through a market mechanism that would give every citizen in Hong Kong a direct and focused incentive to push for more housing. Everyone in Hong Kong benefits from increased housing construction, but that benefit is now diffuse and unfocused, leading the mass of people to sit on the sidelines while current entitlement holders squabble over gains from increasing the housing supply.
By requiring those stakeholders to go to the mass of Hong Kong citizens to purchase valuable building rights, TDRs would give Hong Kong citizens an immediate interest to push for the housing essential for Hong Kong’s future.
The government could further reduce the costs of bargaining by simplifying the fee for new construction. Rather than dicker over the details of infrastructure for each project, the government could impose a uniform price, such as a dedication of 20 per cent of the land for public amenities like transit.
Such a standardised deduction is similar to the Shenzhen government’s mandated dedications in its urban redevelopment during the past decade, which has proven to be quite successful. It is also a practice in New York and other places that the government requires developers to contribute to public facilities from which a real estate project benefits.
There is growing recognition across the world that over-stringent land use regulations have been a barrier to housing supply and economic development. Removing all the barriers to urban growth in America could raise the country’s GDP by between 6.5 and 13.5 per cent, or by about US$1 trillion to US$2 trillion, some economists estimated.
TDRs are one way to give stakeholders and ordinary citizens incentives to reform Hong Kong’s over-stringent urban planning and zoning systems.
Unlocking land now used for warehouses and tiny villagers’ houses would not only significantly alleviate the housing affordability crisis in Hong Kong, but also release the city’s potential for economic growth suppressed by inefficient land use institutions.
Qiao Shitong is a professor of law at The University of Hong Kong and Roderick Hills Jr is a professor of law at New York University