Hong Kong developers’ rural land conversion in New Territories gathers pace, push for lower land premium due to softening market expected
- Sun Hung Kai Properties pays HK$268 million (US$34 million) to convert farmland in Yuen Long into a residential project
- Developers with large holdings in the northern New Territories are likely to negotiate for a lower land premium, analysts say
Hong Kong developers are speeding up the conversion of farmland in the northern New Territories for residential use, with industry observers pointing out that companies are likely to push for lower land premiums due to the softening housing market.
Seven land-premium transactions, including that of SHKP, totalling HK$3.3 billion have taken place in Yuen Long, Lands Department records show. The seven plots will provide a total gross floor area of 890,000 square feet.
Land premium is the fee that developers pay the government when a modification or change in land use results in a higher land value.
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While there is no fixed fee charged for the land conversion premium, the government arrives at the value by taking into account recent transaction prices in both the housing market as well as the land sales market.
“Both housing and land markets actually indicate a declining trend in recent months because of the volatility in the stock market, increase in the unemployment rate and expectations of an interest-rate rise,” said Eddie Kwok, senior director for valuation and advisory services at CBRE Hong Kong.
“This puts developers in a relatively strong position to argue for a lower land premium level,” he said.
Hong Kong developers have recently turned conservative in bidding for government land following a decline in home prices, which have retreated 4 per cent from their peak last September. Last month, the government withdrew the sale of a 1.3 million sq ft site in Tai Lam in the northern New Territories, which would have yielded an estimated 2,020 homes, after all tender bids came in below the reserve price.
Surveyors had estimated the site, Hong Kong’s first plot earmarked for residential flats with a minimum area of 280 square feet, to fetch between HK$7.1 billion and HK$9 billion, or HK$5,500 to HK$6,900 per square foot in the tender.
“The strategy of many developers, particularly the bigger ones, is to retop their land banks by converting agricultural land into residential use in addition to the government land sales,” said Kwok.
The government’s land sale programme for the current financial year ending March 2023 covers 13 residential sites, which will be able to provide 8,000 flats, according to Secretary for Development Michael Wong Wai-lun.
While the government’s projected supply of new flats is up from 6,000 in the last financial year, the supplies are under 10,000 for the fifth consecutive year.
Currently, about 100 million sq ft of rural land is owned by various developers, according to Savills.
“Now they see an opportunity to turn the land into residential development sites through the land premium settlement scheme,” said Charles Chan, managing director of valuation and professional services at Savills.
JLL noted the total maximum developable gross floor area for residential use dropped 15 per cent to 2.86 million sq ft on sites sold by government tender last year compared with 2019, while land premium settlement transactions jumped 76 per cent to 25 last year.
“Whether there are more land premium settlements later this year will depend on the price expectation gap between developers and the Lands Department and the pace of economy recovery,” said Alkan Au, senior director of valuation advisory services department at JLL.
“Developers will expedite the premium settlement if they think the residential market will rebound soon.”
