Does Hong Kong’s land sale system need a new lease of life?

The two-lane road along Ap Lei Chau’s southern coastline looks particularly gloomy on a cloudy, humid March day.

Lee Nam Road appears to have been recently resurfaced, with a slight smell of new asphalt in the air. On one side of it, Mount Johnston bares its barren, rocky face. On the other, a long, tall and drab-looking concrete wall topped with barbed wire blocks off sewage treatment facilities.

It’s a seven-minute walk down the road from the nearest MTR station to reach Hong Kong’s most expensive site since the 1997 handover in the government’s recent land sale.

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In February the rectangular stretch of land measuring 126,595 sq ft was sold to two mainland Chinese developers for a record HK$16.86 billion – or HK$22,118 per sq ft – for residential development. Sandwiched between the sewage treatment plant and an industrial area, with an open unrivalled sea view, the site was almost 50 per cent more expensive than the market’s highest expectation.

“The property market is going crazy,” said Annie Tong, a 45-year-old mother of three who lives in nearby South Horizons, a private housing estate. “It’s really unfair to young people. At such prices, when will young people be able to buy a flat?”

Tong’s family bought their 800 sq ft home in 1998 for HK$2.75 million. The price of the flat had gone up to about HK$10 million last year, she said, and after the February sale an agent told her she could now sell it for over HK$11 million.

“I won’t sell the flat of course,” she said. “There’s no way I can buy another one as big with the money I get.”

The recent wave of mainland developers spending vast sums to buy land in Hong Kong has not only raised many eyebrows but prompted some to wonder whether it is time to review the city’s land leasing arrangement.

Under the system, the government, which owns all the land, leases out sites – generally for 50 years – mainly by sealed tender. Surveyors first assess the value of the site and set a minimum acceptable price based on market developments, land use restrictions and lease conditions. The highest bidder will get the site, but if no offer tops the minimum, the government will cancel the sale and take the site back for future sales.

This upfront payment, or premium, will go to the capital works reserve fund, which is used only for infrastructure works.

Land policy watchers believe the system not only makes it extremely difficult for young people to climb on to the property ladder, but also favours larger developers and forces the government to spend on expensive infrastructure projects.

Developers are required to pay for 97 per cent of the value of a site upfront, with 3 per cent paid in the form of government rent, or ground rent, throughout the lease term.

Some critics have proposed the government lower the premium while charging higher rents, which would make it easier for home buyers to get on the ladder. Others suggested a competition for sites, with contenders offering the best plans, instead of the highest prices, getting the lots.

“The government accumulates too much cash rather than collecting for the future of Hong Kong, when they might need it to finance public expenditure,” said one of the observers, corporate governance advocate David Webb. “It should stop treating itself as separate from the people and return the money to the people.”

The system not only raised the entrance threshold for home buyers, but allowed the government to accumulate a large amount of money that could only be used for infrastructure, leading to “grandiose projects without a justifiable economic case”, Webb said.

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He cited the delayed Hong Kong-Zhuhai-Macau bridge – which has cost the city HK$117 billion and could still further overrun its budget – and the HK$84.4 billion express rail link to Guangzhou, which has also been plagued by delays and cost overruns.

In 2016-17 the government put an estimated HK$119.8 billion into the capital works reserve fund, with over 98 per cent of it income from premiums. That accounted for 27.7 per cent of the government’s total estimated revenue in the year.

The system also thwarted competition, with only big developers having a balance sheet large enough to finance the premiums, Webb said.

Roger Nissim, a former senior official in the Lands Department, was concerned about the abandoning of selling land by public auction. Under auction, he said, developers knew what their top price was and the successful bidder only had to make one more bid to secure the site.

“By tender, you put your best price in straight away and see who wins,” Nissim said. “If the best price is 50 per cent more than the second, then that’s a windfall profit for the government and it’s a distortion of what the rest of the market is thinking.”

The shortcomings of the tender system had been more worrying with massively resourceful mainland developers joining the game and buying up land for unexpectedly high prices, Nissim said.

“It’s like they’ve got a different rulebook,” he said. “To me that sends a warning sign out. There is something wrong and it’s not sustainable. Hong Kong flats have become very unaffordable to a large section of the community.”

To make it easier for buyers to enter the property market, Webb said the government could lower the premium by say 30 per cent, while raising ground rent, currently set at 3 per cent of a flat’s rateable value, to 30 per cent.

Under such a system the government would require developers and future property sellers to disclose the higher ground rent level in all marketing material, including property agents’ advertisements in the secondary market.

By so doing, more developers would be able to afford to join the competition for development rights, and more competition could reduce profit margins, Webb said.

“That would reduce slightly the profit margin of the sector and make property slightly more affordable,” he said.

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He believed the proposal would be attractive to buyers because rateable value would go down when the economy sank or when the land supply went up, so home owners would be more comfortable with the government putting more land into the market.

Mr Tso, who wished to remain anonymous, said he and his wife bought a flat of about 200 sq ft in High One in Cheung Sha Wan for about HK$4 million in 2014.

“We needed a home after getting married,” Tso, an office worker in his 30s, said.

The couple pay around HK$18,000 a month – about 40 per cent of their combined salary – for a 30-year mortgage, he said.

Under Webb’s proposal, the couple would have paid about HK$2.8 million for the flat. If the mortgage arrangements remained unchanged, they would pay about HK$12,600 a month.

But instead of a monthly ground rent of HK$275, they would pay HK$2,750, which adds up to about HK$15,350 a month for mortgage and rent – still lower than what they are paying now.

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Tso said he was interested in the proposal but worried lower entrance prices would make it even easier for speculators with large capital to snap up more flats, causing a shortage of homes if the supply could not keep up.

Nissim said the government could have a pilot scheme to test the proposal, selecting, for example, two sites in the same neighbourhood such as Kai Tak, with one developed under the current system and the other under the proposed high ground rent alternative. He added that it was necessary for the government to resume open auctions to sell land instead of by tender.

Maura Wong, former CEO of policy think tank Civic Exchange, offered something more ingenious. Instead of selling sites one by one, Wong said the government could learn from Paris.

In 2014 the city government put up 23 sites across the French capital for redevelopment in one go and then organised an international competition inviting proposals for innovative urban projects.

The winners were not those who offered the best prices but were judged on objectives such as the provision of affordable housing. The guidelines were different for each site, depending on the needs of the neighbourhood. So one area might prioritise affordable housing while another might prize open spaces.

“Currently, it’s up to the government to decide the use of land, and there is no public engagement in it at all,” Wong said. “[But the Paris concept ] will require both the government and developers to engage the public and collect what local residents care about the most.”

In response to an email enquiry from the Post, chief executive-elect Carrie Lam Cheng Yuet-ngor did not comment on the two proposals or whether it was necessary to review the current land leasing system. Instead, she repeated her election platform, saying she would set up a task force to review land supply options, including reclamation outside Victoria Harbour, developing brownfield sites in the New Territories, tapping into the land reserves of private developers, redeveloping urban areas and accessing the outskirts of country parks.

“The high land premium as we observe today stems from the acute supply-demand imbalance of land resources,” she said in her written reply. “To tackle this issue, the ultimate and effective solution still requires an increase in land supply.”

The Development Bureau had not responded to a request for comment.

But Nissim begged to differ with Lam, citing University of Hong Kong research last year, which studied government land sales from 1987 to 2012.

From 1987 to 1997 there was an ample supply of land auctioned for sale, at an average of around 20 hectares a year. There was a hiatus between 1998 and 2004, followed by a restricted land supply for the remainder of the study period, when as little as five hectares per year was sold.

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The analysis showed that throughout the 25 years the level of land supply from government sales did not have any impact on house prices, that Hong Kong people only bought property when prices were rising but refrained from owning a home when they were coming down.

By the end of last year Hong Kong’s population stood at about 7.37 million, while there were around 2.75 million permanent living quarters across the city, which averages at a household size of 2.68. Allowing for a 4 per cent vacancy rate this figure would come to 2.8.

The stated average household size last year was 2.8. Nissim said these figures alone meant that there had already been a broad balance between supply and demand.

Nissim urged the next administration to reconsider using premiums only for infrastructure and maybe it should devote more money and a higher percentage of land in building subsidised housing.

As for the private sector, he said, developers would have their large land banks to turn to, citing a combined land reserve of 92 million sq ft under the three major developers: Henderson Land, New World and Sun Hung Kai.

“It’s not about supply but all about affordability,” he said.