“The authority will not increase the proportion of residential development in the arts hub, which will be kept at 20 per cent,” one insider said. “But instead of renting out the flats only, it hopes to sell them to raise more funding for the hub’s future development. That’s the only thing to relax to allow more flexibility.”

The proposal submitted to the government did not reduce the area dedicated to arts and culture, which stood at roughly 40 per cent of the total gross floor area, and the proportion devoted to office and retail space also remained at 40 per cent, the source said.

The projects could be similar to Hong Kong’s railway development model, where the authority still owned the site, but flats would be sold individually, the insider said, adding details had yet to be finalised.

Betty Fung Ching Suk-yee, CEO of the cultural district’s managing body, last month told the Post that a one-off government endowment of HK$21.6 billion (US$3 billion) granted in 2008 would run out by March 2025.

Hong Kong’s West Kowloon arts hub submits plan to shake up finances

A package of commercial components in the hub was awarded to Sun Hung Kai Properties last November under a “build, operate and transfer” model, a common approach to development that aims to maximise the benefits of public-private partnership.

The operating period was extended from 34 years to 47 years as a sweetener after the first round tender failed to find a winner.

‘Jumping on one leg’: Hong Kong’s West Kowloon arts hub CEO describes money woes

He said the hub’s financial problems stemmed from its ambitious plans, including the late-stage addition of the Palace Museum, adding that the sale of assets would not provide the long-term financial support the authority needed.

“Operations such as running the M+ and Palace museums will generate income year after year through events, admission and parking fees, but selling assets is just a one-off, which could be dangerous,” Lee told a radio programme.

Another source close to the authority explained that proceeds from the residential development would be “reinvested” to generate long-term income.

Hong Kong Palace Museum to raise admission prices by 20 per cent

Chau Kwong-wing, chair professor of real estate and construction at the University of Hong Kong, also questioned the reinvestment approach as he understood the main challenge facing the authority was financial sustainability rather than cash flow.

“I don’t see how this can be a long-term solution,” he said. “In theory the sale price of the property is just the capitalised future rental income. That is, instead of receiving rental income … [the authority] gets one lump sum of capital income.”

Chau asked whether the authority could earn a better return by investing the sale proceeds than retaining rental income, arguing it had “weaker bargaining power” in the current market.

Both Chau and lawmaker Andrew Lam Siu-lo, a former authority board member, agreed increasing the amount of space for residential projects could boost the projects’ appeal to developers. But the sources ruled out the option as the proportion was stipulated in local plans.

Billy Mak Sui-choi, an associate professor at the department of accountancy, economics and finance at Baptist University, said the authority could also consider issuing bonds, but the government would likely have to act as a guarantor.

Or the government could simply dip into its reserves to throw the hub a lifeline, given the district was part of a policy initiative to deliver broader benefits “like Disneyland”, he suggested.

The current funding gap was partly the result of unforeseen factors, such as the pandemic and soaring construction costs, Mak added.

The government might be opposed to the proposed property sale given other possible policy considerations, such as keeping the district’s ownership relatively intact, to ensure planning at the seafront site was maintained and the public continued to enjoy easy access, the academic suggested.

“Why didn’t the government grant the sites to the authority as disposable assets in the first place [to enable a property sale]?” he said. “If it would do so, the government could simply auction off the plots itself and hand the proceeds to the authority.”

Interest rate rises and global economic woes have put pressure on Hong Kong’s property market. Home prices in the private market fell 8.6 per cent in June from a year ago, according to Rating and Valuation Department figures.

Additional reporting by Sammy Heung and Denise Tsang