Land-use conversions in Hong Kong to make areas available for housing developments present many challenges

The government appears determined to go full throttle in its drive to ease the shortage of housing – a prickly issue that has been one key factor in shooting up home prices in Hong Kong.

According to the government, the administration’s strategy is to adopt “an enhanced conventional new town development approach”, in the upcoming development of Kwun Tong North and Fanling North as part of the northeast New Territories development plan.

An article – “‘Wasteful use’ of land” – in last week’s Weekend Property in the SCMP refers to a report from Our Hong Kong Foundation (OHKF), titled “From Housing Market Outlook to Land Supply Strategy”, which states that the government should explore and study all options, not only prioritise converting brownfield sites into developable land.

In the same SCMParticle, Dr Peter Cookson Smith, president of the Hong Kong Institute of Urban Design (HKIUD), says: “We actually have a large amount of land in the New Territories, much of it reasonably well served by public transport of one kind or another.”

The latest government strategy of making more land available for development involves giving private landowners the flexibility to apply for lease modifications, including on-site land exchange, to develop their land into private projects within permitted uses.

To be eligible for an on-site land exchange in the designated Kwun Tong North and Fanling North development areas, it is necessary that certain criteria are met, which include the site being of an area no smaller than 4,000 square metres, clear ownership of the land, completion of the lease modification/land exchange process within a specified time, and that compensation must be made to the affected tenants or occupants comparable to that offered by the government.

However, carrying out due diligence on legal titles and negotiations on the premium to be paid by the developer, a successful land exchange application could be a lengthy and sometimes a daunting process, according to experts. With more land exchange applications – mostly for New Territories sites – expected to be processed by the end of this year, the Lands Department will likely become a bottleneck for granting approvals.

According to the government schedule, the deadline for applications for the first phase of development was last November.

“I believe their [the Lands Department’s] legal team is already inundated with previous appeals or lawsuits involving land matters. And now they have a fresh round of work to do, like handling new land-grant applications and making clarifications on titles to land under applications, all of which [is] time-consuming even [if] part of the job is outsourced,” explains Serena Lau, managing director of surveyor firm RHL International.

The second sticky challenge is mutually agreeing on a land premium payable to the government. In theory, the premium charged is equivalent to the difference in market value between the development permitted under the old-lease conditions and that under the new-lease conditions.

“While surveyors representing the developer and the Lands Department follow the same set of valuation standards, discrepancies on how much the existing site is worth and the future market value of the completed development are inevitable in practice,” Lau says. As a result, land premium negotiations are typically a lengthy back-and-forth process and, even after all efforts have been made, a deal is not necessarily reached.

According to Lands Department records, a total of 15 land exchanges were executed last year, some of which are believed to be agreements made after several years of negotiation or longer. And as of July this year, there were a total of 128 land exchange applications under processing, including 10 on Hong Kong Island, 19 in Kowloon, and 99 in the New Territories.

Of the 11 lease modification/land exchange cases submitted to an independent arbitration, one applicant had accepted the arbitration option by the end of 2015.

Meanwhile, politics, red tape and legal challenges might make the land exchange process an intricate and multifaceted procedure, says Dr Chau Kwong-wing, chair professor of real estate and construction at the University of Hong Kong.

“To refute allegations of questionable or underpriced land deals with private developers, these days the government tends to [demand] higher land premiums, which would narrow developers’ profit margins and reduce their motivation for a land exchange,” he explains.

In a rising property market, developers may still find it reasonable to do so as the future value of the completed project may exceed its value today. But as property prices continue to soften, Chau expects that land exchange activity would slow down.

A typical land-use conversion application involving a piece of farmland requires the approvals of various government departments, not to mention the possible legal challenges such as adverse possession cases and judicial reviews. And then the whole issue is sometimes also complicated by resistance from affected residents being reluctant to leave.