Marketing costs for residential projects range from 5.5 to 9 per cent of sales. Photo: Jonathan Wong

NewHong Kong government urged to review land premium assessment system to raise home supply

Developers say sharp increase in marketing cost has not been reflected in assessment process

The Hong Kong government has been urged to review marketing cost for residential projects, one of the parameters used in assessing the amount of land premium to charge when developers apply for land to be rezoned as residential, a move that will overall improve land supply.

Property consultants said the current assessment by the government on marketing costs for residential projects did not reflect the actual spending by developers. It adversely affected the ability of the government and developers to reach an agreement on the amount of land premium to convert their non-residential sites into residential use.

"Consequently, this will affect the new housing supply," said Lau Chun-kong, head of Asia valuation advisory services at property consultant JLL.

Under the current land administration policy, where a lease modification or change of land use results in an increase in land value, the developer is liable to pay the premium, The Lands Department will then deduct the projected development costs and the developer's profit from the enhancement in land value.

According to the government's calculation, marketing cost accounts for 1 per cent or less of the sales proceeds, said Lau. But now developers say that cost has risen to more than 6 per cent.

"It depends on the size of the development. In our experience, marketing cost for a single-block building is between 6 to 8 per cent of the selling price," said Phileas Kwan Po-lam, an executive director of Asia Standard International Group.

"Agents' commission is on the rise, from originally 2 per cent to an average of 3 to 5 per cent," said Kwan.

It will be easier for the government and developers to reach an agreement on land premium charges if the government revises the parameters for the assessment of land premiums, Kwan said.

JLL conducted a survey on the sales and marketing for 30 residential projects it has handled over the past five years to determine the change in marketing cost.

Currently, the marketing costs for general residential projects range between 5.5 per cent and 9 per cent. The smaller the scale of the project, the higher the marketing cost as a percentage of the sales proceeds, it said.

The cost was further pushed up after the government introduced the Residential Properties (First-hand Sales) Ordinance, which took effect in 2013.

Lau of JLL said the government should increase the proportion of sales and marketing cost to 6 per cent of the sales proceeds, with adjustments for development scale of the new projects.

"We believe it could help both parties to reach a land premium agreement and increase the new housing supply as a result," he said.

According to data from the Development Bureau, in fiscal year 2011/2012 there were 4,000 flats supplied by way of land exchange or lease modification of private land. The number supplied through this channel, however, started to decrease dramatically afterward.

For the latest fiscal year to January 2015, the new housing supply from land exchange and/or modification was only 100 flats.

This article appeared in the South China Morning Post print edition as: Land premium review sought to boost supply