Market players embrace greater transparency at Hong Kong land sales

Greater transparency in land sales will help level the playing field, but it is unlikely to cool Hong Kong’s red-hot property sector, according to market watchers. Media reports say the new administration led by Chief Executive Carrie Lam Cheng Yuet-ngoris likely to disclose the five highest tenders at future land sales as a way of improving transparency.

Market players are generally receptive to the idea, saying that more disclosure could help to level the playing field and calm market sentiment. But the direct impact on future home prices is considered minimal, given that the land disposal method is a tiny piece of the equation.

The consensus has been that tendering, or a sealed-bid auction, in which tenderers give their best and final bids, remains one of the best methods for land sales, despite recent calls for a resumption of open land auctions.

Lau Chun-kong, an international director at property consultant JLL, has welcomed the proposal, saying it could increase market transparency by making the prices offered by top bidders known to the public.

“But we have yet to know more about the nitty-gritty of the plan. We would like to know when the bidding results will be revealed, tender closing and award dates, and when the land premium has to be paid.”

There is a chance that the top bidder, after finding out that the offer it has made is substantially higher than the first runner-up, in an awkward situation known as the “winner’s curse”, will not proceed to closing.

“In Singapore, the names of tenderers and their submitted prices are announced at the tender closing date. We would also like to know if the government is going to increase the deposit amount to be paid on tender submission,” Lau adds.

In comparing the merits of tendering against that of an open auction, tendering has up till now achieved better land sales revenue for the government while promoting competition among bidders of different backgrounds and sizes.

“For example, in the past year since July 2016, 20 residential sites have been awarded to local and mainland developers, with keen competition ranging from nine to 21 bidders. In 2017, all residential sites sold by tender were awarded to [mainland]-related developers.”

Yet, in an open land auction, the winner is just one bid above others, no matter how thin the winning margin is. With the announcement of the top five bids, the mystery of how wide the gap is between the best and the rest can be addressed.

Eddie Hui Chi-man, a professor of construction and real estate at Polytechnic University, believes that disclosing the highest bids would produce similar results.

But he says the gap between the highest and lowest bids would be likely to narrow as overly optimistic or conservative bidders would adjust towards a market consensus.

“While [an] open auction is highly transparent, conducted in a real-time setting, there are also downsides.”

From experience, the same developer, usually the big ones, could take part in the same auction through different subsidiaries or entities. Hui insists the possibility of collusion among bidders cannot be ruled out, which makes an open auction less competitive.

“In a sealed-bid auction, bidders simultaneously make ‘best and final’ offers,” he says. “The risk that they collude on bids is lower.”

Jacinto Tong Man-leung, founder of Gale Well Group, is upbeat about the top bids at future land sales being revealed to the public. “It allows the market to know how much the majority of developers value the site, and in some sense, [give] their take on the market outlook,” he says.

“Most importantly, developers can no longer use a red-hot land market as an excuse to mark up new home prices in the typical ‘flour-and-bread’ pitch.”

Donald Choi, managing director at Nan Fung Development, says “an open public auction is a relatively transparent method in which bidders [developers’] valuations on the site going under the hammer can be observed over the course of the bidding process”.

“But imagine in a televised auction, it could turn out to be a moment of embarrassment if the government fails to sell the site because all the bids placed did not reach the undisclosed reserve price.”

By contrast, in a sealed-bid tender, bidders have to be aggressive to maximise the chance of winning because there is only one chance to get their way.

While it is true that the government can generate more revenue from tender sales, the result is a higher land price, which seems to have been confirmed by record land prices fetched in recent land sales.

Revealing the highest bids after a tender sale has taken place is the best achievable balance for now in terms of transparency and fairness, and can avoid sending a wrong signal to the market, but he says there is room to make the rules of the game more transparent and fairer.

“Disclosing the top bid prices, including the winner’s and that of other unsuccessful bids, is only retrospective. It won’t give any guidance to future bidding as every piece of land is different and requires its own assessment.”

If the intention is to provide pricing transparency, it would make more sense to announce all bid prices, in real time, to all tenderers through an open tendering process, Choi suggests.

“I can only guess that one of the reasons is fear of embarrassment when how much the market is willing to pay for a site is below the hidden reserve price.”

That secretive reserve price suggests the government does maintain a high land price policy and is one of the reasons behind high property prices, Choi notes.