September 2, 2009 SCMP
In this column a fortnight ago, Roger Nissim, adjunct professor in the Real Estate and Construction Department of the University of Hong Kong urged a resumption of regular land auctions by the government. He commented, inter alia, that given the state of the market there could be no rational fear of land being sold cheaply.
I would concur with that. The evidence from the market suggests there is keen demand from end-users and developers to absorb an increase in land supply and housing units. Moreover, at present levels of supply, I would argue that developers are not able to keep pace with projected growth in demand for housing.
The government remains concerned that it might be accused of selling land cheaply. The most recent comment on this issue came from Secretary for Development Carrie Lam Cheng Yuet-ngor in March, when she announced the 2009-2010 Application List of sites.
The government has adhered to the “not selling land cheaply” policy diligently, selling only one plot of land at HK$16.5 million during the downward market cycle from last year to March this year. The solitary sale was in contrast to the HK$10.6 billion of land revenue it drew from lease modifications and private treaty grants in the same period.
Such a policy, however, likely acted as a constraint on the release and sale of development land during the buoyant market periods of between 2004 and 2007.
For this period, total land revenue amounted to HK$112 billion and the usage of this land was principally for residential development. Over the same period developers reaped revenue of about HK$371 billion from the sale of new flats. The spending on development land from government represents about 30 per cent of the sales revenue of new units.
It has to be noted that such a comparison is for indicative purposes rather than on a like-for-like basis as there would be a time lag of up to a few years before the land bought from the government can be developed and units put up for sale.
The figures above suggest that developers may not have been able to replenish their land banks to provide the supply level of new units in recent years. This is because a ratio of land cost relative to the sales revenues of 30 per cent means that developers were able to spend just HK$30 buying land from the government for every HK$100 they earned from selling flats.
More typically, land costs amount to 50 per cent or more of the ultimate sale price of completed units of new residential developments in Hong Kong and the 30 per cent ratio that emerges in the data for the period 2004-2007 period is far lower than the 50 per cent cost factor anticipated to replenish the land bank for development – as restricted by supply of development land.
This suggests the supply of new units will continue to diminish – particularly in a generally rising property market in which land values tend to climb before completed sale prices.
Had the government not been constrained by its concern of selling land cheaply more land revenue income could have been received in those good years and in turn enabled a more stable and adequate supply of new units into the market.
While the government points out that there is no supply shortage in the residential market, the real issue is the shortage of new stock. The total number of new units from 2004 to last year was 79,190. This comes to 15,838 per year on average.
However, only 10,470 and 8,780 new units were released in 2007 and last year respectively, far lower than in previous years and compared to the peak supply period of 1999-2003 when an average of 30,000 units were supplied each year. We have yet to see whether the projected number of units for this year at about 14,740 can be realised.
Against this supply shortage is a strong demand for new stock, shown by the huge price difference between old and new units.
The huge price premium on the latter compared to older stock in the same locality, which could be as large as the price of an older unit of similar size, sends a loud and clear signal that demand is strong for new units and that the market is prepared to pay the price.
The shortage of land supply from the government, coupled with a dramatic increase in land values fuelled partly by the incentives from green building features and price increases of completed units, have reignited site assembly exercises in the urban area.
This is helping urban renewal in Hong Kong. But the supply from such exercises is being restricted by difficulties posed by the strata title land ownership structure and the need to demolish existing buildings. Development land supply therefore still hinges on the government’s perception of the demand and supply situation.
The government should seize the land sale opportunities in the current upswing of the property market by improving the land sale system. The resumption of regular government land auctions would allow market forces to function more efficiently and assist government officials to judge land market conditions.
Lau Chun-kong, International Director and Head of Valuation Advisory Services, Jones Lang LaSalle