Hunghom Peninsula : Policy and Profits

by Christine Loh

The latest controversy over Hunghom Peninsula (HP) provides an interesting lesson for all to ponder about land policy. The guns are being pointed at the government and developer not to tear down new flats. Is there a “win-win solution”?

“The news that brand new blocks of flats, which had never been occupied were to be demolished created a public uproar because it was seen as extremely wasteful.

It’s a tough one but maybe ….

A. Hunghom what?

1. HP: HP are government built flats.

2. HOS flats: These were built to help lower-income folks buy their own homes. A large number of these and other public housing flats were produced from 1998 as part of the Chief Executive’s (CE) 1997-98 policy to supply 85,000 residential units per year. At the time, his policy was popular.

3. Why 85,000?: In 1997, when the CE took office, property prices were high with strong demand. The CE also thought owning property would help to instill in the people a sense of belonging.

4. Asian financial crisis: Property prices plummeted. People were less keen to buy obviously when prices are falling, not rising. In 2000, when the property market was weak, the government was frequently asked what it would do to stop the slide in prices. Various measures were taken. Developers were unhappy about the cheap home ownership housing as they competed with the private market.

5. Policy change: In 11/2002, the government said there was “serious imbalance” in supply and demand in the property market. It would stop the production/sale of home ownership flats from 2003 onwards and terminate other similar schemes.

7. HP saga: In 2/2004, the government sold HP to the private sector developer it had partnered with to build the flats. The deal was the developer gave up receiving payment of HK$1.9 billion from the government for not nominating purchasers for the 2,470 flats, plus pay a premium of HK$864 million to modify the lease condition, which would allow the developer to sell the flats in the open market.

B. OK, so what …

1. Developer decision: The developer announced in 11/04 to redevelop HP altogether. It said the decision represented “our best effort to accommodate the many, often conflicting, priorities of the community. It would be a massive waste if this prime site was not used to its full potential”. The developer believes there is now little demand for low-end small flats.

2. All hell broke loose: The news that brand new blocks of flats, which had never been occupied were to be demolished created a public uproar because it was seen as extremely wasteful. Green groups said it would generate a lot of waste. The developer responded that their plan included a waste reduction scheme to recycle 95% of the existing estate.

3. 1st Ministerial huff: The environmental minister noted on 1/12 that tearing down HP would be “totally against environmental protection principles. I absolutely do not support it”.

4. LegCo’s wrath: Legislators want to know whether the government knew at the time of the deal with the developer that it might demolish rather than refurbish the flats. They may want to push the government to exercise its powers to refuse alteration to the existing lease thus stopping redevelopment.

5. 2nd Ministerial puff: Today, the housing minister said he had yet to received a formal modification application from the developer. He said HP were “end stock” for the government, and commented that now the market has become stronger, the developer decided to redevelop rather than sell the flats. He called upon the developer to response directly to public concerns.

C. Observations: some questions to ponder

1. Demand for quality: 2004 prices show that buyers are willing to pay 3 to 4 times more per sq ft for bigger better flats. HP in its present form would not meet that demand. So, of course the developer wants to redevelop.

2. Quantity of wastes: Apart from recycling 95% of the waste, there is the issue of embodied energy in making the various materials used in building HP, then the energy needed to demolish the flats and then to recycle the materials. The total energy lost will be much more than what has been calculated by the developer.

3. Lease modification: The developer paid HK$864 million for lease modification. Such payments are usually calculated based on the value of the development. This amount may well reflect the value of low-quality, tiny flats. The construction cost per sq ft for these flats were probably around 50% of better flats. However, if the developer were to build much larger, nicer flats then the premium they would have to pay government upon application for change of the lease conditions will be in the billions in today’s market.

Something for LegCo to ponder:

4. Option I: Stick to the original deal. The developer-purchaser sells the small flats, which are not much in demand in the private market at a price and do its best to maximise profits.

5. Option II: It negotiates the modification premium with government PLUS agree to share profits with the government. The government uses the profits earned to generate a significant environmental gain. Examples may include buying out sensitive ecological sites in private hands for conservation, improving air quality in some material way etc.

Christine Loh

Civic Exchange – HK’s independent think tank

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