(Reprinted from HKCER Letters, Vol. 16, September 1992)
Planning and Development in Hong Kong
Town Planning and Development
In July 1991, the government released an important consultative document entitled Comprehensive Review of the Town Planning Ordinance. The document represents a broad-based government review of and a set of recommendations for planning and land-use regulation. If the proposals are adopted, they will have potentially significant impacts on the economy in general and on housing development in particular.
The distinguishing feature of the Hong Kong planning and land development system is that virtually all land in Hong Kong is legally owned and managed by the Crown. Private developers and other users gain use of the land by purchasing leases issued by the government. The leases include a variety of conditions that specify site coverage, plot ratio, building height, and minimum floor area to be constructed.
One unique feature of the leasehold system is the relationship between leaseholders and the government. For property developers, leases are considered a contract between the government and the owner of the lease. The nature of the contract is implicit since the terms are not legally enforceable, at least with respect to planning and development control.
Despite the lack of a formal contract allowing maximum development, the system of land development operates as if these formal arrangements existed and were respected by all parties involved in the contract, especially the government. Moreover, procedures exist for developers to modify the lease or change the land-use requirements specified in the lease. If the change results in increasing the value of the property or its development potential, the developer compensates the government by paying a premium on the land.
Importantly, the lease purchase is not a legal point of commitment, or a legal contract between the government and property developers, specifying the extent of development control over land use. While not legally binding, this element of the leasehold system has allowed land markets to work efficiently and effectively to meet the changing demands of consumers and producers in the local economy. The existence of this implicit contract has been instrumental in reducing uncertainty within the property market because, historically, the government has been reluctant to alter the development potential of land stipulated through the lease conditions or changes in zoning plans.
The Demand for Control
As Hong Kong's wealth and income has grown, its politicians and planners have become more sensitive to the social costs of growth. Minimizing these social costs, some believe, requires the abandonment of positive noninterventionism, particularly with respect to planning and land-use regulation.
For example, some claim that a casualty of economic growth has been the environment. Extensive pollution in Victoria and Tolo Harbours has raised questions concerning the viability of the environment when industrial waste is dumped haphazardly and untreated. These concerns have led to the reduction of plot ratios in the old industrial area of Kwai Chung. Similarly, concern over congestion resulted in downgrading residential developments in the Mid-levels on Hong Kong Island.
Land-use incompatibility has also become an important planning issue. Cement factories, for example, are found next to residential areas, creating problems from unwanted dust. Automobile repair shops are located underneath residential buildings, creating noise throughout the night. Better planning, advocates of the proposals argue, will enable these inefficiencies to be eliminated.
To cope with these changing circumstances, planners have become more and more willing to intervene in the development process to direct or influence the pace and pattern of development. In some cases, these changes have been clear and open. The moratorium on development in Pokfulam and the plot ratio reductions in the Mid-levels and Tsuen Wan serve as examples. The most ambitious manifestation of the new activism may be represented by the Metroplan.
Moreover, planners have recently argued that the current land-use planning system is inefficient and, in some cases, ineffective given the lack of development control and the inflexibility of the leasehold system. Development control is exercised largely through the Buildings Ordinance and through lease conditions that effectively limit planning input to the front end of development. Any planning change that might affect the lease condition requires mutual consent of the leaser and the lessee, restricting the discretion of planners. The developer is unlikely to consent to such a change if it entails a financial loss.
This lack of comprehensive planning control over development led the consultative document to identify several areas for improvement in the existing planning system. The 1939 Town Planning Ordinance, the review observes, ignores many contemporary issues in modern planning such as environmental impact, civic design, conservation, and nonconforming uses. Enforcement through leases is extremely inflexible since planning requirements can only be imposed when the lease expires. Even when the lease expires, planners may have little impact on future land use if the lease includes a clause allowing for automatic lease renewal. These issues have become particularly important on Hong Kong Island and Kowloon where long-term leases have few restrictions on land development.
To ameliorate these problems, the proposals call for centralizing development control and enforcement in a Planning Authority. Through the use of a planning certificate, the Planning Authority would ensure that development conformed to existing Outline Zoning Plans before work even began. The Planning Authority would also be permitted to stop work (or levy fines) on a construction site if the development were considered in violation of the existing plan or if a planning certificate had not been issued.
In concept and in practice, this reform represents a significant break with the past. The planning certificate can be used to require development to conform to plans that are in the draft and objection stages of consideration. It would be issued after the public exhibition period for draft plans, while the current system allows development to proceed as new drafts of statutory plans are being considered by the Town Planning Board. The planning certificate would be used to ensure that the developer complies with any draft or approved statutory plan or restrictions imposed by the Planning Board. By not issuing a planning certificate, planners could also prevent development if the site was under public objection and could ensure that the development satisfied the planning authority's concerns over density, plot ratio, site coverage, etc.
Under the new proposals, discretionary power over density control and other planning-related provisions would be transferred to the Planning Authority from the Building Authority. The introduction of the planning certificate entails a substantive shift in the development approval process from a system that emphasizes processing building applications to one that determines the suitability of development for planning purposes. The planning certificate will also give formal control over the development process to planners.
Another issue is compensation. Currently, the government is required to pay compensation to property owners if their land is resumed for public purposes. However, no compensation will be paid property owners for changes that occur through planning decisions. Thus, if the planners decide to reduce plot ratios or restrict other types of development on property, legally these planning-oriented actions would not require the government to pay compensation even though they may be considered as a break in the implicit contract over the right to develop land. On the other hand, the government does exact land premia from developers who want to upgrade their land to capture the economic benefits of more intensive development.
To maintain consistency, the government should pay compensation to developers if the value of their property is downgraded through planning decisions. The economic development in Hong Kong hinges in large part on the contractual nature of land development and the mutual respect implicit in that arrangement. If the government pursues planning objectives that significantly and negatively affect property developer interests, uncertainty would be introduced into property markets, with potentially significant economic and revenue-raising impacts.
Delays and Uncertainty
The proposals, if adopted, are likely to have significant impacts on property markets in Hong Kong. The economic impacts will emerge from two fundamental changes in the way planning is practised in Hong Kong; the changes involve: (1) delays that will result from public participation in the development process, and (2) the breakdown of the contractual nature of development under the leasehold system.
One type of uncertainty that will be introduced into the planning system involves the procedural uncertainty that results from adopting a new planning framework. This uncertainty may be the easiest to quantify since the design of the new planning system places boundaries on processing planning applications. The proposed system, for example, limits the planning application to between three and nine months. The average length of time, of course, will depend on how often objections are raised to new developments (or redevelopments), but the proposed reforms increase the opportunity and likelihood that plan applications will result in a rejection or the imposition of conditions.
Unfortunately, unpredictable delays are difficult to cope with and the increased uncertainty will impact the expected profitability of developments. The market will discount the expected value of new developments accordingly. An increase in uncertainty will provide incentives for leaseholders and developers to delay land development until they have more information concerning permissible leases and until the plan application/approval procedures have become more established.
Another type of uncertainty is somewhat more abstract and more difficult to estimate. With a new planning and regulatory system, informal procedures will also change. In addition to changing the procedures for approving and implementing plans, the process of negotiating with private developers and interpreting the powers of the planning authorities will also evolve. Developers will be less likely to commit to new developments unless they receive a clear sign of support from within the government or from major interests -- that could delay development.
The third type of uncertainty likely to have the most important economic impact is the philosophical shift in planning practice that may take place under the new system of planning. Not only is the current system well known, it is also fundamentally noninterventionist. Since the new system is intended to give planners more discretion over development, less flexibility will be given to developers. To the extent the new system facilitates more interventionist planning, the current system of property rights will be significantly affected. Thus, those investing in Hong Kong's property market will be unclear about the stability and respect for property rights under the new system.
The impacts of the proposals are significant since the Hong Kong property market is the focal point of the territory's recent growth, accounting for 45 percent of the capitalization in the Hong Kong stock market, 60 percent of Hong Kong's investment expenditures, and almost 40 percent of bank lending. Property markets have contributed 40 percent of total government revenues during the 1980s as well. As Hong Kong's economy develops into a global financial and services hub, smoothly functioning commercial and residential property markets will be pivotal.
A recent study by the author shows that, if development were delayed for one year, added costs per project on Hong Kong Island could range from HK$241 million for a 500,000 square foot commercial office building to HK$603 million for a 1 million square foot office building, depending on prevailing interest rates. If all new office space added on Hong Kong Island in 1991 were subject to a one-year delay, the added costs for financing new developments would exceed HK$1 billion. A one-year delay could add between HK$480 per square foot to Hk$603 per square foot to the cost of commercial development, depending on prevailing interest rates. Similarly, a one-year delay in the construction of new residential units could add HK$1.1 billion to the cost of developing a 5 million square foot residential estate. Overall, the added costs to residential construction could vary from HK$250 per square foot to HK$300 per square foot, depending on prevailing interest rates.
The study also indicates that the potential impact on government revenues could be significant. The uncertainties introduced into the planning process will reduce the value of leases, a major source of revenue for the government, and actual delays in the development process could easily generate losses in the tens of millions in general rates, profits taxes, and stamp duties. Two case studies of existing projects revealed that losses to the government could range from $8.8 million to $10.8 million per project in permanent and temporarily foregone revenues.
The potential impact of the proposed changes to Hong Kong's town planning ordinance are not trivial. While many believe several benefits will accrue to the territory through the adoption of the proposals in the consultative document, the impacts will reverberate beyond the offices of planners, planning consultants, government officials, and developers. Indeed, any change that significantly affects the property market in Hong Kong will have significant implications for the economy and government. The proposed reforms will delay the development process, increase uncertainty in property markets, and significantly disrupt the contractual nature of land development.
Compensation is an important element of the land development process since it holds the public sector accountable for the economic impacts of adverse decisions. If the public sector is released from any obligation to calculate the costs of its decisions, public officials and planners will be more inclined to use their regulatory authority to impinge on property markets, redirect investment, and disrupt the development process. In essence, without compensation, an important instrument of political and government accountability will be destroyed in Hong Kong, and if the government exercises its powers to alter land uses according to planning principles, without regard to the resultant economic costs, the certainty and the stability of the local property market may be significantly compromised.
Mr. Samuel Staley is President of Urban Policy Research Institute, U.S.A. He has been to Hong Kong several times to work on a study of town planning for the Centre. His work, entitled Planning, Uncertainty and Economic Development in Hong Kong, is being released by the Centre.