Hong Kong’s once-lucrative land market looks to be in trouble after a series of unsuccessful tenders for government plots cast a shadow over the city’s finances.
Earlier this month, Hong Kong’s largest public transport company, the MTR Corporation, revealed that it had received no proposals for a joint development project in Tung Chung, a residential town next to Hong Kong airport.
The housing development was planned to sit next to a new railway station expected to be completed in 2029, which is part of a government scheme to further develop Tung Chung.
This marked the fifth unsuccessful tender involving government plots and projects initiated by the quasi-government Urban Renewal Authority and the MTR Corporation, of which the government owns 51%, in the current fiscal year.
While local developers initially expressed interest, none finally came through for the project, which involves over 65,000 sq metres of residential floor area.
The story is being repeated across Hong Kong, despite historical high demand for homes due to the territory’s size. Terence Chong Tai-leung, professor of economics at the Chinese University of Hong Kong, said developers have a glut of unsold flats, which makes them less likely to bid for new projects. Economists say the trend presages a wider downturn.
Local agency Centaline Property estimated that there were up to 20,000 unsold new flats on the Hong Kong market in October.
“[The lack of bids] can also be read as a gesture for the government to further reduce stamp duties,” Chong said.
In November, the government reduced buyer’s stamp duty from 15% to 7.5%, among other property tax breaks.
Developers had urged the government to remove stamp duties completely to revitalise the housing market, but critics say lifting the restrictions may hike property prices and make housing even more unaffordable in Hong Kong.
Housing in Hong Kong is notoriously unaffordable. Prices for small flats under 40 square metres went for more than HKD$170,000 (£17,400) a square metre in 2022, and more for larger units.
The unaffordability is also reflected in Hong Kong’s home ownership ratio of 51% in 2019, lower than the 61% in Japan and 85% in Taiwan, according to research by its legislature. Home ownership among people under 35 also plunged from 22.1% in 1997 to 7.6% in 2019.
Brian Wong Shiu-hung, a member of the independent Liber Research Community that studies land and development policies in Hong Kong, said these unsuccessful tenders reveal “structural problems” in the government’s financing model.
Wong said the government had been relying on selling land at high prices to finance its infrastructure projects and other public expenditure.
While this has been successful in the past, generating as much as HK$164bn in the 2017-2018 fiscal year, Wong said the model does not work during an economic downturn, as developers are strapped for cash and high interest rates discourage them from borrowing.
“We do not know how long this malfunctioning will last, but this has exposed the structural problem of Hong Kong’s public finance,” Wong said.
Land revenue is one of the top income sources for the Hong Kong government, accounting for 11% of its total income in the past decade.
In recent years, land sales became a more significant income source as tax revenue dropped in the post-pandemic economy. However, a property crisis in mainland China has meant that fewer Chinese developers are bidding in Hong Kong. The debt-laden real estate giant Evergrande, for instance, offloaded a residential project in Hong Kong to VMS Securities in 2021.
According to the government’s land sale programme for the current fiscal year, only two out of 18 listed plots have been sold, for HK$7bn – a far cry from financial minister Paul Chan Mo-po’s estimated land revenue of HK$85bn this year.
Noting the poor land sale records, accountancy firm Deloitte in November estimated Hong Kong’s budget deficit this fiscal year to be HK$131.6bn – more than double the HK$54.4bn Chan forecasted in February.
But Chong said he was not worried about short-term budget deficits because of Hong Kong’s fiscal reserve of over HK$800bn.
“After the Covid-19 pandemic, it would be hard to find examples where public finance is doing well, Hong Kong is no exception,” Chong said, adding that the government should seek to diversify its income sources.
