May 12, 2005

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Hong Kong's property market

Two pieces in today's SCMP on potential changes in the Hong Kong Government's land sale policy. This is another test for The Don - will he buckle to the developers and start publishing reserve prices? Of course in most auctions the reserves are not disclosed, and for good reason. And the developers need to be careful what they wish for or they may get a taste of their own medicine. I'll let Jake van der Kamp explain:

"The government should also announce the minimum reserve price of each site and be more flexible on the developers' proposed prices. Without knowing the base price, no one knows how much more they need to propose to make the government release a site for auction"

Ricky Wong Kwong-yiu,
Director,
Wharf Estate Development

I have a suggestion for you, Mr Wong. The next time your company releases some new flats for purchase by the public, I would like it to adopt a new system for selling those flats.

Under this system, you would fix and publish absolute minimum prices for these flats. You would then proceed by inviting bids from the public for them and by making two further binding commitments.

The first is that you will not sell the flats at all unless you are bid at least the minimum prices.

The second is that you will sell all the flats at their minimum prices if you are bid no higher.

It would put you in a bit of a bind, I know. What if you set your minimum prices too high and you get no bidders? By the rules of this system, you cannot just tweak your prices lower. You have to withdraw the project from the market if your committed minimum prices are not met. Your finance director will not be pleased.

Alternatively, what if you set those minimum prices too low? Unless demand is truly enormous, you will effectively invite potential buyers to bid only the minimum prices or a fraction above and, by the rules of this system, you will then have to sell the flats at those prices. Once again, someone will not be pleased.

But, Mr Wong, you would have no grounds for complaint either way. This is no more than what you are asking our government to do when it sells land to you under the application list system.

Would it not be better for you to establish minimum prices that you are willing to accept for your flats but keep those prices a secret? You can then invite the public to bid for the flats.

You may still decide not to accept the bids if you think they are too low, but you have not tipped your hand to the buyers. Your chances of getting a good deal more than your minimum prices are now much enhanced.

And this is essentially how the application list system works at the moment. You tell the government you would like to bid for a piece of land and if your bid is above the reserve price, which it keeps a secret, it will hold an auction for that land. If you are the only bidder, you will get it at your bid but, otherwise, you will have to chase the bids up as far as you think you can afford.

Of course, it may turn out that your original bid was well above the reserve price, that you are the only bidder and that you paid a good deal more than you had to pay. Tough luck for you and good luck for me because I am a taxpayer, and the more extra money that comes in from land sales the lower my taxes can remain.

Thus, when housing secretary Michael Suen Ming-yeung says, "We know many developers face many difficulties [with the application list] ... we will carefully consider their opinions", my advice to him, Mr Wong, is that he should not spend too much time considering your opinion.

Sauce for the goose is sauce for the gander. You do not sell your flats the way you want the government to sell you land and I think Mr Suen should take his lead from what you do rather than what you say.

If there is anything wrong with the application list system, it is certainly not that the government keeps reserve prices for land on the list a secret.

In fact, I do not think there is much wrong with the system anyway.

The biggest complaint that developers have is that these reserve prices are too high, that they cannot afford them and that Hong Kong will therefore not have enough new developed property in coming years unless the government becomes more accommodating.

There may be elements of truth in this. There is certainly evidence that supply of new residential property over the next few years may be considerably less than demand for it. This may also be true of office property.

But I was not absolutely certain that I could carry the load of my mortgage when I first bought a flat. Any interruption of employment and that mortgage could have been at risk.

I see no reason why developers should be given greater comfort, particularly with a rising property market that is likely to reward them with handsome profits on any minimum price the government sets for land.

I think Mr Suen should indeed carefully consider whether he is looking at a supply-demand imbalance in the future, but this proposal that he publish reserve prices is one that he should ignore.

The SCMP's editorial:
The brief, almost throwaway line from housing minister Michael Suen Ming-yeung on Tuesday suggested the government is considering another shift in its land-sale policies. Mr Suen promised to "carefully consider" calls from property developers for the application list system - by which land is put up for auction - to be changed. This remark hinted at a retreat by the government from its strong support for the system. Only last month, Mr Suen paid tribute to its "clarity, certainty and consistency".

Yesterday, tycoon Stanley Ho Hung-sun added meat to the bones of Mr Suen's comments. He confidently predicted that the system would soon be scrapped.

Certainty, consistency and clarity are qualities which the government should be striving for. Sudden policy changes deprive the market of the predictable conditions it needs. We have had too many twists and turns in the past. But reforms which make the system more flexible, transparent and market-oriented would be welcome. This is the direction in which the government should be moving. And changes to the application list mechanism could help.

The system has been described by the government as "entirely market-driven". But this is not the case. Officials decide which sites will be included on the list. Developers then make a bid for the site they wish to buy. If that bid meets the minimum price required by the government, an auction is scheduled. The site then goes to the highest bidder.

One of the complaints from property developers is that the minimum price set by the government is kept confidential. If their bids are too low, they are rejected. But they do not know how much higher they need to go to trigger an auction. This gives the government considerable control over the market. In practice, it limits the supply of land and pushes prices higher. The system was introduced to "stabilise" the market at a time when prices were plummeting. Now that the economy has rebounded, it gives the impression - despite government denials - that officials have returned to the high land-price policy of the past.

It is interesting to note that only six of the 17 sites on the application list last year were sold. This was at a time when the market was on the up. It suggests that the government was setting the minimum prices too high - even though the actual price secured when an auction had taken place tended to be much higher.

Mr Ho expressed the belief yesterday that the government would revert to a system under which land auctions are held at regular intervals - without any need for an application to trigger them. Certainly, the administration should make its long-term plans for land sales known. This would introduce the certainty which Mr Suen spoke of and ease concerns about a shortage of land.

But any review of property market policies should not stop there. If property developers are keen to see the application list system go, they should be prepared to accept other reforms. The arrangements for internal sales hit the headlines last month when a record $31,500 per sq ft was paid for a property in West Kowloon. These private deals are subject to little regulation, lack transparency and have the potential to distort the market. Restrictions on them were lifted in 2002 as part of a package of measures intended to halt the slide in prices. The current arrangements should now be reconsidered.

In the longer term, the government should be looking to distance itself from the property market as much as possible. This is very difficult to achieve so long as its traditional heavy reliance on land sales for revenue continues. Plans to broaden and stabilise the revenue base, preferably through a goods and services tax, should be put into action. This will make the sale of land less important to the government's coffers. Then, perhaps, the market will be allowed to decide when land is sold - and for how much.

posted by Simon on 05.12.05 at 11:39 PM in the




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