Economics of Real Estate Development: HK Case

Transcription

1 M.Sc. (Urban Design) x CUHK 21 Jan 2014 Economics of Real Estate Development: HK Case by Dr Edward CY Yiu Associate Professor Dept of Geography and Resource Management, Chinese University of Hong Kong 1

2 Urban Problems Unaffordable Housing; Subdivided Flats and Coffin Rooms; Walled City; and Dilapidated Buildings. 2

3 Housing Price x 5 in 10-yr HK Housing Price Index +60%,-40%! Global #1 Increase

4 Unaffordable Housing Median to Median International Standard 2012 HK Price to Income Ratio Rent to Income Ratio < 6 15 < 30% 37% A decent housing in HK is unaffordable

5 Price to Income Ratio: HK 2011 = 12.6 SIN 2011 = 4.4

6 Country/ city GDP per Capita Ave. Living Area (sf) Per Person (sf) US 51,704 2,476 ~800 Taiwan 38,357 1,119 ~370 SIN 60,799 1, Tokyo 35, ~220 Shanghai 9, HK 50, Ave per person living area of HK = 0.5 of SIN

7 Modest overall density, but very high urban density of HK.

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10 Dilapidated but Redev is Slow stock> 50 yrs old Rate of increase No. of Private Buildings 5,000 blocks 500 blocks pa No. of Private Housing Units 35,000 units 3,000 units pa Demolition - 2,515 units % - 7%

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12 Why So Many Urban Problems? A Supply Chain Problem on Land 12

13 Supply Chain of RED Markets Land Supply Development Control Development Finance Real Estate Supply and Demand Investment Demand Redevelopment and Urban Renewal 13

14 Bankers / Investors Dev Finance Sources of Funds RED Flow Investment Demand Investment Demand Contractors Buyers or tenants RE S&D Developer Development Stage Dev Control Income Generating Stage Land acquisition / Redevelopments Land Supply Government / Landlords 14

15 Government s Roles in RED RED links everything Bank Risk Users (Quarters, Offices) and Facilitators (Loans) BANKS / HKMC Investors Govt Income Monetary Policy Sole Land Supplier (18% land sale income excl. other related taxes) Govt s Roles in RED Market Policy Maker and Law Enforcer Negative equity and unemployment Private Housing Market (Owners) Biggest Developer and Housing Owner (Public Housing) Development Control PRH (land supply, re demand) Developers HOS (land supply, re demand) 15

16 Leasehold Land Interests 99.9% of land in Hong Kong are owned by the government; Granted by land leases for 50, 75, 90 or 999 years; Disposed by auctions, tenders or private treaty grants. A Land Auction Gazette on November 16, 1855: Caine Road Area 25,850 sf

17 Land Lease Land cannot be created, nor destroyed; Terms and conditions of a lease govern the land for centuries; See an indenture (front page) of a piece of land in Victoria Road signed in 1927

18 Restrictive Land Supply Land (for all uses) Private Housing Units to be built Bef 1997 < 50 ha Ave. 26, / ha 9, / ha 10, / ha 13,550 Target - 20,000 See Peng, R. and Wheaton, W.C. (1994) Effects of Restrictive Land Supply on Housing in Hong Kong: An Econometric Analysis, JHR 5(2),

19 Development Control 4 Regimes Statutory Controls: Building Control (Buildings Ordinance, Cap.123) including Heritage Preservation (Antiquities and Monuments Ordinance, Cap. 53) Planning Control (Town Planning Ordinance, Cap. 131) Environmental Protection Control (Environmental Impact Assessment Ordinance, Cap. 499) Contractual Control: Lease Administration Apply on leasehold interests only Non-statutory Formalities and procedures are governed by Conveyancing and Property Ordinance (Cap. 219) LEASE BO EIAO TPO

20 Development Control Further Limits Land Supply Planning Control Lease Control Building Control Env. Control Change of Use s.16 application Land premium Prescriptive codes Impact assessments Consequences New Supply is limited to New Development Negotiation, government becomes an investor Rigid and difficult to be adapted to other uses Tedious and expensive

21 Development Control Further Limits Land Supply How can one know accurately the demand without using the market? Glaeser et al. (2005) argue that the limited supply response primarily is the consequence of an increasingly restrictive regulatory environment. Wong (2013) contends that the government failed to convert in time the industrial zoned land to commercial / residential zone, is one of the major reasons of insufficient housing supply in HK. See Wong, R.Y.C. (2013) 香港深層次矛盾, 中華書局 Glaeser, E.L., Gyourko, J. and Saks, R. (2005) Why is Manhattan So Expensive? Regulation and the Rise in Housing Prices, Penn IUR Publ. Glaeser, Edward, and Gyourko, Joseph. The Impact of Zoning on Housing Affordability. Economic Policy Review 9, No. 2 (2003):

22 Existing Land Use Distribution & Government Vacant Land Zoning Land Area (ha) Government Vacant Land (ha) Residential 9, , % Commercial % Industrial 1, % GIC 3, % Recreation 2, % Total 58, , % %

23 Total Land Use Area (ha) SIN v HK 2010 SIN 2012 HK Res. 10,000 (14%) 9,760 (9.5%) Ind./Com. 9,700 (13%) 2,300 (2.1%) Green 5,700 (8%) ~73,000 (66%) GIC 5,400 (8%) 3,700 (3.5%) Total 71, ,200 Land is NOT limited but is at the sole discretion of the government.

24 1957 OZP for MTW Apr.9,1957,OZP: LK 10/18/4 Labor supply emphasis of town planning Blue: residential Red: Industrial Orange: R/I

25 1969 OZP for MTW 1969 OZP: S/K10/1 R/I -> R Separation Theory of Town Planning Since the 2000s, sustainability theory of town planning advocates local community, cutting transports, may go back to the old plan.

26 2008 OZP for MTW 2008 MTW OZP: S/K10/20,No I Use Red:CDA Brown:Res Blue:GIC Green:O Facility Provision Emphasis of Town Planning Work = Commute

27 MTW OZPs Comparisons OZP (Year) S/K10/1 (1969) S/K10/20 (2008) Population 84, ,180 Land Uses Area(ha) % Area (ha) % Commercial % Industrial % 0 0 CDA % Res. (A) % Res. (B) % % Res. (C) % GIC % % Open % % 27

28 No Height Limit in BO S Building (Planning) Regulations (BPR); Controlled by Plot Ratio (pr) and Site Coverage (sc) Schedule 1 of BPR: Choose the building height and building use first; Determine the site classification by how many streets abutting the site; A trade-off between height and intensity.

29 Domestic buildings Non-domestic buildings Ht Percentage site coverage Plot ratio Percentage site coverage Plot ratio Class A site B C Class A site B C Class A site B C Class A site B C <= 15 m >15 m <=18 m >55 m <= 6 1 m Over 61 m

30 Development Finance Stocks Bankers / Investors Sources of Funds Debt Dev Finance JV REITs Developer Equity Investment Demand Investment Demand Contractors Development Stage BOT/ BOOT Dev Control Mortgage Buyers or tenants Sales and Leaseback Income Generating Stage Land acquisition / Redevelopments Land Supply Government / Landlords 30

31 Sales and Leaseback Standard Chartered Bank Headquarters in Hong Kong; It was completed in 1990 (a redevelopment) at NO cost to the bank; Nishimatsu Property Co. owns a lease of the site and building for 25 years; After which it reverts to the bank, under its 850-year lease; Construction cost was about $600 million; A JV between Nishimatsu and Gammon Construction Co. 31

32 BOT / BOOT The Eastern Harbour Crossing A pioneer project of BOT in 1989 The New HK Tunnel Co. Ltd. (NHKTC) holds the franchise until 2015 The franchise was awarded by the government to the company by competitive tender Contractor built and operates the tunnel Government does not require any investment, but defer the ownership 32

33 PPP Developer: NWD main contractor: Hip Hing Project Outcome: TDC have a world class CEC at no capital cost; NWD took 2 world class hotels, an office tower and a serviced apartment tower at no land cost; The site was gifted by the Govt in

34 Investment Demand Currency Board Arrangement Currency exchange rate is fixed! Linked Exchange Rate (peg) US$1 = HK$7.8; Interest rate is fixed! If the rate does not follow the US's, arbitrage can make no-risk profit!! (carry-trade) Inflation does not follow Economic conditions very different from the US; When the economic conditions are opposite, then Either a LOW INTEREST RATE + HIGH INFLATION; Or a HIGH INTEREST RATE + HIGH DEFLATION.

35 Negative Correlation of Real Interest Rate & Housing Price Casual observations confirmed the negative relationship hypothesis: HIBOR % CPIA yoy % RIR HPI (yr end)

36 RIR v. HPI yoy of HK

37 RIR v. HPI yoy of HK Yiu, C.Y. (2010) Negative real interest rate and housing bubble implosion an empirical study in Hong Kong, 2010 JFMPC 14(3),

38 Implications of Neg. RIR Saving in cash is a net loss; Borrowing to invest in housing is costless; Monthly mortgage payment < Monthly rent; The risk of loss is capped by government bailout; Who can borrow more determines who can earn more; Low interest rate in the US usually accompany US$ drops; If US$ drops, foreign investors can earn both capital gain and currency gain, by buying HK housing units.

39 Predicament of Redevelopment Tutorial discussion: Financial viability of redevelopment: Flat-for-flat self-initiated redevelopment Regentrification Residual plot ratio Compulsory sale with min. compensation Government subsidy Site area = 500 sm UOM Existing gfa sm Redevelopable gfa sm Compensation per sm Construction cost per sm Expected selling price per sm Scenario 1 Flat-for-flat Scenario 2 Regentrification 3,000 3,000 Scenario 3 Residual Plot Ratio 3,000 3,000 4,500 Scenario 4 Minimum Compensation 3,000 3,000 3,000 $ - 100, ,000 20,000 $ 30,000 50,000 30,000 30,000 $ - 200, , ,000 39

40 Predicament of Redevelopment Site area = 500 sm total compensation costs total construction costs UO M $ $ Other costs $ Total costs $ Total Revenues $ Gross Profits $ Scenario 1 Flat-for-flat Scenario 2 Regentrification Scenario 3 Residual Plot Ratio Scenario 4 Minimum Compensation - 300,000, ,000,000 60,000,000 90,000, ,000, ,000,000 90,000,000 30,000,000 30,000,000 45,000,000 30,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000,000 (120,000,000) 120,000,000 60,000, ,000,000 40

41 The End comments are welcome. Enquiries to: 41