In the Northern Metropolis development map, Yuen Long is a key area for development. There is not much unused land, and in addition to the protected area, it is used as a container storage site and other purposes. Photography / Jiao Jian
After a series of new adjustments to industrial development ideas, the old model of "land finance" supported by high land prices in Hong Kong, China is unsustainable. New ways to play such as the double-envelope system, in-situ land exchange, and area development are emerging in an endless stream, when will they be effective and fill the gaps?
"Caijing" special Hong Kong reporter Jiao Jian
Editor|Su Qi
A plot of land that was originally scheduled to be sold at the end of June was postponed for half a year two days before the bid deadline, which has become a rare event in the land market of the Hong Kong Special Administrative Region of China in recent days.
It has attracted attention in the cold market atmosphere for a long time, because it will explore a new model of industrial land. Although the land area in Hong Kong's New Territories is small, according to the SAR Government, it is the first multi-storey modern industrial building site to be launched to implement the two major policy objectives.
The so-called two major objectives, one is to promote industrial development, and the other is a little bit of a mouthful, that is, to "integrate and assist in the upgrading and transformation of brownfield operations affected by government projects in a land-efficient manner". To understand the expressions, it is necessary to take into account some special local contexts, and the two objectives are also intrinsically related.
Take, for example, brownfields, which are mentioned in the target: in Europe and the United States, they generally refer to land that has been developed or destroyed, most of which has been used for industrial purposes. In Hong Kong, China, the term has been widely used since around 2008, mostly referring to abandoned agricultural land in the rural New Territories that is being used for temporary purposes, such as open-air container yards and car parks. The source of this is that when Hong Kong's economy took off in the sixties and seventies of the last century, the planning and utilization of abandoned farmland in the New Territories was not very reasonable.
As Hong Kong hopes to provide new space for the economy through new land development, the aftermath of the previous "uneven development" has also surfaced. For example, the Northern Metropolis (GBA) plan, which has been vigorously promoted by the HKSAR Government in the past two terms, would ideally lead to a gradual and balanced development of Hong Kong "from south to north", eventually forming a "polycentric" model and working more closely with Shenzhen. However, in many areas covered by the plan, there is still a phenomenon that farmland is abandoned and converted into temporary land or even "brownfield".
Adjusting the status quo of land use over decades requires a complex and multifaceted relationship. For the future development of Hong Kong, China, it is of exploratory significance to effectively find ways to improve these land plots in the new round of large-scale land development, and to alleviate the pressure of financial investment through the idea of "district development", so as to find a starting point for the macro goals of the Northern Metropolis. What are the details, and what are the challenges?
Advantages and disadvantages of the "double envelope system".
Yuen Long, located in the northwest of the New Territories and far away from the city centre of Hong Kong, is a lowland and well-supplied since ancient times. According to the "Xin'an County Chronicles" and other historical materials, its place name was first written Yuancheng.
In the development map of the Northern Metropolis, Yuen Long and the adjacent Hung Shui Kiu and Tuen Mun are all key development areas. However, as mentioned earlier, there is not much unused land that can be easily developed, and there are large areas of protected areas (such as the Mai Po Nature Reserve, which is an international wetland), and there are also dense brownfield sites. According to a rough local survey in 2021, this area accounts for nearly 70% of the nearly 2,000 hectares of brownfield sites in Hong Kong.
One of the most popular sites is the Yuen Long Innovation Park, which is located at the intersection of Fuk Wang Street and Manulife Street (Yuen Long Town Lot No. 545, "Yuen Long Site"). Earlier this year, the industrial site was valued at HK$1,500 to HK$2,500 per square foot of floor area, with a total valuation of between HK$2.5 billion and HK$4.37 billion.
In order to enhance the design flexibility and increase the scale effect, the Yuen Long site is actually formed by the merger of three sites. The current site has a total area of about 32,440 square metres and is earmarked for the development of a multi-storey modern industrial building (for logistics and/or vehicle maintenance) with a maximum floor area of 161,500 square metres.
This arrangement is related to the future development of Yuen Long in the Northern Metropolis. Specifically, the Yuen Long site has the advantage of being connected to the airport, land boundary control points and the rest of Hong Kong, and the development of logistics and other industries is not without purpose. According to the notice of the SAR government on March 8 this year, it started public bidding for the land on March 15, and the tender is expected to close on June 28.
In order to better integrate the existing brownfield sites and achieve a series of policy objectives, the Development Bureau of the HKSAR Government has set up a series of "new plays" for the land transfer, such as requiring the successful developer to hand over not less than 30% of the maximum floor area (i.e. not less than 48,450 square metres) to the Government. Managed and leased by the government or government-commissioned agencies to brownfield operators affected by the project.
In order to find a way out for the affected so-called "stakeholders" (stakeholders), the relevant regulations can be described as detailed, such as "the government will charge preferential rents comparable to the rents of brownfield sites in the relevant industries for the first five to ten years" before they transition to market-based rental prices.
What is even more different from the past is that the bidding for land in Yuen Long will be different from the practice of "the highest price wins" and will adopt the "two-envelope system".
The so-called "two-envelope system" is a land transfer method that has only become popular in the local area in recent years, and the developer needs to submit two separate envelopes, one for the design proposal and the other for the price proposal. In the industry, they are referred to as "technical standards" and "price standards" respectively.
Compared with the simple and straightforward price of the higher price, the new system has more details to consider, one of which is the proportion of points in the two envelopes. Taking the commercial land transfer of the Central Harbourfront in 2020 as an example, the Development Bureau's arrangement for it is to split the design and price ratios to 55 percent; On this basis, in order to ensure that there is no undersale, the tender price must also be higher than the pre-determined reserve price to be shortlisted.
The reason why the simple high land price policy and the increasing application scenarios of the "two-envelope system" are related to the development thinking that Hong Kong is adjusting when transferring public and industrial land. Although the traditional land sale model also specifies the requirements for public land and facilities in the bidding documents, the projects are often dominated by the commercial interests of the developer, and most of them can only meet basic quantitative indicators.
"Over the years, the development mentality of focusing only on immediate economic interests and focusing on quantity over quality has led to the deterioration of Hong Kong's overall environment. It is worthy of recognition and encouragement that the Government should no longer follow the rules and regulations, and take the first step towards change in response to the demands of the new generation for environmental protection, public space and social responsibility. A person from the Hong Kong Institute of Architects once said this when commenting on the aforementioned Central project.
For specific sites in Yuen Long, tenderers are also required to submit non-price proposals and price proposals separately so that the Government can consider a range of non-price factors other than the land price to select the most suitable successful bidder. In accordance with the local Supplies and Procurement Regulations, the proportion of non-price proposals is 70% and 30% is proposed.
The continuous decline in the proportion of price factors from the previous five-five-year opening to the current seven-three opening is considered to be another concrete example of the SAR government's further transformation of development thinking. However, after the relevant standards were announced, it was also considered to be very difficult to implement.
Hong Kong has a proven track record of success and failure in implementing certain policies through the sale of special-purpose land. Considered less successful by the industry are the development of the West Kowloon Entertainment District and the Kai Tak Cruise Terminal. A more successful example is the construction of Gleneagles Hospital in Wong Chuk Hang.
In contrast, a two-envelope transfer project with a small volume and a small number of targets is easier to achieve. The difficulty is greatly increased when the relevant development goals involve sustainability, people-centred goals, etc., which are more difficult to quantify. Some economists in Hong Kong have previously pointed out that multiple and subjective measures will face a series of difficulties.
A similar phenomenon exists in the process of government procurement auctions using the two-envelope system. In the past, the low-price model may lead to consequences such as deterioration in project quality and delays. In California, United States, for example, the state government sometimes adopts the "A+B bidding" method, which uses on-time completion as one of the scoring criteria.
In the case of the Central project, which consisted of senior directorate officials from different disciplines and appointed a number of people with relevant professional backgrounds as independent technical advisors, some members of the industry still pointed out that it lacked relatively objective assessment and adoption criteria for the "best" design.
Specific to the Yuen Long site project: its public non-price proposal part includes three parts: 3A, 3B and 3C. 3A is the 10% of the overall development, mainly related to the deadline of the building specification; 3B accounted for 45%, 20% for overall site design and 20% for assisting brownfield operations, and 5% for providing more than 30% of designated floor space; The 3C component also accounted for 45 per cent, and most importantly, 20 per cent for supporting innovation proposals; About 15% of the company has experience in operating multi-layer industries in the past, and the remaining 10% is ESG proposals.
In short, there are two aspects to consider non-price factors: one is related to the development of the industry, including how the building is innovatively constructed, such as the application of science and technology, advanced design, etc.; The second is to accommodate brownfield stakeholders, such as returning more square footage, or completing development more quickly.
Some industry insiders also analyzed the difficulties faced by developers to the "Caijing" reporter, that is, Hong Kong used to build so-called "modern industrial buildings" with few new technologies and new designs, and the old experience of building industrial buildings is difficult to replicate. "On the one hand, we need to study additional non-land price factors, and on the other hand, we need to consider reducing land prices. It's not easy to handle. ”
The nature of the project, which is both public and private, as well as the specific use of the project, also makes some developers who are inexperienced in industrial development feel daunted. Prior to this, similar logistics projects were usually developed by industry enterprises directly buying land, and rarely using the form of subletting or selling after developers bought land and built buildings.
Due to the involvement of a series of non-price contents, a source from the Development Bureau also admitted when revealing the information, "The proportion of non-price suggestions is as high as 70%, which shows that the government attaches great importance to the layout and quality of industrial buildings. Prospective bidders are advised to put more effort into formulating non-price proposals at the tender stage. These factors make the drafting of tenders more complex and time-consuming. ”
Xu Sheng is not allowed to lose the test
Based on Hong Kong's past experience, the tendering period for the sale of land under the "two-envelope system" is often longer than that for cash tenders. To allow sufficient time for the tenderers to prepare, the initial tender period set by the Government for the Yuen Long site was 15 weeks. Even so, two days before the deadline, it was announced that the tender would be extended for six months.
One of the official explanations was that the industry (including some potential tenderers) had expressed the need for more time to formulate proposals to consider extending the tender closing date. Second, the similar "Hung Shui Qiao land" has entered the bidding acceleration period.
As the last industrial site to be tendered in Hong Kong in the previous financial year, the overall sluggishness of Hong Kong's land market and its multiple pathfinder roles are also considered to add complexity to the land transfer in Yuen Long.
"This site is a litmus test for the development of the Northern Territories Metropolis and 'modern industries'. It is believed that the government's market response to this land will be more tense than whether the residential land can be sold. Lau Lichao, former director of the Lands Department of the Hong Kong SAR Government, recently wrote an article pointing out that "this time the bid failed...... It will increase the government's difficulties in land acquisition, delay the development of residential properties in the Northern Metropolis and increase the uncertainty of the prospects for brownfield operations, which will not benefit all stakeholders. ”
In a relatively sluggish market environment, the possibility of failing to bid is not impossible. As one of the main sources of revenue for the HKSAR Government, the land sales in the 2023/24 financial year are hardly satisfactory. The actual revenue was less than 20% of the original estimate in the Budget, and the bid failed as many as six times. In the last quarter of the year (January to March 2024), the relevant authorities took measures to stop land sales.
According to the information of the Lands Department of the HKSAR Government, as at 25 June, the land premium revenue in the first quarter (April to June) of the 2024/25 financial year was about $190 million (including land premium of over $100 million and land sale revenue of about $82 million), a decrease of nearly 90% compared with $1.37 billion in the same period last year.
Tuen Mun is another major development area in the Northern Metropolis. According to the plan, in addition to land development, traditional industries such as fishing are also expected to benefit from the upgrading of this area. Photography / Jiao Jian
According to the HKSAR Government's budget this year, the land revenue that can be obtained is about 33 billion yuan, which is in sharp contrast to the more than 100 billion yuan a few years ago. At present, it is actually quite difficult to achieve this low goal. In addition to a series of internal and external macro factors, Hong Kong's industrial adjustment in recent years also means that the model of mainly pursuing high land prices to support "land finance" is unsustainable to a certain extent.
For example, industrial development and meeting housing needs require low-cost land. The HKSAR Government's current solution is to develop the Northern Metropolis and to reclaim land at Kau Yi Chau for development. But the development process itself means investment, and the Northern Metropolis has more than $224 billion in known expenditures or budgets.
Bond issuance is one of the core modes for the HKSAR Government to promote the development and infrastructure construction of new development areas in the future. In the next five years, Hong Kong will issue between $95 billion and $135 billion of bonds each year, earmarked for land development and infrastructure.
Complementing this, in order to bring in external resources for joint development, the SAR Government will adopt some concessions when promoting relevant projects, such as in-situ land exchange. This model refers to the application of the landowner (developer) to exchange the original agricultural land lease for residential, industrial and commercial land deed, and pay the land premium.
In terms of industrial land considerations, the above-mentioned land transfer in Yuen Long is represented. In fact, after the news of the imminent launch of the Hung Shui Kiu site, optimistic market participants also believe that it will bring a series of benefits.
One of the advantages is due to the gradual increase in the application of the "ground flower" model. This means that in the case of land that is under the responsibility of the government in the Northern Metropolis, in order to speed up the pace of development, the land will be tendered before the completion of the land formation, or the bidding will be carried out at the same time as the land formation.
Specifically, the Hung Shui Kiu site is located at the Hung Shui Kiu and Ha Tsuen Areas 39A and 39B sites in Yuen Long, which originally provided community isolation facilities. After the accelerated relocation of the relevant facilities, the released land is also planned for modern industrial buildings and logistics uses.
The second benefit stems from the mutual complementarity of industrial land. As both the Hung Shui Kiu and Yuen Long sites can be used for modern logistics purposes, some investors may consider undertaking comprehensive planning for the two sites to increase their enthusiasm for land acquisition.
Compared with the Yuen Long site, the Hung Shui Kiu site has a total area of about 77,700 square metres and a maximum floor area of about 544,000 square metres. The government has not yet determined how much floor space will be returned to the government for the project, which is expected to be tendered in September, and the relevant scoring weights are also being studied.
In early July, the Secretary for Development of the Hong Kong Special Administrative Region Government, Mr Lin Hon-ho, described the site as "indeed large-scale. However, the industry also said that modern logistics emphasizes scale. Some market players are particularly interested in large-scale land use. "We don't worry about the size of the building, which is what makes it attractive."
On this basis, she also clearly foreshadowed the new way of playing in the Northern Metropolis in the provision of industrial and residential land, namely "precinct development".
In the Hong Kong context, the so-called "district development" refers to the government setting aside a large area of land for interested enterprises or consortiums to invest in land development, and to be responsible for land formation, infrastructure, planning and development, so as to alleviate the pressure on the government's cash flow. In this way, the old mode of applying for funding from the Legislative Council, completing land resumption and land formation, and returning funds after land sale can be changed to a greater extent.
According to the Secretary for Innovation, Technology and Industry of the HKSAR Government, Sun Dong, recently revealed that the Shaling I&T site in the Northern Metropolis may become the first land parcel in the district to adopt the district development model. This site consists of 2 hectares of land that has been formed, and if the surrounding land with potential development but not yet formed is added, the total development area will be 10 hectares.
Compared with Shenzhen, which has generally adopted the development model, "Hong Kong still has the opportunity and space to practice this development model in the Northern Metropolis." Compared with piecemeal land acquisition, it has many benefits for industrial development, such as making the overall industry more coordinated and functional." In recent years, Dong Ji, managing director of Zhongyu International, who has continued to pay attention to Shenzhen-Hong Kong industrial land, told the "Caijing" reporter that "planning is one thing, and the result is one thing." The most important thing that determines good or bad is the operational level. ”
He also suggested that "Hong Kong can combine Singapore's industrial operation experience with the industrial environment of Chinese mainland, especially Shenzhen and the Guangdong-Hong Kong-Macao Greater Bay Area, to avoid detours in the development of the area." The Hong Kong government has a relatively strong ability to execute, and many of the planned things have been completed in good results. ”
Editor-in-charge