Hong Kong faces HK$10 billion potential shortfall in land sales revenue as city faces first fiscal deficit in 15 years

Lam Ka-sing

Hong Kong is likely to miss its target of collecting HK$143 billion (US$18.3 billion) from land sales and premium revenue in the current financial year to March 31, likely contributing to the city’s first budget deficit in 15 years.

The government has generated HK$113.8 billion of such revenue between April 1 and December 18, 2019, according to calculations based on Lands Department records. Land sales earmarked for the rest of current year could only possibly raise the tally to about HK$133 billion, analysts said.

Five analysts expected a shortfall against the budgeted figure, while one expect collection to surpass the target, according to a survey conducted by the South China Morning Post last week.

Hong Kong raised this year’s land sales and premium target by 22 per cent to HK$143 billion, a level that has come under severe pressure since June when anti-government protests gathered momentum and occasionally turned violent. The beleaguered economy fell into a technical recession in the third quarter, and Financial Secretary Paul Chan Mo-po said its first fiscal deficit since 2004 is “unavoidable.”

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Revenue will be “slightly lower than the budget estimate since some parcels of land were withdrawn from sale,” said Thomas Lam, an executive director at Knight Frank, who sees a likely outcome of HK$130 billion to HK$135 billion. “Market sentiment in the recent six months has been lacklustre, transaction prices were lower and the number of premium cases were also lower.”

The government forecast land sales and premium to provide 22.8 per cent to its coffers in the year to March 31. They contributed 19.5 per cent to 26.6 per cent in the preceding three fiscal years, according to official data. Apart from outright land sales, the city collects premium from modification, exchanges and extension of leases.

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The government has earmarked four sites for sale this quarter, Secretary for Development Michael Wong said on December 31. They are two residential land parcels in Mong Kok and one in Kwun Tong. A commercial plot in the former international airport site in Kai Tak could be put up on to the market, after an attempt to sell a separate parcel failed in September 2019.

Vincent Cheung, managing director at Vincorn Consulting and Appraisal, said the HK$143 billion target may not be achievable because the relatively smaller plots of development land being lined up for sales in Mong Kok this quarter may only yield about HK$800 million.

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“The [price of] Anderson Road parcel in Kwun Tong really depends on the terms to first-time buyers,” said Cheung. Besides, the planned sale of a commercial plot in Kai Tak is also subject to risk of withdrawal, he added, because of lowballing by bidders in recent tenders in the area.

Last September, the Lands Department withdrew the tender for a commercial site on the runway of the former Kai Tak airport after rejecting all five bids below its reserve price. The parcel was put up for sale after Goldin Financial Holdings forfeited a HK$25 million deposit after winning the tender in June.

James Cheung, an executive director at Centaline Surveyors, said HK$133 billion is more realistic “because one piece of land had to be recalled and other parcels were sold at a price level below expectations” as market sentiment cracked under pressure from protests and US-China trade war.

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Hannah Jeong, head of valuation and advisory services at Colliers International, said “the land sales revenue would be difficult to reach” especially if the government does not lower its asking prices for the commercial site. She estimated a land sales revenue of HK$125 billion in total if all sites are sold as planned.

It would be a difficult task to predict land premium revenue as it depends on applications by private owners for lease modification, she added.

“Property developers are supposed to review their agricultural land banks for conversion to residential use, which the government encourages in 2019 policy address,” Jeong said. “However, we have not seen much progress yet given the current market condition.”

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At CHFT Advisory and Appraisal, senior director Alex Leung is a rare optimist in a beaten-down market. The government could surpass its collection target if land sales from December 2019 to March 2020 are completed as scheduled, and prices do not deviate too much from official valuation, he added. His estimate is for HK$161.2 billion.

“The government did not withdraw the West Kowloon commercial land though it was lower than some surveyors' expectations,” Leung said. “The government’s annual budget is usually conservative.”

Any shortfall in the collection is likely to be small, according to Chris Leung, a lecturer in finance at Chinese University of Hong Kong. A HK$10 billion shortfall should not be a big problem in the short term, given the city’s large reserves, he said.

Financial secretary Chan warned in early December that the city’s first fiscal deficit since 2004 could emerge because of slashed land sales and tax revenues amid recession and additional spending packages to stimulate the economy.

“Reduced revenue for the government weakens resources of public services,” Chan said in his blog on January 5. “The most affected are the minorities that are most in need.”

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