The URA has been branded an aggressive developer for projects such as Wan Chai's Lee Tung Street. Photo: K. Y. Cheng

Land exchange option could reinvigorate Hong Kong's urban renewal

Francis Neoton Cheung says it would spur developers to initiate projects and ease focus on bottom line

Statutory bodies are not all created equal. Some, like the Consumer Council, are welcomed by the public because of its clear mission, while others are born with inherent identity issues. The latter category is perhaps best represented by the Urban Renewal Authority, which is primarily tasked with upgrading Hong Kong's ageing neighbourhoods.

Its struggle for a sharper identity focus recently came to a boil when its managing director resigned over purported differences with the chairman. At the heart of the debate is URA's struggle to reconcile purpose with profit.

Frequent haggling with affected owners occurs over the URA's method of assessing the compensation based on the value of a notional seven-year-old flat in the vicinity. The URA has also been branded an aggressive developer for projects such as Wan Chai's Lee Tung Street, the so-called "Wedding Card Street", which has forced the body to shift to a more passive approach that relies on property owners initiating redevelopment.

Finally, there's the financial viability of the URA, given current market conditions. While the body has enjoyed bountiful revenues since its founding in 2000, more than doubling the initial government investment of HK$10 billion into a capital and reserves accumulation of about HK$24 billion, future income is in doubt and it has run a deficit in the past two years. The reason: soaring construction costs and the dwindling number of old urban buildings with high redevelopment potential.

Yet the need for the URA is as pressing as ever. Currently, there are more than 4,000 buildings in Hong Kong aged 50 or older, with the number expected to increase in the next decade. Out of the 4,000 now, about 3,000 are in a serious state of disrepair.

What is the most effective way of renewing ageing urban landscapes with low redevelopment value, like Cheung Sha Wan's Kim Shin Lane, or other dilapidated buildings in San Po Kong and Sai Wan Ho?

It's time to resolve the identity crisis once and for all, so the URA can more effectively serve its function. The solution: a strategic retreat from property development through the reintroduction of land exchange entitlements.

In the 1960s and 1970s, faced with the enormous task of developing new towns and budget constraints, the British government offered two categories of land exchange entitlements in lieu of cash to affected land owners. What was commonly known as "Letter A" and "Letter B" offered rights to alternative, similarly sized plots in the same area in return for surrendering existing plots that were already built on (A) or used as farmland (B).

The Hong Kong government could now create a new category of land exchange entitlement - a "Letter C" - that promises developers the right to other plots within the same district. This would encourage developers to round up owners in old buildings, freeing the URA from this often difficult task. The affected owners would benefit because they would be compensated readily according to market value and not subject to the "seven-year rule", a frequent source of tension.

More importantly, because there would be no cash outlay, the URA would no longer feel compelled to rebuild on the plots of the old buildings it gained control of to recoup its investment. It would no longer have to behave like a private developer concerned only with the bottom line.

Where there is a planning deficit in certain areas, plots might be better used for urban amenities, parks or widening existing roads, thereby unleashing new enhancements in district-wide planning for the benefit of the public. Prime plots with redevelopment value could still be auctioned or sold by open tender, with proceeds going back to the Treasury. The URA would free itself from the thankless role of expropriator, focusing instead on formulating the optimal development scheme, urban design, planning approval and project management.

There's an important caveat to this approach. For the new "Letter C" to work, flats bought for urban renewal must be exempt from the outset from the new special stamp duty aimed at driving out property speculators, which has recently brought the market for old flats to a standstill. Currently, an exemption is implemented by way of a refund, but to further encourage private developers to round up owners in old buildings and mobilise them to sell, the transactional tax should be waived altogether.

As Hong Kong's residential buildings constructed during the post-war boom enter their 50- or 60-year mark, the need for urban renewal is critical. It's time to reinvigorate the renewal process - and improve our neighbourhoods and citizen-government relations at the same time - by striking the right balance between government intervention and private market forces.

This article appeared in the South China Morning Post print edition as: Land exchange option could resolve the URA's dilemma of purpose vs profit