26traditionally given <strong>the</strong> Lands Department great discretionin disposing <strong>of</strong> land, setting lease terms and decidingpremiums. 71 A serious breach <strong>of</strong> <strong>the</strong> contract entitles <strong>the</strong>government to “re-entry”, which is to re-possess <strong>the</strong> landwithout compensation. In practice, this is only done as alast resort, but <strong>the</strong> threat <strong>of</strong> re-entry compels compliance. 72The obvious limitation <strong>of</strong> development control throughlease conditions, however, is that lease conditions can onlybe altered when <strong>the</strong> lease expires, or when <strong>the</strong> owner appliesfor lease modification. New lease conditions throughplanning controls or building regulations can also only beimposed prior to approving building plans for a site. Given<strong>the</strong> multi-decade duration <strong>of</strong> leases, <strong>the</strong> planning needs <strong>of</strong><strong>the</strong> city can change dramatically in between opportunitiesfor modification. Some leases cannot be changed at all unless<strong>the</strong> land owner voluntarily applies for a modification — <strong>the</strong>government cannot impose new conditions on renewableleases, nor on old colonial 999-year leases.Secondly, <strong>the</strong>re is <strong>the</strong> Buildings Ordinance, which isadministered by <strong>the</strong> Buildings Department. Its purposeis to ensure safety in building construction and design,and grew out <strong>of</strong> sanitation and safety legislation firstenacted in <strong>the</strong> 1850s to address problems <strong>of</strong> sanitationand overcrowding. 73 While <strong>the</strong>se laws were initially heavilyopposed, <strong>the</strong>y became accepted over time because <strong>the</strong>irstandards applied uniformly to everyone. Most <strong>of</strong> <strong>the</strong>current Buildings Ordinance dates from 1962 and coversdiverse issues from construction standards to emergencyvehicle access to building maintenance. The Buildings(Planning) Regulations under <strong>the</strong> Ordinance also containdevelopment controls based on plot ratio and site coverageto ensure that buildings receive adequate sunlight andventilation. Any new buildings must comply with <strong>the</strong>Buildings Ordinance before <strong>the</strong> Buildings Department willissue <strong>the</strong>m with building and occupation permits, and oldbuildings may be subject to inspections and, if necessary,mandatory repair orders.Finally, <strong>the</strong>re is an administrative and statutory urban planning(zoning) system under <strong>the</strong> Town Planning Ordinance. Thisis administered by an appointed statutory body, <strong>the</strong> TPB,and its executive arm, <strong>the</strong> Planning Department. This was arelatively late addition, superimposed on top <strong>of</strong> <strong>the</strong> existinglease system and Buildings Ordinance. The Town PlanningOrdiannce, based on <strong>the</strong> British planning system, 74 waspassed in 1939 because <strong>the</strong> colony’s rapid growth called formore sophisticated methods <strong>of</strong> town planning. However, itsimplementation was delayed until after World War II. 75The Town Planning Ordinance empowers <strong>the</strong> TPB, through<strong>the</strong> Planning Department, to draw up statutory town plans.These plans, called Outline Zoning Plans (or DevelopmentPermission Area Plans in areas) show what is intended to beplanned in a district. The only o<strong>the</strong>r body allowed to drawup statutory plans is <strong>the</strong> URA, whose powers are limitedto declared Development Scheme boundaries. Plots <strong>of</strong>land are zoned for specific uses — residential, commercial,industrial, open space, etc. If a land owner wants to use hisland for a purpose o<strong>the</strong>r than what is stated in <strong>the</strong> OZP, orif <strong>the</strong> land is within a zoned Comprehensive DevelopmentArea, he must apply for TPB approval. Since 1973, <strong>the</strong>government has also asserted <strong>the</strong> right to impose statutorydensity and height controls in specific geographical areas,usually based on calculations <strong>of</strong> <strong>the</strong> capacity <strong>of</strong> <strong>the</strong> area’sinfrastructure. These controls were heavily opposed byland owners because <strong>the</strong>ir restrictions applied differentlyto different plots <strong>of</strong> land, on top <strong>of</strong> <strong>the</strong> existing BuildingsRegulations.Imposing a statutory planning system on top <strong>of</strong> <strong>the</strong> existinglease system was problematic, resulting in <strong>the</strong> wateringdown <strong>of</strong> <strong>the</strong> Town Planning Ordinance. Leaseholdersjustifiably saw <strong>the</strong> introduction <strong>of</strong> additional developmentcontrols in excess <strong>of</strong> those already stated in <strong>the</strong>ir leases asan attenuation <strong>of</strong> <strong>the</strong> development rights that <strong>the</strong>y hadfairly purchased. Hence, <strong>the</strong> Town Planning Ordinance<strong>of</strong> 1939 ruled out <strong>the</strong> possibility <strong>of</strong> compensating ownersfor loss <strong>of</strong> development rights, but it also did not containany provisions for enforcement. The plans drawn up by<strong>the</strong> TPB were only meant to administratively guide futuredevelopment.The planning permissions system for non-conforming usesdescribed above was only set up in <strong>the</strong> 1970s; and only in1991 was <strong>the</strong> TPB granted powers to inspect and fine nonconforminguses in <strong>the</strong> New Territories. In urban areas,enforcement must still be carried out indirectly through <strong>the</strong>Buildings Ordinance and lease conditions. 76 No action canbe taken against non-conforming land uses if <strong>the</strong>y do notalso violate lease conditions or <strong>the</strong> Buildings Ordinance.
Implications for Urban RenewalThe unique land administration and urban planning systems described above have many important implications for Hong Kong’s economy and its property market in particular. In <strong>the</strong>following section, we will explore <strong>the</strong> effects <strong>the</strong> institutional context has on <strong>the</strong> problems <strong>of</strong> urban renewal in Hong Kong.Why Don’t BuildingsRenew Themselves?The Problem <strong>of</strong> PremiumsThe crucial thing about Hong Kong’s fragmented urbanplanning system is that satisfying one set <strong>of</strong> requirementsdoes not mean that one is in good standing with all three.Strictly speaking, statutory requirements take precedenceover private contracts, so if statutory town plans or <strong>the</strong>Buildings Ordinance conflicts with lease conditions,<strong>the</strong> former should be followed. However, if a proposednew development complies with both <strong>the</strong> OZP and <strong>the</strong>Buildings Ordinance but violates <strong>the</strong> lease conditions, <strong>the</strong>land owner must still seek a lease modification. Doing sorequires paying a premium if <strong>the</strong> new use is more valuablethan <strong>the</strong> old.The rationale is this: <strong>the</strong> original price <strong>of</strong> a land lease soldin a government land auction reflects <strong>the</strong> value <strong>of</strong> <strong>the</strong>development rights contained in <strong>the</strong> lease. If a land ownersubsequently wishes to exceed <strong>the</strong> lease’s terms, a premiumis charged to reflect <strong>the</strong> full difference in land value beforeand after <strong>the</strong> change <strong>of</strong> use. Lease modification premiumsadd significantly to <strong>the</strong> cost <strong>of</strong> urban renewal and <strong>the</strong>reforeinhibit it.Firstly, <strong>the</strong> premiums cost millions or sometimes billions<strong>of</strong> dollars. The press reported that <strong>the</strong> lease premium paidby <strong>the</strong> former LDC (which was not yet exempt frompremiums) and its private sector partner, Great Eagle Group,on <strong>the</strong> Langham Place development amounted to HK$300million in 1999. This sum, negotiated in <strong>the</strong> depths <strong>of</strong> <strong>the</strong>Asian Economic Crisis, was much lower than <strong>the</strong> HK$2.5billion that it would have cost in 1997 at <strong>the</strong> height <strong>of</strong> <strong>the</strong>property market. 77 (The project’s total development costswere reported at HK$10 billion, <strong>of</strong> which HK$4.4 billionwas spent buying <strong>the</strong> site.)Secondly, <strong>the</strong> lease conversion premium must be paidup front and in one payment. This means that smallerdevelopers and individual property owners are <strong>of</strong>ten simplyunable to come up with <strong>the</strong> money. The system is biasedin favour <strong>of</strong> large developers, who possess large amounts <strong>of</strong>capital and <strong>the</strong> ability to accumulate large land banks so that<strong>the</strong>y can time lease modification applications to coincidewith market downturns. 78 Yet while large developers areat an advantage, <strong>the</strong>y <strong>of</strong>ten find urban renewal projectsunattractive, requiring much both in <strong>the</strong> way <strong>of</strong> funds andpatience. A business strategy that requires waiting untila market downturn to negotiate <strong>the</strong> premium, and <strong>the</strong>nwaiting until a market upturn to complete construction,makes urban renewal a very slow process. Buying greenfieldsites is far more straightforward in comparison, even ifcompetitive bidding makes <strong>the</strong> land itself more costly. 79Thirdly, <strong>the</strong> way in which land premiums are calculateddoes not take into account <strong>the</strong> costs incurred by a developerin acquiring and clearing a site. Experts have argued thatbecause <strong>the</strong> “after” value <strong>of</strong> <strong>the</strong> site is assessed on a “clearedsite” basis, <strong>the</strong> premium does not take into account <strong>the</strong>costs <strong>of</strong> compensating all <strong>the</strong> owners and tenants, anddemolishing <strong>the</strong> existing buildings. 80 Experts have alsopointed out that <strong>the</strong> “before” value is assessed based on <strong>the</strong>existing uses without taking into account any expectation<strong>of</strong> future change, which in practice inflates <strong>the</strong> marketprice. A property owner selling to a developer expects that<strong>the</strong> developer will make far more pr<strong>of</strong>it from <strong>the</strong> land in<strong>the</strong> future, so he will demand a higher price. The premiumcalculation excludes this “hope” element, so <strong>the</strong> developereffectively pays twice.In <strong>the</strong> past, Hong Kong managed never<strong>the</strong>less to redeveloplarge swa<strong>the</strong>s <strong>of</strong> <strong>the</strong> city privately because <strong>of</strong> <strong>the</strong> large plotratio gains allowed by changes in government policy. After<strong>the</strong> Buildings Ordinance was revised in 1956 to allowsignificantly higher densities, owners <strong>of</strong> suburban propertiesrushed to apply for lease modification. 81 (Many such leaseshad been bound by 35-foot height restrictions). The largegain in plot ratio outweighed <strong>the</strong> expense <strong>of</strong> <strong>the</strong> premiums.However, present day environmental concerns have made<strong>the</strong> fur<strong>the</strong>r relaxation <strong>of</strong> plot ratios highly unlikely.By <strong>the</strong> 1980s, opportunities for large plot ratio gains hadbecome much scarcer. Small developers started to complainabout <strong>the</strong> burden <strong>of</strong> lease conversion premium. At a LegCodiscussion in 1986 on urban renewal (prior to <strong>the</strong> settingup <strong>of</strong> <strong>the</strong> LDC), Legislative Councillor Dr. Henrietta Ip,who was <strong>the</strong> director <strong>of</strong> a construction company, urged <strong>the</strong>Lands Tribunal to look into <strong>the</strong> issue <strong>of</strong> land premiums,arguing:“The question is how to put this <strong>the</strong>oretical calculation[<strong>of</strong> lease modification premium] into practice andyet arrive at a fair and balanced premium so as toexcite <strong>the</strong> redevelopment <strong>of</strong> such potential sites. Very<strong>of</strong>ten, <strong>the</strong> experience is that <strong>the</strong> demand for excessivepremium rarely justifies <strong>the</strong> landlord’s financialoutlay to demolish existing buildings, compensatetenants and pay <strong>the</strong> premium as well as bear <strong>the</strong> risk<strong>of</strong> rising bank interest and uncertain market. Suchsites are <strong>the</strong>refore abandoned by <strong>the</strong> large propertydevelopment corporations.” 82The premium problem inhibits not only redevelopment, buteven <strong>the</strong> adaptive re-use <strong>of</strong> old buildings. If a land ownerwishes to change <strong>the</strong> permitted land use <strong>of</strong> a building (i.e.from residential to commercial), even without demolishingand rebuilding, he must still pay a lease modificationpremium or else pay a fee to obtain a temporary change<strong>of</strong>-usewaiver valid for <strong>the</strong> lifetime <strong>of</strong> <strong>the</strong> building. Thelease modification premium is typically assessed based on<strong>the</strong> expected value <strong>of</strong> <strong>the</strong> land after redevelopment to <strong>the</strong>27
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106A building rehabilitated by the
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112Wan Chai Market. Built in 1937,
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Appendix 1Name of projectAddress/lo
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Name of projectAddress/locationArea
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128110 Chan, B. W. (2002), “The h
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Room 701, Hoseinee House,69 Wyndham