Treating the Symptoms - A Critical Review of ... - Civic Exchange

40The URA’s compensationpolicyA little-explored area of inquiry is the effect the URA’soperations may have on the market for redevelopmentand rehabilitation. It is beyond the scope of this sectionto empirically prove the URA’s impact on the propertymarket. Rather, the goal is to outline what one might expectto happen according to conventional economic theory inorder to open up areas of inquiry for future researchers.When the URA bill was initially being drafted in 2000,some experts and professional bodies put forward the viewthat the government should refrain from engaging directlyin property development; they argued that the primaryrole of the URA should be to facilitate private sectorurban renewal and that direct involvement should be alast resort. 152 The concern was that the URA should notcompete unnecessarily with private companies, and that asa government agency with special powers and subsidies, itwould have an unfair advantage. The government did notagree with them and sought specifically to strengthen thebody in order to intervene directly in the market.The URA’s advantages over private companies, mentionedin Part I, are summarized below:a.b.c.The URA does not have to pay land premium, givingit and its private sector partners a large advantage overnon-participating developers.It can use the power of mandatory resumption, and iseven required to invoke it within a certain time limitby its ordinance. Private developers cannot requestcompulsory purchase until they have acquired 90% ofall the shares in a piece of land.The URA pays above-market rates in compensationto displaced homeowners as a matter of policy. Thismeans the URA offers more than what a regularresidential buyer would be willing to pay, and inmany though not all cases, more than what a privatedeveloper would pay. (Owners can sometimes extractsignificantly more than the market price out of aprivate developer, especially if they are one of the lastowners to sell.)Based on these advantages, we would expect that:a.b.c.d.e.Owners of aged properties will prefer to sell to theURA over ordinary home buyers (who are fairlyscarce), and in some cases will prefer to sell to the URAover a private developer.Private developers will find that they have to at leastmatch the URA’s standard offer in order to induceowners to sell.With the offer of higher prices, more owners willwish to sell their properties either to the URA or to adeveloper who makes an equivalent offer; but since thisraises costs, private developers will want to purchasefewer properties.In orthodox economic theory, whenever there are morepeople who wish to sell than people who wish to buy,a queue of sellers forms. Owners will wait for yearsfor the URA to buy them out, perhaps even forgoingopportunities to sell at a lower price or to put theirproperties to more productive uses.A corollary is that owners waiting to be bought out by theURA are unlikely to invest in renovating or rehabilitatingtheir properties, since owner improvements are notrewarded by a higher compensation level. Due to theuncertainty of where and when the URA will conductits next projects, owners may see little option but towait for resumption. The possibility of mandatoryredevelopment makes aged buildings in targeteddistricts into unattractive investments and probablydepresses their regular market price. Owners mighteven believe that leaving their buildings to deterioratewill increase the likelihood of intervention, resultingin generous compensation.