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Planning and development control through lease conditions
Habitat International 25 (2001) 599–615
Planning and development control through lease conditions Eddie Chi-man Hui* Department of Building and Real Estate, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong Received 21 November 2000; received in revised form 20 April 2001; accepted 10 May 2001
Abstract The Hong Kong government has pledged to deal with the imbalance between supply and demand of housing. Given the innate constraints of limited land resources in Hong Kong and the extensive and expedient control enforced through lease conditions, the Hong Kong government can alleviate the longrecognized problem of housing shortage by modifying specific development conditions. Therefore, the supply of housing units can be changed at a faster pace to satisfy the requirement of private dwellings. Other factors affecting the property market in Hong Kong include land supply, economic issues, population growth, and income growth. Many studies, for example, Hui et al. (Monograph, Department of Building and Real Estate, Hong Kong Polytechnic University and Hong Kong Government (Study of Housing Demand, Hong Kong Government Printer, Hong Kong and Study of Housing Demand Model, Hong Kong Government Printer, Hong Kong), have investigated in detail the impacts of these factors on the property market. However, little or nothing is known about the planning and development control through lease conditions. Therefore, this study particularly attempts to examine how the Hong Kong government exerts its influence in the local private residential market through changing the development conditions. These conditions will be studied separately and distinctively in order to capture their unitary effects upon the local private residential real estate market. Section 1 looks at Hong Kong’s tenure system, followed by the deliberation of how planning and development control is done through lease conditions (in Section 2). Sections 3 and 4 set out the analytical framework and report on the findings of how lease conditions affect property supply. The concluding section gives out recommendations. r 2001 Elsevier Science Ltd. All rights reserved. Keywords: Hong Kong; Property market; Planning and development; Lease conditions
1. Introduction The Hong Kong government auctions off land to private developers. The developers, in essence, are bidding for the lease to the land to obtain the right to develop and sell to end-users. The rights *Corresponding author. Tel.: +852-2766-5881; fax: +852-2764-5131. E-mail address: [email protected] (E.C. Hui). 0197-3975/01/$ - see front matter r 2001 Elsevier Science Ltd. All rights reserved. PII: S 0 1 9 7 - 3 9 7 5 ( 0 1 ) 0 0 0 2 8 - 5
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to property use, income and transfer was further illustrated from the observations made by Peng and Wheaton (1994): ‘‘Land for noninstitutional uses is generally leased to the highest bidder at public auctions with lease terms of 75 years or longer. Each lease term requires a large lump-sum premium and a small annual rent. Because they serve only as a legal symbol to maintain the lessor and lessee relationship, the premium attached to any given land lease approximates the land value. Most of the leases are transferable, and the land market is a market of land leases.’’ (Peng & Wheaton, 1994, p. 267) All land disposed in Hong Kong is subject to lease terms which are technically and commonly referred to as lease conditions. At the auction, the highest bidder is not guaranteed the lease. The developer must comply with the conditions set in the Conditions of Sale before successfully acquiring the lease. Essentially, the developer must present a master plan showing that the conditions set out in the lease will be met. The lease has a specified time in which the developer must complete the development and meet the requirements to the government’s satisfaction. Since 1997, the government has boldly realized that Hong Kong faces land site constraints because suitable sites for housing and opportunities for redevelopment are becoming rare. Redevelopment becomes more difficult because fewer underdeveloped areas are remaining, it is increasingly difficult to assemble developable site due to multiple ownership, and it is extremely hard to identify financially viable opportunities for redevelopment. The government has also acknowledged that the smaller the gap between the supply and demand for housing, the less pressure there is on providing affordable housing. The obvious restriction on land site availability has led the government to conclude that an increase in development density to make use of existing housing sites is a possibility to alleviate the interim housing shortage problem. The paramount question for the Hong Kong government is to resolve the dilemma between (1) the policy of providing adequate and affordable housing against the shortage of housing supply and (2) the regulations for control on property development. The government is well aware of the use of non-statutory and administrative practices to control the nature and intensity of property development in addition to statutory controls. It can simply include constraints and conditions in leases drawn for developable sites. As each lease has contractually enforceable conditions, the government exerts almost absolute and monopolistic control directly over land supply and hence housing supply. First and foremost, there is a need to take a more in-depth investigation into the extent to which the development conditions in government land leases are affecting the private residential property market in Hong Kong in terms of supply quantity and price. It is essential to investigate which of the development conditions has the most impact; thus not only to improve future modification and formulation of regulations but also to ease the shortage of housing supply and provide affordable housing.
2. Hong Kong’s land tenure system Hong Kong is one of five remaining regions adopting a leasehold land tenure system. Other places include Stockholm, Canberra, Israel and Amsterdam. A leasehold land tenure system is defined as the Government owning all land and what the purchaser of the land receives is a lease
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to use the land. The purchaser is given a bundle of rights. This bundle includes the right to transfer, use and earn income. Unlike the freehold system, the user of the land does not have ownership of the land. The user only has exclusive rights for a specified time. Hong Kong’s land tenure system was carried over from its previous British colonial governments who had ruled the territory from 1842 to 1997. The current government continues to be the sole owner of all land in the territory. Ho (1999) states that the government has an absolute perpetual title of all land holdings in Hong Kong, except one land parcel at St. John’s Cathedral located on the island, which is given a freehold privilege, on the condition that the use remains for the purpose of a church. The leasehold system in Hong Kong imposes a civil contract between the government and an individual within a specified time. Lai (1998) asserted that the property rights enjoyment would not render the leasehold less ‘‘private’’ than the freehold while the lease is in effect. Other than the specification for the duration of property rights, there is little real distinction between the leasehold and freehold land tenure systems. Both Hong (1999) and Archer (1977) capture the essence of public land and leasehold systems by comparing and contrasting leasehold systemized countries with those administered by freehold. Archer uses Canberra to study the cost and benefits of a leasehold system and finds that a leasehold system provides greater capital for the government to allocate. Using Canberra as an example, Archer shows ‘‘how this system can be used to provide a high standard of planned urban development in a rapid growth situation’’ (Archer, 1977). Hong attempts to capture this same aspect through a comparison between Hong Kong and Canberra. The main difference between freehold and leasehold lies with ownership. Some researchers view that a leasehold land tenure system allows the government to completely control the urban development of a region and reap the gains from increased value of lands by collecting land rents/ premiums. Archer (1977) emphasizes that leasehold land tenure systems is an effective system for maintaining planning control. Learning from the experience of Canberra is beneficial, as it is one of the few places that effectively has a well-established leasehold tenure system. Hong (1999) takes the view that there are both costs and benefits to a leasehold tenure system. In comparing Hong Kong and Canberra, Hong finds that problems emanate from capturing land value, land speculation, managing land uses and urban redevelopment. Lai (1998) indicates that the leasehold system is the government’s way of allocating private property rights through contracts and that there is little difference between leasehold and freehold in terms of governance. In essence, the allocation of private property rights is a means of urban planning through the leasehold system. In review and comparison, Bramely (1993) finds that local town planning affect the elasticity of supply, whereas Peng and Wheaton (1994) reveal that restrictive land has little effect on the supply of housing in Hong Kong. However, Bramely’s study focuses more on how housing supply responds to restrictive land use regulations, while Peng and Wheaton focus on how production of housing is affected from government restricting the amount of land to be developed each year. Although both researches study the effects of housing from different aspects, the common linkage between this study and of those mentioned lies fundamentally with restrictions on development. Lease conditions are not the only factor limiting the potentiality of development. Prior studies have shown that restrictive land supply, planning, zoning, density controls, development controls, and many other factors contribute to the production of housing in a market. Those studies include Barlow (1993); Bramely (1993); Brueckner (1995); Dowall (1984); Dowall and Landis (1982);
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Elliott (1981); Evans (1996); Fischel (1990); Hannah et al. (1993); Hui (1998); Mark and Goldberg (1986); Monk and Whitehead (1996); Neutze (1987); Peng and Wheaton (1994); Pogodzinski and Sass (1991); Pollakowski and Wachter (1990); Sagalyn and Sternlieb (1973). This study here provides, in particular to Hong Kong’s property market and of those similar in nature, an additional insight to understanding real estate development. The findings from this study touch upon a characteristic of the real estate development market that was not previously touched upon in other researches. Consequently, additional knowledge is presented in this study which reveals another piece of the puzzle to understanding the impacts on the property market. In the study of real estate development, the concept of substitution between land and structure is fundamentally inherent. This is also relevant to lease conditions that constrain the development potential of a site. Given a small site, normally the developer would substitute more structure to compensate for the land size. However, in the presence of lease conditions, a constraint on both land and structure is placed and thus affecting the substitutability of the development. A relaxation of the constraints with lease conditions would result in a greater of substitution effect between land and structure. For instance, for a given area of land auctioned annually, the greater the flexibility in lease conditions the larger the possible supply of units would be made available onto the market. Currently, the Hong Kong government plays a relatively indirect role in the property market by implementing schemes such as home ownership schemes, land disposal policies, and loan programs. This indirect role is in favour with the view of scholars that believe that government invention in the real estate market should be minimal. With the significant relationship of development conditions in government lease with housing supply, the government has an alternative measure in affecting the property market, while maintaining its indirect role. Not only the government but also, as mentioned above, private developers have the opportunity to develop a greater potential of housing with more flexible lease conditions and possibly fewer lease modifications. With fewer lease modifications, developers will have fewer stages in their development process and improve the timing of when housing supply is introduced to the market. Whether the issue of supply meeting demand is more predominant or not, in Hong Kong, in particular in the recent 10 years, housing and land policies have been ineffective in addressing the concerns of consumers and developers of the property market. Thus, there is a need to improve land regulations and policies (Hui et al., 2000).
3. Development conditions of government leases Government leases are official contractual documents between private owners (lessees) and the government (lessor). The leases usually consist of general conditions and special conditions. The former includes terms relating to disclosure of principal, rent, ratable value, effective date of the lease, maintenance, right to inspect, breach of lease condition, etc. The latter specifies building covenant, use of land, development conditions, etc., and basically imposes regulations with respect to compliance criteria, space construction constraints, and building design and disposition restrictions. All recent leases in their conditions specifically ask for compliance with Cap. 131 (Building Ordinance) and Cap. 123 (Town Planning Ordinance). Firstly, buildings erected or to be erected
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must comply with the Building Ordinance (Cap. 123), any regulations made under it, and any of its amending legislation. Secondly, the use of land lot for which buildings erected or to be erected must comply with the requirements of the Town Planning Ordinance (Cap. 131) and any of its amending legislation. The Buildings Ordinance provides statutory regulations on the planning, design and construction of buildings and associated works, making provision for the rendering safety of dangerous buildings and lands, and making provision for matters connected enforcement and approval authorities. The density of development has been controlled either through lease conditions, or in the case of unrestricted leases, by the Building Ordinance. Although the existing Town Planning Ordinance aims to control the land use and the volume of building development, it does not contain any enforcement provision. Its statutory effect mandates that current land development and change of land use have to conform to the specific zoning plan. In addition to the requirement for complying with the two ordinances, development conditions found in leases mainly control space development that can increase or reduce housing supply quantity. These conditions emphasize eight key areas of control in the housing development: (1) total gross floor area, (2) maximum site coverage, (3) height, (4) maximum number of storeys, (5) maximum number of units, (6) number of buildings, (7) unit size and (8) design and disposition. Depending upon the location of a lot, a lease may not include all eight conditions. The variance of this stipulation can either limit the availability of building space from a lot or make more space available for accommodations. The development conditions of the government land leases in Hong Kong can increase or decrease the number of housing units supplied into the local real estate market and thus cause fluctuations in housing prices. These conditions can also constrain the sizes of units by varying their terms in the leases. Furthermore, the government can exercise control over the supply of land in the market by leasing within a leasehold land tenure system as discussed widely by Leung (1986) and Yeh (1993). Thus, the Hong Kong government can dictate not only the pace and direction of development through the lease, but more importantly the size and the number of units made available by relaxing or tightening the development conditions.
4. The framework: hypotheses and methodology A set of seven models are used to compare the impact on supply from the development conditions. We use the 125 leases and the stated restricted values of each specified condition for analysis. These models measure the effects of the quantitative values of the development condition on supply. The set of models are set up to perform a linear regression analysis. We will use the conditional values stated in the lease. For the purpose of this research, a mechanical function can be derived to assist in developing a model to describe the relationship between lease conditions and supply. The function can be stated as: Completed units of a lease ¼ f ð gross floor area; site coverage; units; buildings; storey; height; unit size; design and disposition; lot sizeÞ:
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1. Total gross floor area. The total gross floor area allowable for construction has a bearing on the supply quantity in the market. Various alternative terms are found in this clause. Some terms are less rigid than others are. More rigidly, the term of gross floor area still may set both the maximum and minimum of floor space. This renders a property developer to work within a given range, and the government would be more certain of the number of housing units to be supplied in the future. The term usually states that the total gross floor area of any building or buildings to be erected on the lot shall not be less than a certain number of square metres and shall not exceed a certain number of square metres. Also, a ‘‘no guarantee’’ clause is sometimes annotated immediately that the maximum floor area may not be attained. 2. Site coverage. The maximum site coverage is not necessarily found in every government land lease in Hong Kong, and it is generally included in the leases of the lots located in the New Territories (NT). The term states the maximum percentage that a building or buildings can cover the land lot. This condition generally states that the total site coverage of any building or buildings on the lot shall not exceed a certain percentage of the land lot area. 3. Height. The height condition varies in accordance to the location of a lot. Some leases state explicitly a certain number for the aggregate height in metres accounted from above the datum or mean formation of a building and its structure. Moreover, additional rooms and fixtures for facility purposes placed on the roof which exceed the height limit require prior written approval from the Director of the Lands Department. Other terms relating to height may require observation of the height limit stipulated in the Hong Kong Airport (Control of Obstructions) Ordinance and any amending legislation: Also, these terms may call for obtaining prior approval in writing from the Director of the Lands Department. 4. Number of storeys. Similar to the maximum site coverage, the number of storeys is not necessarily found in the ‘‘Development Conditions’’ of every government land lease in Hong Kong. Perhaps, it is more often included in the leases for lots located in the NT. The term states the maximum number of storeys that shall be built. 5. Number of units. The most influential term among the development conditions for controlling the supply quantity of housing is by stating in the lease explicitly the total number of units permitted to be built on a land lot. This term directly limits the number of housing units supplied into the market. The unit size is also constrained since the gross floor areas are usually specified in the leases. That is, stating the number of units simultaneously dictates the unit size of a developable site. 6. Number of buildings. Occasionally, a few leases state the number of buildings permitted on some lots. This term is more commonly found in leases in the NT, as developable land on Hong Kong Island and Kowloon Peninsular is naturally restricted. Similarly, some leases state the maximum size of each unit. Since the minimum gross floor area is stated in every lease, the variation in unit size can increase or decrease the supply quantity of housing. 7. Design and disposition. In addition to regulatory compliance and space development constraints, the term for design and deposition generally includes external elevations and finishing of buildings. It states that the design and disposition of any building or buildings erected or to be erected are subject to the approval in writing of the Director of the Lands Department. Except for site formations, commencement of building works is prohibited until the approval has been obtained.
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The Hong Kong government specifies the minimum gross floor area that must be built in every lease issued for private residential development. Through this term, the government aims to prevent under-development and under-utilization of land. This function, in a simplistic setting, studies the effects of lease conditions on the supply of housing. Since similar studies are limited, maintaining a simple and flexible model allows for a clearer and more defined comprehension of the findings of this study; and in turn creating a foundation for more advanced studies on this topic. After careful review of the sample of leases, 45 leases contain restriction on the number of units. Within the 45 leases, only 8 built to the exact amount of units that were specified in the lease, while 31 leases built below the specified amount. The number of units actually produced from each lease is determined by the development conditions set out in the lease and by the private developer’s preferences. These restrictive conditions in the lease serve as a specific limitation, under which the developer attempts to maximize the development potential of a site in return for the highest possible profit (see Appendix A for definitions) (Table 1). Under this conception, it is expected that the greater the values stated in the restriction, the greater effect on supply in terms of number of units. Given the conditions in the lease, when comparing two leases both with a similar development condition present in the leases, it is expected that the lease with the larger value will generate greater output of units than the one with a smaller quantitative value. The expected outcomes will be verified by calculating the correlation coefficient between each condition and the units produced under the circumstances of each set. The correlation coefficient describes how a set of variables moves together. A coefficient close to positive 1 emulates a strong positive relationship, whereas a coefficient close to negative 1 emulates a strong negative relationship. The figure obtained during from the correlation analysis will not indicate the relationship between the two variables in numerical sense. Since the correlation coefficient characterizes the relationship between the dependent variable with the independent variables, performing a multiple regression model will delineate the aspect of the degree to which each variable impacts the number of units produced. Thus, the following hypotheses can be stated to simplify the understanding of a supply effect: Null hypothesis (H0 ): bj pt; where b is the t-statistic for condition j. At a confidence interval of 95%, b ¼ 1:984 for degrees of freedom of 100.
Table 1 Expected outcome (hypothesis) Lease conditions
Supply effect
Gross floor area (gfamax/gfamin) Site coverage (sitecove) Height (height) Storeys (storey) Buildings (nobuilding) Units (nounits) Unit Size (maxunsiz/minunsiz) Design and disposition (dad)
+ + + + + + + +
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Alternative hypothesis (H1 ): bj Xt; where b is the t-statistic for condition j. At a confidence interval of 95%, b ¼ 1:984 for degrees of freedom of 100. The null hypothesis states that a condition having a t-statistic less than the specified t-statistic value at the 95% confidence interval indicates an insignificant variable. The alternative hypothesis states that a condition having a t-statistic greater than the specified t-statistic value at the 95% confidence interval indicates a significant variable. 4.1. Sources of data A total of 125 leases were randomly gathered as the sample for this study, from the various branches of the Land Registry. Since the completion year comes a few years after the issue year, the data analysis is based on the completion year of a lease rather than the issue year. By doing so, completions of residential units for the corresponding years can be conveniently used to analyse the effects of the lease conditions on supply. Additionally, the sample selected for this study is a group of leases that have been restricted for private residential users and were issued for development between 1985 and 1995; thus, completion years range from 1989 to 1999. The sample of leases varies from disposal methods. The corresponding number of completed units for each lease were obtained through various editions of the ‘‘Monthly Digest’’, issued by the Buildings Department. The data are regressed against the lease conditions outlined in the previous section of the paper. In the set of data separated by semi-annual intervals, the logarithm of the total completed units of the leases for each of the 6 months is calculated. This is done to prevent any abnormal results.
5. Findings and analysis Among the cases selected for the sample, the lot size averaged to 8569 m2. The majority of the leases are obtained from the NT region of Hong Kong. Leases from NT make up 79.2 percent of the total sample, while Kowloon and Hong Kong make up 19 percent and 7 percent respectively. On average, leases are completed within 3–4 yr. Further statistical details of the sample of leases are outlined in Table 2. In addition, details pertaining to the number of leases containing certain development conditions are presented with frequency tables to gain a clear picture as to the common lease structure in Hong Kong in Appendix B. As noted earlier, correlation coefficients are used to explain the relationship between two variables. Therefore, to analyse the validity of the expected outcomes laid out in the earlier section, correlation coefficients were calculated for each set of data. Table 3 reveals the relationship of each condition with the supply of units, outlining the correlation results of the full set of data. It was expected that the lease conditions would have a positive effect on supply as the value of the restriction increases. However, the results of the correlation analysis show that only the conditions of maximum GFA, number of storeys and number of units have a relatively strong positive relation with price (0.269, 0.600 and 0.815, respectively). These three conditions are
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E.C. Hui / Habitat International 25 (2001) 599–615 Table 2 Descriptive statistics
N Mean Median Mode Std.Dev Min Max
Lot
Years
Max GFA
Min GFA
Site cov
Storeys
Unit
Comp. units
Building Unit size
Height
124 8568.56 6433.50 1860.00 7822.63 1.53 43520.00
125 3.34 3.00 3.00 0.94 1.00 7.00
124 32377.21 25290.00 0.00 35158.07 0.00 210480.0
125 16247.05 13111.00 16800.00 15122.21 0.00 76000.00
125 0.2227 0.25 0.20 0.1107 0.00 0.56
125 4.83 0.00 0.00 8.34 0.00 30.00
125 201.45 0.00 0.00 431.11 0.00 2500
125 419.30 285 288 553.94 1.00 4144
125 125 0.056 3.16 0.00 0.00 0.00 0.00 0.5433 17.8 0.00 0.00 6.00 130.
125 70.63 51.82 0.00 91.32 0.00 680
significant at the 0.001 level and can be interpreted by stating ‘‘as the value of these conditions increases the greater the units produced by the lease’’.1 In order to examine the degree to which development conditions affect the number of units released to the market, a regression analysis is performed. S.P.S.S. is used to perform a linear regression for each model using the method of forced entry. Test variables are also used to examine whether a combination of certain conditions would reflect greater effects. Among the development conditions that were tested, the restrictions on number of units, maximum gross floor area and number of storeys were consistently significant in each of the seven models. Table 4 outlines the models and the coefficients obtained from running each model using the defined sets of data. The interpretation below would focus on those variables that have produced significant effects on the models. Model 4 of this analysis produced the highest adjusted R2 of 0.611, meaning approximately 60% of the variance in supply can be explained by the variables in the model. Models 2 and 7 also produce adjusted R2 of 0.602 and 0.604, respectively. However, when examining the t-statistic for the condition on the number of units, model 7 with the test variable of unit size per storey shows to be significantly greater. Another interesting observation with both sets of models is with the number of observations in relation to the adjusted R2 : In statistical regression analysis, intuitively the greater number of observations will create a better model for explanatory purposes. However, in this study the opposite is observed, where the fewer the observations the greater the R2 : 1 Further analysis is performed to test the effects of collinearity. Correlation coefficients are calculated between each independent variable. High correlation coefficients will indicate interdependence between the independent variables. This interdependence is termed collinearity. According to this analysis, there is an apparent interdependence between the conditions of maximum gross floor area and number of units as expected. The correlation coefficient calculated is significant at the 0.001 level. A similar result appears between the conditions restricting the number of units and number of storeys. However, a few correlation coefficients, in particular those measured with the number of buildings variable, were unable to be computed due to an insufficient number of leases containing such a restriction. Notwithstanding this result, the interdependence found in the corresponding pair of condition exhibits some multicollinearity in the analysis of this study; however, further analyzing the results from the multivariate analysis there seems to be no significant impact nor distort the findings of this study. In addition, as shown in a similar study on the impacts of zoning upon housing by Mark and Goldberg (1986), ‘‘multicollinearity does not in most cases appear to be a serious problem and, therefore, does not explain these results.’’ Also, Mark (1980) shows that a similar-type study that using a principal component regression to deal with potential multicollinearity did not substantially improve the results.’’
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Table 3 Correlation for supply with development conditions Development conditions
N
Correlation
Maximum GFA Minimum GFA Site coverage Storeys Units Buildingsa Maximum unit size Minimum unit size Height
99 124 106 53 45 2 4 6 91
0.269a 0.066 0.001 0.600a 0.815a 1.00a 0.556 0.477 0.089
a
Significant at the 0.001 level (two-tailed).
Observing the coefficients calculated for the restriction on the number of units in Table 4, there is a relative consistency in the effect on supply. Using model 7 as an example, the coefficient generated from the regression reveals 0.443. Under the assumption given earlier pertaining to this set of data, an extra unit allowable under this restriction will produce 0.443 of an extra unit. With this intuition, it is obvious that other development conditions are affecting a whole unit to be produced when there is a one unit increase on the restriction of the number of units. Similarly, referencing to the same table, the restriction on maximum gross floor are in model 7 reflects that an extra one metre square of floor area allowed will result in 0.002755 addition to the number of units completed by the lease. Furthermore, interpreting the restriction on the number of storeys in alternative models, reveals that an additional storey allowable will result in an increase of 13 to 15 completed units. However, the variables used in these models have an explanatory power of less than 25 percent.
6. Conclusion and recommendations As few studies have touched upon the topic of the effects of government leases on Hong Kong’s property market, this study serves as a first of its kind. In reviewing the results represented in the previous section and with the regressions performed under a 95% confidence interval, the conclusion to reject the null hypothesis can be drawn. By rejecting the null hypothesis, implies that the development conditions observed in this study have a statistically significant effect on the supply of housing in Hong Kong; thus, it can be concluded that a relationship exists between conditions contained in government land leases and housing supply. The extent to which the relationship exists agrees with the expected outcomes outlined in Table 2. The presence of lease conditions in a lease has a negative relationship with respect to housing supply. However, considering the presence of lease conditions alone does not effectively explain the degree of the relationship. We have also looked at the degree to which lease conditions affect the number of units produced. The statistical coefficients calculated reveal that there are relatively small incremental effects on supply of housing units, as the value of lease condition changes.
Table 4 Linear regression models Model 1
Model 2
Lot size (t-stat) Maximum gross floor area (t-stat) Minimum gross floor area (t-stat) Site coverage (t-stat) Height in metres (t-stat) Number of storeys (t-stat) Number of units (t-stat) Number of buildings (t-stat) Design and disposition (t-stat) Maximum unit size (t-stat) Minimum unit size (t-stat) Height/storey (t-stat) Site coverage b Maximum GFA (t-stat) Unit size/storey (t-stat) Units/Storey (t-stat) Site coverage b Lot size (t-stat) Constant (t-stat) Observations R2 AdjustedR2
0.01565 (2.342)a 0.00242 (1.391) 0.002466 (0.689) 375.034 (0.887) 1.011 (1.913) 14.771 (2.650)a 0.275 (2.000) 29.410 (0.357) 26.346 (0.179) 1.133 (0.305) 2.837 (0.743)
0.009186 (1.451) 0.004513 (2.886)a 0.007164a (2.107) 265.449 (0.580) F
a
Significant at the 0.05 level. Significant at the 0.10 level.
0.423 (3.899)a 451.860 (0.854) 256.185 (-0.335) 2.022 (0.736) 3.246 (1.310) 4.205 (0.793)
0.01389 (2.101)a F 0.0001462 (0.049) F 1.019 (1.951) 13.097 (2.382)a 0.392 (3.278)a 36.088 (0.433) 36.912 (0.261) 0.288 (0.073) 0.845 (0.200)
Model 4
Model 5
0.008381 (1.345) 0.003842 (2.433)a 0.00453 (1.346) 407.418 (0.884) 0.999 (0.853) F
0.02100 (3.110)a 0.006118 (3.229)a 0.005384 (1.337) 1198.196 (2.478) 2.783 (1.777) F
0.423 (3.988)a 265.072 (0.748) 92.242 (0.167) F F
F 494.879 (1.182) 706.107 (0.994) 5.212 (1.461) 3.134 (1.120)
Model 6 F 0.002835 (1.487) 0.001318 (0.370) F 0.661 (1.293) 13.781 (2.459)a 0.419 (3.393)a 30.972 (0.372) 29.116 (0.196) 0.411 (0.121) 2.787 (0.879)
Model 7 0.007199 (1.157) 0.002755 (2.012)b F 487.147 (1.057) 1.715 (1.628) F 0.443 (4.180)a 404.135 (1.182) 410.705 (0.815) F F
0.005285 (0.625) 5.138 (0.403)
1.464 (0.123) 1.228 (0.354)
489.453 (2.057) 123 0.315 0.240
504.649 (0.617) 54 0.677 0.602
225.858 (1.543) 124 0.294 0.231
380.086 (0.615) 54 0.677 0.611
1185.424 (1.510) 54 0.587 0.491
0.01535 (0.628) 314.062 (2.149) 124 0.279 0.216
728.560 (1.287) 54 0.664 0.604
609
b
F
Model 3
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Supply effect enter-method for full sample analysis
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More specifically, the study narrows the relationship down to finding which of the lease conditions has a significant impact. Furthermore, three lease conditions consistently appear statistically significant in all the analysis performed. Firstly, with correlation analysis, number of units, maximum gross floor area and number of storeys showed strong positive correlation not only with supply, but also with one another. Secondly, with regression analysis, the same three conditions revealed consistent statistical significance under each model tested. With this in mind, the aforementioned lease conditions ought to have a bearing on the production of housing supply. With this knowledge, the government holds an additional tool in moving towards playing a more direct role in Hong Kong’s property market, whilst addressing the paramount issues of providing adequate and affordable housing with maintaining regulations for control on property development. The three particular development conditions should be given more careful attention when considering alterations to land policies. It should also be noted that in Hong Kong, lease modification is a common practice taken by many developers. Therefore, for the private sector, the conditions discussed in the former should also be considered in the decision making process of lease modification.2 Acknowledgements This study was funded by the Research Grant Committee of the University Grants Council, Hong Kong (B-Q219 PolyU 5007/98E); and also by University Block Grant (G-T029 PolyU 5003/ 99E). Appendix A The maximum gross floor area (gfamax) is not necessarily stated in every lease for private residential development. It is at the lessee’s discretion to develop the desired floor area and determine the number of units built for each floor. The site coverage (sitecove) is the largest floor area of any particular building erected on a site. Each lease states the area of a site in square metres. Some leases state the site coverage while others do not. This restriction does not directly determine the number of units supplied into the property market. But, it affects the size of a constructed floor and indirectly the size of a unit, thereby the number of units. The number of units (nounits) is the most direct method for controlling not only housing supply quantity but also the size of units, and this term is only found in a few leases. Increasing the number of units will directly bring more housing supply quantity into the market.
2 Throughout this study, the focus has been on the quantity of housing supply; however, the quality is equally important in the studying any property market. A recommendation for further research in this area relating to lease conditions is greatly encouraged to uncover a more detailed and in-depth analysis on the impacts of government lease conditions. In doing so, better implementing tools in land and housing policies for both the public and private sectors shall result.
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E.C. Hui / Habitat International 25 (2001) 599–615 Table 5 Variable definition Variable name
Label
Value
Explanatory notes
Compunit
Measured in number of units
Units completed by each lease
Area
Completed Number of Units in a Lease Location Area
Areas where leases were obtained
Lotsize
Lot size
1=Hong Kong, 2=Kowloon, 3=New Territories Measured in m2
Years
Years to complete development
Plot
Plot ratio
Set I variables Maxgfa
Gross floor area restriction
0=No, 1=Yes
Sitecov
Site coverage restriction
0=No, 1=Yes
Units
Number of units restriction
0=No, 1=Yes
Building
Number of buildings restriction 0=No, 1=Yes
Storeys
Number of storeys restriction
0=No, 1=Yes
Heighlim
Height restriction
0=No, 1=Yes
Unitsize
Unit size restriction
0=No, 1=Yes
Dad
Design and disposition
0=No, 1=Yes
Stated restricted maximum gross floor area in lease Stated restricted minimum gross floor area in lease Stated restricted site coverage in lease Stated restricted number of units in lease Stated restricted number of buildngs Stated restricted number of storeys in lease Stated restricted height
Measured in m2
Set II variables Gfamax Gfamin Sitecove Nounits Nobuilding Storey Height
Measured in number of years, rounded to the nearest whole year. Measured as a ratio of GFA and lot size
Measured in m2 Measured lot size Measured units Measured buildings Measured storey Measured
in percentage of in whole numbers/ in whole numbers/ in whole numbers/ in metres
Area/size of the lot contained in the lease Number of years from the date of issue of the lease, to complete the development Calculated by dividing the maximum gross floor area by the lot size and rounded to the nearest whole number Leases containing a restriction on gross floor area Leases containing a restriction on site coverage Leases containing a restriction on the number of units Leases containing a restriction on the number of buildings Leases containing a restriction on the number of storeys Leases containing a restriction on the height of each building Leases containing a restriction on the unit size of each unit Leases containing a condition on the design and disposition of the development The stated maximum gross floor area allowable The stated minimum gross floor area required The stated site coverage restricted to use The stated restricted number of units allowable The stated restriction on the number of buildings buildable The stated restricted number of storeys buildable The stated height restriction for each building
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Table 5 (continued ) Variable name
Label
Value
Explanatory notes
Maxunsiz
Measured in m2
Test1
Stated restricted maximum unit size Stated restricted minimum unit size Sitecove*lotsize
Measured in m2
Test2
Height/storey
Measured in metres
Test3
Maxgfa*sitecove
Measured in m2
Test4
Unitsize/storey
Measured in m2
Test5
Unit/storey
Measured in number of units per storey
The stated maximum unit size allowable The state minimum unit size required Multiplying site coverage with lot size gives an integer reflecting the largest area that a floor can obtain Dividing height by the number of storey gives an integer illustrating the height of each storey Multiplying maximum gross floor area with site coverage gives an integer reflecting the largest area of a floor given the maximum gross floor area Dividing maximum unit size by storey gives an integer illustrating unit sizes per storey Dividing the maximum number of units by storey gives an integer measured as a whole number and illustrating the number of units for each storey
Minunsiz
Measured in m2
The number of buildings (nobuild) is stated in some leases. Again, this restriction would not pose a direct limitation on housing supply quantity. But, it will indirectly affect the number of units and price. This term is often used in site where the area is designed to maintain low density. The maximum number of storey (storey) that can be built on a site is sometimes stated in a lease. The area of a site, site coverage, and number of storeys noticeably affect the gross floor area that can be built. The height restriction (height) allowed for each building is used as a means to indirectly control the gross floor area. This restriction varies with site coverage permitted for construction on a site. As the height is extended, the site coverage becomes smaller in numerical terms. The maximum size of each unit (maxunsiz) restricts the unit sizes. Since the gross floor area is stated in every government land lease, the unit size can restrict the supply quantity. Thus, the units size in square metres together with the gross floor area conceptually and directly affect the number of housing units supplied in the market. However, only the minimum floor area and occasionally the maximum floor area are stated in leases. Design and disposition (dad ) requires the lessee(s) to obtain approval from the Director of Lands Department. This requirement delay the timing of housing supply introduced into the market and ultimately affects housing prices.
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E.C. Hui / Habitat International 25 (2001) 599–615 Table 6 Frequency Area
Frequency
Percent
(a) Area Hong Kong Kowloon New Territories Total Number of years
7 19 99 125 Frequency
5.6 15.2 79.2 100 Percent
(b) Years to complete 1 2 3 4 5 6 7 Total Present in lease
1 22 47 46 7 1 1 125 Frequency
0.8 17.6 37.6 36.8 5.6 0.8 0.8 100 Percent
(c) Buildings ordinance No Yes Total
1 124 125
0.8 99.2 100
(d ) Town planning ordinance No Yes Total
82 43 125
65.6 34.4 100
(e) Gross floor area No Yes Total
28 97 125
22.4 77.6 100
( f ) Site coverage No Yes Total
16 109 125
12.8 87.2 100
( g) Number of storeys No Yes Total
70 55 125
56 44 100
(h) Number of units No Yes Total
80 45 125
64 36 100
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Table 6 (continued ) Present in lease
Frequency
Percent
(i) Number of buildings No Yes Total
123 2 125
98.4 1.6 100
( j ) Design and disposition No Yes Total
82 43 125
65.6 34.4 100
(k) Unit size No Yes Total
119 6 125
95.2 4.8 100
(l ) Height No Yes Total
34 91 125
27.2 72.8 100
Table 5. Displays the variables mentioned above which will be used for the research. The variable name, type, label, value and explanation are used to describe each variable. Appendix B In addition, details pertaining to the number of leases containing certain development conditions are presented with frequency tables (Table 6).
References Archer, R. W. (1977). The public land and leasehold system in Canberra, Australia: The use of the leasehold land tenure base for financing the capitals development, 1958–1971. American Journal of Economics and Sociology, 36, 351–366. Barlow, J. (1993). Controlling the housing market: Some examples from Europe. Urban Studies, 30, 1129–1149. Bramely, G. (1993). The impact of land use planning and tax subsidies on the supply and price of housing in Britain. Urban Studies, 30, 5–30. Brueckner, J. K. (1995). Land supply and growth controls. Journal of Public Economics, 57, 393–416. Dowall, D. E. (1984). The suburban squeeze: Land conversion and regulation in the San Francisco Bay Area. Berkeley: University of California Press. Dowall, D., & Landis, J. D. (1982). Land use controls and housing costs: An examination of San Francisco Bay area communities. AREUEA Journal, 10, 67–93. Elliott, M. (1981). The impact of growth control regulations on housing prices in California. AREUEA Journal, 9, 115– 133.
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Evans, A. W. (1996). The impact of land use planning and tax subsidies on the supply and price of housing in Britain: A comment. Urban Studies, 33, 581–585. Fischel, W. A. (1990). Do growth controls matter? A review of empirical evidence on the effectiveness and efficiency of local government land use restrictions. Monograph. Lincoln Land Institute: Cambridge, MA. Hannah, L., Kim, K. H., & Mills, E. S. (1993). Land use controls and housing prices in Korea. Urban Studies, 30, 147– 156. Ho, A. (1999). Relationship between development conditions in government lease, housing supply and housing price. Hong Kong Polytechnic University, B.Sc. Dissertation, unpublished Hong, Yu-Hong. (1999) Myths and realities of public land Leasing: Canberra and Hong Kong. Lincoln Institute of Land policy: Land Lines March 1999. Hui, C.M. (1998). Land development for housing and industry. Proceedings of international seminar on land policy and economic development, International Center for Land Policy Studies and Training, Taiwan, November. Hui, C.M., Chan, A., Wong, F., Wong, K.C., Leung, B. (2000). The supply of land for housing in Hong Kong. Monograph. Department of Building and Real Estate, Hong Kong Polytechnic University. Lai, L. W. (1998). The leasehold system as a means of planning by contract. Town Planning Review, 69, 249–275. Leung, C. Y. (1986). The land tenure system. Hong Kong in transition. Hong Kong: Oxford University Press. Mark, J. (1980). A preference approach to measuring the impact of environmental externalities. Land Economics, 56, 103–116. Mark, J. H., & Goldberg, M. A. (1986). A study of the impacts of zoning on housing values over time. Journal of Urban Economics,, 20, 254–273. Monk, S., & Whitehead, C. M. (1996). Land supply and housing: A case-study. Housing Studies, 11(3), 407–423. Neutze, M. (1987). The supply of land for a particular use. Urban Studies, 24, 379–388. Peng, R., & Wheaton, W. C. (1994). Effects of restrictive land supply on housing in Hong Kong: An econometric analysis. Journal of Housing Research, 5, 263–291. Pogodzinski, J. M., & Sass, T. R. (1991). Measuring the effects of municipal zoning regulations: A survey. Urban Studies, 28, 597–621. Pollakowski, H., Wachter, S.M. (1990). The effects of land use constraints on land values. Land Economics, 66, 315– 324. Sagalyn, L. B., & Sternlieb, G. (1973). Zoning and housing costs. New Brunswick, New Jersey: Rutgers Center for Urban Policy Research. Yeh, A. (1993). Urban planning under a leasehold system. Hong Kong: Centre of Urban Planning and Environmental Management, University of Hong Kong.
Planning and development control through lease conditions Eddie Chi-man Hui* Department of Building and Real Estate, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong Received 21 November 2000; received in revised form 20 April 2001; accepted 10 May 2001
Abstract The Hong Kong government has pledged to deal with the imbalance between supply and demand of housing. Given the innate constraints of limited land resources in Hong Kong and the extensive and expedient control enforced through lease conditions, the Hong Kong government can alleviate the longrecognized problem of housing shortage by modifying specific development conditions. Therefore, the supply of housing units can be changed at a faster pace to satisfy the requirement of private dwellings. Other factors affecting the property market in Hong Kong include land supply, economic issues, population growth, and income growth. Many studies, for example, Hui et al. (Monograph, Department of Building and Real Estate, Hong Kong Polytechnic University and Hong Kong Government (Study of Housing Demand, Hong Kong Government Printer, Hong Kong and Study of Housing Demand Model, Hong Kong Government Printer, Hong Kong), have investigated in detail the impacts of these factors on the property market. However, little or nothing is known about the planning and development control through lease conditions. Therefore, this study particularly attempts to examine how the Hong Kong government exerts its influence in the local private residential market through changing the development conditions. These conditions will be studied separately and distinctively in order to capture their unitary effects upon the local private residential real estate market. Section 1 looks at Hong Kong’s tenure system, followed by the deliberation of how planning and development control is done through lease conditions (in Section 2). Sections 3 and 4 set out the analytical framework and report on the findings of how lease conditions affect property supply. The concluding section gives out recommendations. r 2001 Elsevier Science Ltd. All rights reserved. Keywords: Hong Kong; Property market; Planning and development; Lease conditions
1. Introduction The Hong Kong government auctions off land to private developers. The developers, in essence, are bidding for the lease to the land to obtain the right to develop and sell to end-users. The rights *Corresponding author. Tel.: +852-2766-5881; fax: +852-2764-5131. E-mail address: [email protected] (E.C. Hui). 0197-3975/01/$ - see front matter r 2001 Elsevier Science Ltd. All rights reserved. PII: S 0 1 9 7 - 3 9 7 5 ( 0 1 ) 0 0 0 2 8 - 5
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to property use, income and transfer was further illustrated from the observations made by Peng and Wheaton (1994): ‘‘Land for noninstitutional uses is generally leased to the highest bidder at public auctions with lease terms of 75 years or longer. Each lease term requires a large lump-sum premium and a small annual rent. Because they serve only as a legal symbol to maintain the lessor and lessee relationship, the premium attached to any given land lease approximates the land value. Most of the leases are transferable, and the land market is a market of land leases.’’ (Peng & Wheaton, 1994, p. 267) All land disposed in Hong Kong is subject to lease terms which are technically and commonly referred to as lease conditions. At the auction, the highest bidder is not guaranteed the lease. The developer must comply with the conditions set in the Conditions of Sale before successfully acquiring the lease. Essentially, the developer must present a master plan showing that the conditions set out in the lease will be met. The lease has a specified time in which the developer must complete the development and meet the requirements to the government’s satisfaction. Since 1997, the government has boldly realized that Hong Kong faces land site constraints because suitable sites for housing and opportunities for redevelopment are becoming rare. Redevelopment becomes more difficult because fewer underdeveloped areas are remaining, it is increasingly difficult to assemble developable site due to multiple ownership, and it is extremely hard to identify financially viable opportunities for redevelopment. The government has also acknowledged that the smaller the gap between the supply and demand for housing, the less pressure there is on providing affordable housing. The obvious restriction on land site availability has led the government to conclude that an increase in development density to make use of existing housing sites is a possibility to alleviate the interim housing shortage problem. The paramount question for the Hong Kong government is to resolve the dilemma between (1) the policy of providing adequate and affordable housing against the shortage of housing supply and (2) the regulations for control on property development. The government is well aware of the use of non-statutory and administrative practices to control the nature and intensity of property development in addition to statutory controls. It can simply include constraints and conditions in leases drawn for developable sites. As each lease has contractually enforceable conditions, the government exerts almost absolute and monopolistic control directly over land supply and hence housing supply. First and foremost, there is a need to take a more in-depth investigation into the extent to which the development conditions in government land leases are affecting the private residential property market in Hong Kong in terms of supply quantity and price. It is essential to investigate which of the development conditions has the most impact; thus not only to improve future modification and formulation of regulations but also to ease the shortage of housing supply and provide affordable housing.
2. Hong Kong’s land tenure system Hong Kong is one of five remaining regions adopting a leasehold land tenure system. Other places include Stockholm, Canberra, Israel and Amsterdam. A leasehold land tenure system is defined as the Government owning all land and what the purchaser of the land receives is a lease
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to use the land. The purchaser is given a bundle of rights. This bundle includes the right to transfer, use and earn income. Unlike the freehold system, the user of the land does not have ownership of the land. The user only has exclusive rights for a specified time. Hong Kong’s land tenure system was carried over from its previous British colonial governments who had ruled the territory from 1842 to 1997. The current government continues to be the sole owner of all land in the territory. Ho (1999) states that the government has an absolute perpetual title of all land holdings in Hong Kong, except one land parcel at St. John’s Cathedral located on the island, which is given a freehold privilege, on the condition that the use remains for the purpose of a church. The leasehold system in Hong Kong imposes a civil contract between the government and an individual within a specified time. Lai (1998) asserted that the property rights enjoyment would not render the leasehold less ‘‘private’’ than the freehold while the lease is in effect. Other than the specification for the duration of property rights, there is little real distinction between the leasehold and freehold land tenure systems. Both Hong (1999) and Archer (1977) capture the essence of public land and leasehold systems by comparing and contrasting leasehold systemized countries with those administered by freehold. Archer uses Canberra to study the cost and benefits of a leasehold system and finds that a leasehold system provides greater capital for the government to allocate. Using Canberra as an example, Archer shows ‘‘how this system can be used to provide a high standard of planned urban development in a rapid growth situation’’ (Archer, 1977). Hong attempts to capture this same aspect through a comparison between Hong Kong and Canberra. The main difference between freehold and leasehold lies with ownership. Some researchers view that a leasehold land tenure system allows the government to completely control the urban development of a region and reap the gains from increased value of lands by collecting land rents/ premiums. Archer (1977) emphasizes that leasehold land tenure systems is an effective system for maintaining planning control. Learning from the experience of Canberra is beneficial, as it is one of the few places that effectively has a well-established leasehold tenure system. Hong (1999) takes the view that there are both costs and benefits to a leasehold tenure system. In comparing Hong Kong and Canberra, Hong finds that problems emanate from capturing land value, land speculation, managing land uses and urban redevelopment. Lai (1998) indicates that the leasehold system is the government’s way of allocating private property rights through contracts and that there is little difference between leasehold and freehold in terms of governance. In essence, the allocation of private property rights is a means of urban planning through the leasehold system. In review and comparison, Bramely (1993) finds that local town planning affect the elasticity of supply, whereas Peng and Wheaton (1994) reveal that restrictive land has little effect on the supply of housing in Hong Kong. However, Bramely’s study focuses more on how housing supply responds to restrictive land use regulations, while Peng and Wheaton focus on how production of housing is affected from government restricting the amount of land to be developed each year. Although both researches study the effects of housing from different aspects, the common linkage between this study and of those mentioned lies fundamentally with restrictions on development. Lease conditions are not the only factor limiting the potentiality of development. Prior studies have shown that restrictive land supply, planning, zoning, density controls, development controls, and many other factors contribute to the production of housing in a market. Those studies include Barlow (1993); Bramely (1993); Brueckner (1995); Dowall (1984); Dowall and Landis (1982);
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Elliott (1981); Evans (1996); Fischel (1990); Hannah et al. (1993); Hui (1998); Mark and Goldberg (1986); Monk and Whitehead (1996); Neutze (1987); Peng and Wheaton (1994); Pogodzinski and Sass (1991); Pollakowski and Wachter (1990); Sagalyn and Sternlieb (1973). This study here provides, in particular to Hong Kong’s property market and of those similar in nature, an additional insight to understanding real estate development. The findings from this study touch upon a characteristic of the real estate development market that was not previously touched upon in other researches. Consequently, additional knowledge is presented in this study which reveals another piece of the puzzle to understanding the impacts on the property market. In the study of real estate development, the concept of substitution between land and structure is fundamentally inherent. This is also relevant to lease conditions that constrain the development potential of a site. Given a small site, normally the developer would substitute more structure to compensate for the land size. However, in the presence of lease conditions, a constraint on both land and structure is placed and thus affecting the substitutability of the development. A relaxation of the constraints with lease conditions would result in a greater of substitution effect between land and structure. For instance, for a given area of land auctioned annually, the greater the flexibility in lease conditions the larger the possible supply of units would be made available onto the market. Currently, the Hong Kong government plays a relatively indirect role in the property market by implementing schemes such as home ownership schemes, land disposal policies, and loan programs. This indirect role is in favour with the view of scholars that believe that government invention in the real estate market should be minimal. With the significant relationship of development conditions in government lease with housing supply, the government has an alternative measure in affecting the property market, while maintaining its indirect role. Not only the government but also, as mentioned above, private developers have the opportunity to develop a greater potential of housing with more flexible lease conditions and possibly fewer lease modifications. With fewer lease modifications, developers will have fewer stages in their development process and improve the timing of when housing supply is introduced to the market. Whether the issue of supply meeting demand is more predominant or not, in Hong Kong, in particular in the recent 10 years, housing and land policies have been ineffective in addressing the concerns of consumers and developers of the property market. Thus, there is a need to improve land regulations and policies (Hui et al., 2000).
3. Development conditions of government leases Government leases are official contractual documents between private owners (lessees) and the government (lessor). The leases usually consist of general conditions and special conditions. The former includes terms relating to disclosure of principal, rent, ratable value, effective date of the lease, maintenance, right to inspect, breach of lease condition, etc. The latter specifies building covenant, use of land, development conditions, etc., and basically imposes regulations with respect to compliance criteria, space construction constraints, and building design and disposition restrictions. All recent leases in their conditions specifically ask for compliance with Cap. 131 (Building Ordinance) and Cap. 123 (Town Planning Ordinance). Firstly, buildings erected or to be erected
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must comply with the Building Ordinance (Cap. 123), any regulations made under it, and any of its amending legislation. Secondly, the use of land lot for which buildings erected or to be erected must comply with the requirements of the Town Planning Ordinance (Cap. 131) and any of its amending legislation. The Buildings Ordinance provides statutory regulations on the planning, design and construction of buildings and associated works, making provision for the rendering safety of dangerous buildings and lands, and making provision for matters connected enforcement and approval authorities. The density of development has been controlled either through lease conditions, or in the case of unrestricted leases, by the Building Ordinance. Although the existing Town Planning Ordinance aims to control the land use and the volume of building development, it does not contain any enforcement provision. Its statutory effect mandates that current land development and change of land use have to conform to the specific zoning plan. In addition to the requirement for complying with the two ordinances, development conditions found in leases mainly control space development that can increase or reduce housing supply quantity. These conditions emphasize eight key areas of control in the housing development: (1) total gross floor area, (2) maximum site coverage, (3) height, (4) maximum number of storeys, (5) maximum number of units, (6) number of buildings, (7) unit size and (8) design and disposition. Depending upon the location of a lot, a lease may not include all eight conditions. The variance of this stipulation can either limit the availability of building space from a lot or make more space available for accommodations. The development conditions of the government land leases in Hong Kong can increase or decrease the number of housing units supplied into the local real estate market and thus cause fluctuations in housing prices. These conditions can also constrain the sizes of units by varying their terms in the leases. Furthermore, the government can exercise control over the supply of land in the market by leasing within a leasehold land tenure system as discussed widely by Leung (1986) and Yeh (1993). Thus, the Hong Kong government can dictate not only the pace and direction of development through the lease, but more importantly the size and the number of units made available by relaxing or tightening the development conditions.
4. The framework: hypotheses and methodology A set of seven models are used to compare the impact on supply from the development conditions. We use the 125 leases and the stated restricted values of each specified condition for analysis. These models measure the effects of the quantitative values of the development condition on supply. The set of models are set up to perform a linear regression analysis. We will use the conditional values stated in the lease. For the purpose of this research, a mechanical function can be derived to assist in developing a model to describe the relationship between lease conditions and supply. The function can be stated as: Completed units of a lease ¼ f ð gross floor area; site coverage; units; buildings; storey; height; unit size; design and disposition; lot sizeÞ:
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1. Total gross floor area. The total gross floor area allowable for construction has a bearing on the supply quantity in the market. Various alternative terms are found in this clause. Some terms are less rigid than others are. More rigidly, the term of gross floor area still may set both the maximum and minimum of floor space. This renders a property developer to work within a given range, and the government would be more certain of the number of housing units to be supplied in the future. The term usually states that the total gross floor area of any building or buildings to be erected on the lot shall not be less than a certain number of square metres and shall not exceed a certain number of square metres. Also, a ‘‘no guarantee’’ clause is sometimes annotated immediately that the maximum floor area may not be attained. 2. Site coverage. The maximum site coverage is not necessarily found in every government land lease in Hong Kong, and it is generally included in the leases of the lots located in the New Territories (NT). The term states the maximum percentage that a building or buildings can cover the land lot. This condition generally states that the total site coverage of any building or buildings on the lot shall not exceed a certain percentage of the land lot area. 3. Height. The height condition varies in accordance to the location of a lot. Some leases state explicitly a certain number for the aggregate height in metres accounted from above the datum or mean formation of a building and its structure. Moreover, additional rooms and fixtures for facility purposes placed on the roof which exceed the height limit require prior written approval from the Director of the Lands Department. Other terms relating to height may require observation of the height limit stipulated in the Hong Kong Airport (Control of Obstructions) Ordinance and any amending legislation: Also, these terms may call for obtaining prior approval in writing from the Director of the Lands Department. 4. Number of storeys. Similar to the maximum site coverage, the number of storeys is not necessarily found in the ‘‘Development Conditions’’ of every government land lease in Hong Kong. Perhaps, it is more often included in the leases for lots located in the NT. The term states the maximum number of storeys that shall be built. 5. Number of units. The most influential term among the development conditions for controlling the supply quantity of housing is by stating in the lease explicitly the total number of units permitted to be built on a land lot. This term directly limits the number of housing units supplied into the market. The unit size is also constrained since the gross floor areas are usually specified in the leases. That is, stating the number of units simultaneously dictates the unit size of a developable site. 6. Number of buildings. Occasionally, a few leases state the number of buildings permitted on some lots. This term is more commonly found in leases in the NT, as developable land on Hong Kong Island and Kowloon Peninsular is naturally restricted. Similarly, some leases state the maximum size of each unit. Since the minimum gross floor area is stated in every lease, the variation in unit size can increase or decrease the supply quantity of housing. 7. Design and disposition. In addition to regulatory compliance and space development constraints, the term for design and deposition generally includes external elevations and finishing of buildings. It states that the design and disposition of any building or buildings erected or to be erected are subject to the approval in writing of the Director of the Lands Department. Except for site formations, commencement of building works is prohibited until the approval has been obtained.
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The Hong Kong government specifies the minimum gross floor area that must be built in every lease issued for private residential development. Through this term, the government aims to prevent under-development and under-utilization of land. This function, in a simplistic setting, studies the effects of lease conditions on the supply of housing. Since similar studies are limited, maintaining a simple and flexible model allows for a clearer and more defined comprehension of the findings of this study; and in turn creating a foundation for more advanced studies on this topic. After careful review of the sample of leases, 45 leases contain restriction on the number of units. Within the 45 leases, only 8 built to the exact amount of units that were specified in the lease, while 31 leases built below the specified amount. The number of units actually produced from each lease is determined by the development conditions set out in the lease and by the private developer’s preferences. These restrictive conditions in the lease serve as a specific limitation, under which the developer attempts to maximize the development potential of a site in return for the highest possible profit (see Appendix A for definitions) (Table 1). Under this conception, it is expected that the greater the values stated in the restriction, the greater effect on supply in terms of number of units. Given the conditions in the lease, when comparing two leases both with a similar development condition present in the leases, it is expected that the lease with the larger value will generate greater output of units than the one with a smaller quantitative value. The expected outcomes will be verified by calculating the correlation coefficient between each condition and the units produced under the circumstances of each set. The correlation coefficient describes how a set of variables moves together. A coefficient close to positive 1 emulates a strong positive relationship, whereas a coefficient close to negative 1 emulates a strong negative relationship. The figure obtained during from the correlation analysis will not indicate the relationship between the two variables in numerical sense. Since the correlation coefficient characterizes the relationship between the dependent variable with the independent variables, performing a multiple regression model will delineate the aspect of the degree to which each variable impacts the number of units produced. Thus, the following hypotheses can be stated to simplify the understanding of a supply effect: Null hypothesis (H0 ): bj pt; where b is the t-statistic for condition j. At a confidence interval of 95%, b ¼ 1:984 for degrees of freedom of 100.
Table 1 Expected outcome (hypothesis) Lease conditions
Supply effect
Gross floor area (gfamax/gfamin) Site coverage (sitecove) Height (height) Storeys (storey) Buildings (nobuilding) Units (nounits) Unit Size (maxunsiz/minunsiz) Design and disposition (dad)
+ + + + + + + +
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Alternative hypothesis (H1 ): bj Xt; where b is the t-statistic for condition j. At a confidence interval of 95%, b ¼ 1:984 for degrees of freedom of 100. The null hypothesis states that a condition having a t-statistic less than the specified t-statistic value at the 95% confidence interval indicates an insignificant variable. The alternative hypothesis states that a condition having a t-statistic greater than the specified t-statistic value at the 95% confidence interval indicates a significant variable. 4.1. Sources of data A total of 125 leases were randomly gathered as the sample for this study, from the various branches of the Land Registry. Since the completion year comes a few years after the issue year, the data analysis is based on the completion year of a lease rather than the issue year. By doing so, completions of residential units for the corresponding years can be conveniently used to analyse the effects of the lease conditions on supply. Additionally, the sample selected for this study is a group of leases that have been restricted for private residential users and were issued for development between 1985 and 1995; thus, completion years range from 1989 to 1999. The sample of leases varies from disposal methods. The corresponding number of completed units for each lease were obtained through various editions of the ‘‘Monthly Digest’’, issued by the Buildings Department. The data are regressed against the lease conditions outlined in the previous section of the paper. In the set of data separated by semi-annual intervals, the logarithm of the total completed units of the leases for each of the 6 months is calculated. This is done to prevent any abnormal results.
5. Findings and analysis Among the cases selected for the sample, the lot size averaged to 8569 m2. The majority of the leases are obtained from the NT region of Hong Kong. Leases from NT make up 79.2 percent of the total sample, while Kowloon and Hong Kong make up 19 percent and 7 percent respectively. On average, leases are completed within 3–4 yr. Further statistical details of the sample of leases are outlined in Table 2. In addition, details pertaining to the number of leases containing certain development conditions are presented with frequency tables to gain a clear picture as to the common lease structure in Hong Kong in Appendix B. As noted earlier, correlation coefficients are used to explain the relationship between two variables. Therefore, to analyse the validity of the expected outcomes laid out in the earlier section, correlation coefficients were calculated for each set of data. Table 3 reveals the relationship of each condition with the supply of units, outlining the correlation results of the full set of data. It was expected that the lease conditions would have a positive effect on supply as the value of the restriction increases. However, the results of the correlation analysis show that only the conditions of maximum GFA, number of storeys and number of units have a relatively strong positive relation with price (0.269, 0.600 and 0.815, respectively). These three conditions are
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E.C. Hui / Habitat International 25 (2001) 599–615 Table 2 Descriptive statistics
N Mean Median Mode Std.Dev Min Max
Lot
Years
Max GFA
Min GFA
Site cov
Storeys
Unit
Comp. units
Building Unit size
Height
124 8568.56 6433.50 1860.00 7822.63 1.53 43520.00
125 3.34 3.00 3.00 0.94 1.00 7.00
124 32377.21 25290.00 0.00 35158.07 0.00 210480.0
125 16247.05 13111.00 16800.00 15122.21 0.00 76000.00
125 0.2227 0.25 0.20 0.1107 0.00 0.56
125 4.83 0.00 0.00 8.34 0.00 30.00
125 201.45 0.00 0.00 431.11 0.00 2500
125 419.30 285 288 553.94 1.00 4144
125 125 0.056 3.16 0.00 0.00 0.00 0.00 0.5433 17.8 0.00 0.00 6.00 130.
125 70.63 51.82 0.00 91.32 0.00 680
significant at the 0.001 level and can be interpreted by stating ‘‘as the value of these conditions increases the greater the units produced by the lease’’.1 In order to examine the degree to which development conditions affect the number of units released to the market, a regression analysis is performed. S.P.S.S. is used to perform a linear regression for each model using the method of forced entry. Test variables are also used to examine whether a combination of certain conditions would reflect greater effects. Among the development conditions that were tested, the restrictions on number of units, maximum gross floor area and number of storeys were consistently significant in each of the seven models. Table 4 outlines the models and the coefficients obtained from running each model using the defined sets of data. The interpretation below would focus on those variables that have produced significant effects on the models. Model 4 of this analysis produced the highest adjusted R2 of 0.611, meaning approximately 60% of the variance in supply can be explained by the variables in the model. Models 2 and 7 also produce adjusted R2 of 0.602 and 0.604, respectively. However, when examining the t-statistic for the condition on the number of units, model 7 with the test variable of unit size per storey shows to be significantly greater. Another interesting observation with both sets of models is with the number of observations in relation to the adjusted R2 : In statistical regression analysis, intuitively the greater number of observations will create a better model for explanatory purposes. However, in this study the opposite is observed, where the fewer the observations the greater the R2 : 1 Further analysis is performed to test the effects of collinearity. Correlation coefficients are calculated between each independent variable. High correlation coefficients will indicate interdependence between the independent variables. This interdependence is termed collinearity. According to this analysis, there is an apparent interdependence between the conditions of maximum gross floor area and number of units as expected. The correlation coefficient calculated is significant at the 0.001 level. A similar result appears between the conditions restricting the number of units and number of storeys. However, a few correlation coefficients, in particular those measured with the number of buildings variable, were unable to be computed due to an insufficient number of leases containing such a restriction. Notwithstanding this result, the interdependence found in the corresponding pair of condition exhibits some multicollinearity in the analysis of this study; however, further analyzing the results from the multivariate analysis there seems to be no significant impact nor distort the findings of this study. In addition, as shown in a similar study on the impacts of zoning upon housing by Mark and Goldberg (1986), ‘‘multicollinearity does not in most cases appear to be a serious problem and, therefore, does not explain these results.’’ Also, Mark (1980) shows that a similar-type study that using a principal component regression to deal with potential multicollinearity did not substantially improve the results.’’
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Table 3 Correlation for supply with development conditions Development conditions
N
Correlation
Maximum GFA Minimum GFA Site coverage Storeys Units Buildingsa Maximum unit size Minimum unit size Height
99 124 106 53 45 2 4 6 91
0.269a 0.066 0.001 0.600a 0.815a 1.00a 0.556 0.477 0.089
a
Significant at the 0.001 level (two-tailed).
Observing the coefficients calculated for the restriction on the number of units in Table 4, there is a relative consistency in the effect on supply. Using model 7 as an example, the coefficient generated from the regression reveals 0.443. Under the assumption given earlier pertaining to this set of data, an extra unit allowable under this restriction will produce 0.443 of an extra unit. With this intuition, it is obvious that other development conditions are affecting a whole unit to be produced when there is a one unit increase on the restriction of the number of units. Similarly, referencing to the same table, the restriction on maximum gross floor are in model 7 reflects that an extra one metre square of floor area allowed will result in 0.002755 addition to the number of units completed by the lease. Furthermore, interpreting the restriction on the number of storeys in alternative models, reveals that an additional storey allowable will result in an increase of 13 to 15 completed units. However, the variables used in these models have an explanatory power of less than 25 percent.
6. Conclusion and recommendations As few studies have touched upon the topic of the effects of government leases on Hong Kong’s property market, this study serves as a first of its kind. In reviewing the results represented in the previous section and with the regressions performed under a 95% confidence interval, the conclusion to reject the null hypothesis can be drawn. By rejecting the null hypothesis, implies that the development conditions observed in this study have a statistically significant effect on the supply of housing in Hong Kong; thus, it can be concluded that a relationship exists between conditions contained in government land leases and housing supply. The extent to which the relationship exists agrees with the expected outcomes outlined in Table 2. The presence of lease conditions in a lease has a negative relationship with respect to housing supply. However, considering the presence of lease conditions alone does not effectively explain the degree of the relationship. We have also looked at the degree to which lease conditions affect the number of units produced. The statistical coefficients calculated reveal that there are relatively small incremental effects on supply of housing units, as the value of lease condition changes.
Table 4 Linear regression models Model 1
Model 2
Lot size (t-stat) Maximum gross floor area (t-stat) Minimum gross floor area (t-stat) Site coverage (t-stat) Height in metres (t-stat) Number of storeys (t-stat) Number of units (t-stat) Number of buildings (t-stat) Design and disposition (t-stat) Maximum unit size (t-stat) Minimum unit size (t-stat) Height/storey (t-stat) Site coverage b Maximum GFA (t-stat) Unit size/storey (t-stat) Units/Storey (t-stat) Site coverage b Lot size (t-stat) Constant (t-stat) Observations R2 AdjustedR2
0.01565 (2.342)a 0.00242 (1.391) 0.002466 (0.689) 375.034 (0.887) 1.011 (1.913) 14.771 (2.650)a 0.275 (2.000) 29.410 (0.357) 26.346 (0.179) 1.133 (0.305) 2.837 (0.743)
0.009186 (1.451) 0.004513 (2.886)a 0.007164a (2.107) 265.449 (0.580) F
a
Significant at the 0.05 level. Significant at the 0.10 level.
0.423 (3.899)a 451.860 (0.854) 256.185 (-0.335) 2.022 (0.736) 3.246 (1.310) 4.205 (0.793)
0.01389 (2.101)a F 0.0001462 (0.049) F 1.019 (1.951) 13.097 (2.382)a 0.392 (3.278)a 36.088 (0.433) 36.912 (0.261) 0.288 (0.073) 0.845 (0.200)
Model 4
Model 5
0.008381 (1.345) 0.003842 (2.433)a 0.00453 (1.346) 407.418 (0.884) 0.999 (0.853) F
0.02100 (3.110)a 0.006118 (3.229)a 0.005384 (1.337) 1198.196 (2.478) 2.783 (1.777) F
0.423 (3.988)a 265.072 (0.748) 92.242 (0.167) F F
F 494.879 (1.182) 706.107 (0.994) 5.212 (1.461) 3.134 (1.120)
Model 6 F 0.002835 (1.487) 0.001318 (0.370) F 0.661 (1.293) 13.781 (2.459)a 0.419 (3.393)a 30.972 (0.372) 29.116 (0.196) 0.411 (0.121) 2.787 (0.879)
Model 7 0.007199 (1.157) 0.002755 (2.012)b F 487.147 (1.057) 1.715 (1.628) F 0.443 (4.180)a 404.135 (1.182) 410.705 (0.815) F F
0.005285 (0.625) 5.138 (0.403)
1.464 (0.123) 1.228 (0.354)
489.453 (2.057) 123 0.315 0.240
504.649 (0.617) 54 0.677 0.602
225.858 (1.543) 124 0.294 0.231
380.086 (0.615) 54 0.677 0.611
1185.424 (1.510) 54 0.587 0.491
0.01535 (0.628) 314.062 (2.149) 124 0.279 0.216
728.560 (1.287) 54 0.664 0.604
609
b
F
Model 3
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Supply effect enter-method for full sample analysis
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More specifically, the study narrows the relationship down to finding which of the lease conditions has a significant impact. Furthermore, three lease conditions consistently appear statistically significant in all the analysis performed. Firstly, with correlation analysis, number of units, maximum gross floor area and number of storeys showed strong positive correlation not only with supply, but also with one another. Secondly, with regression analysis, the same three conditions revealed consistent statistical significance under each model tested. With this in mind, the aforementioned lease conditions ought to have a bearing on the production of housing supply. With this knowledge, the government holds an additional tool in moving towards playing a more direct role in Hong Kong’s property market, whilst addressing the paramount issues of providing adequate and affordable housing with maintaining regulations for control on property development. The three particular development conditions should be given more careful attention when considering alterations to land policies. It should also be noted that in Hong Kong, lease modification is a common practice taken by many developers. Therefore, for the private sector, the conditions discussed in the former should also be considered in the decision making process of lease modification.2 Acknowledgements This study was funded by the Research Grant Committee of the University Grants Council, Hong Kong (B-Q219 PolyU 5007/98E); and also by University Block Grant (G-T029 PolyU 5003/ 99E). Appendix A The maximum gross floor area (gfamax) is not necessarily stated in every lease for private residential development. It is at the lessee’s discretion to develop the desired floor area and determine the number of units built for each floor. The site coverage (sitecove) is the largest floor area of any particular building erected on a site. Each lease states the area of a site in square metres. Some leases state the site coverage while others do not. This restriction does not directly determine the number of units supplied into the property market. But, it affects the size of a constructed floor and indirectly the size of a unit, thereby the number of units. The number of units (nounits) is the most direct method for controlling not only housing supply quantity but also the size of units, and this term is only found in a few leases. Increasing the number of units will directly bring more housing supply quantity into the market.
2 Throughout this study, the focus has been on the quantity of housing supply; however, the quality is equally important in the studying any property market. A recommendation for further research in this area relating to lease conditions is greatly encouraged to uncover a more detailed and in-depth analysis on the impacts of government lease conditions. In doing so, better implementing tools in land and housing policies for both the public and private sectors shall result.
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E.C. Hui / Habitat International 25 (2001) 599–615 Table 5 Variable definition Variable name
Label
Value
Explanatory notes
Compunit
Measured in number of units
Units completed by each lease
Area
Completed Number of Units in a Lease Location Area
Areas where leases were obtained
Lotsize
Lot size
1=Hong Kong, 2=Kowloon, 3=New Territories Measured in m2
Years
Years to complete development
Plot
Plot ratio
Set I variables Maxgfa
Gross floor area restriction
0=No, 1=Yes
Sitecov
Site coverage restriction
0=No, 1=Yes
Units
Number of units restriction
0=No, 1=Yes
Building
Number of buildings restriction 0=No, 1=Yes
Storeys
Number of storeys restriction
0=No, 1=Yes
Heighlim
Height restriction
0=No, 1=Yes
Unitsize
Unit size restriction
0=No, 1=Yes
Dad
Design and disposition
0=No, 1=Yes
Stated restricted maximum gross floor area in lease Stated restricted minimum gross floor area in lease Stated restricted site coverage in lease Stated restricted number of units in lease Stated restricted number of buildngs Stated restricted number of storeys in lease Stated restricted height
Measured in m2
Set II variables Gfamax Gfamin Sitecove Nounits Nobuilding Storey Height
Measured in number of years, rounded to the nearest whole year. Measured as a ratio of GFA and lot size
Measured in m2 Measured lot size Measured units Measured buildings Measured storey Measured
in percentage of in whole numbers/ in whole numbers/ in whole numbers/ in metres
Area/size of the lot contained in the lease Number of years from the date of issue of the lease, to complete the development Calculated by dividing the maximum gross floor area by the lot size and rounded to the nearest whole number Leases containing a restriction on gross floor area Leases containing a restriction on site coverage Leases containing a restriction on the number of units Leases containing a restriction on the number of buildings Leases containing a restriction on the number of storeys Leases containing a restriction on the height of each building Leases containing a restriction on the unit size of each unit Leases containing a condition on the design and disposition of the development The stated maximum gross floor area allowable The stated minimum gross floor area required The stated site coverage restricted to use The stated restricted number of units allowable The stated restriction on the number of buildings buildable The stated restricted number of storeys buildable The stated height restriction for each building
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Table 5 (continued ) Variable name
Label
Value
Explanatory notes
Maxunsiz
Measured in m2
Test1
Stated restricted maximum unit size Stated restricted minimum unit size Sitecove*lotsize
Measured in m2
Test2
Height/storey
Measured in metres
Test3
Maxgfa*sitecove
Measured in m2
Test4
Unitsize/storey
Measured in m2
Test5
Unit/storey
Measured in number of units per storey
The stated maximum unit size allowable The state minimum unit size required Multiplying site coverage with lot size gives an integer reflecting the largest area that a floor can obtain Dividing height by the number of storey gives an integer illustrating the height of each storey Multiplying maximum gross floor area with site coverage gives an integer reflecting the largest area of a floor given the maximum gross floor area Dividing maximum unit size by storey gives an integer illustrating unit sizes per storey Dividing the maximum number of units by storey gives an integer measured as a whole number and illustrating the number of units for each storey
Minunsiz
Measured in m2
The number of buildings (nobuild) is stated in some leases. Again, this restriction would not pose a direct limitation on housing supply quantity. But, it will indirectly affect the number of units and price. This term is often used in site where the area is designed to maintain low density. The maximum number of storey (storey) that can be built on a site is sometimes stated in a lease. The area of a site, site coverage, and number of storeys noticeably affect the gross floor area that can be built. The height restriction (height) allowed for each building is used as a means to indirectly control the gross floor area. This restriction varies with site coverage permitted for construction on a site. As the height is extended, the site coverage becomes smaller in numerical terms. The maximum size of each unit (maxunsiz) restricts the unit sizes. Since the gross floor area is stated in every government land lease, the unit size can restrict the supply quantity. Thus, the units size in square metres together with the gross floor area conceptually and directly affect the number of housing units supplied in the market. However, only the minimum floor area and occasionally the maximum floor area are stated in leases. Design and disposition (dad ) requires the lessee(s) to obtain approval from the Director of Lands Department. This requirement delay the timing of housing supply introduced into the market and ultimately affects housing prices.
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E.C. Hui / Habitat International 25 (2001) 599–615 Table 6 Frequency Area
Frequency
Percent
(a) Area Hong Kong Kowloon New Territories Total Number of years
7 19 99 125 Frequency
5.6 15.2 79.2 100 Percent
(b) Years to complete 1 2 3 4 5 6 7 Total Present in lease
1 22 47 46 7 1 1 125 Frequency
0.8 17.6 37.6 36.8 5.6 0.8 0.8 100 Percent
(c) Buildings ordinance No Yes Total
1 124 125
0.8 99.2 100
(d ) Town planning ordinance No Yes Total
82 43 125
65.6 34.4 100
(e) Gross floor area No Yes Total
28 97 125
22.4 77.6 100
( f ) Site coverage No Yes Total
16 109 125
12.8 87.2 100
( g) Number of storeys No Yes Total
70 55 125
56 44 100
(h) Number of units No Yes Total
80 45 125
64 36 100
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Table 6 (continued ) Present in lease
Frequency
Percent
(i) Number of buildings No Yes Total
123 2 125
98.4 1.6 100
( j ) Design and disposition No Yes Total
82 43 125
65.6 34.4 100
(k) Unit size No Yes Total
119 6 125
95.2 4.8 100
(l ) Height No Yes Total
34 91 125
27.2 72.8 100
Table 5. Displays the variables mentioned above which will be used for the research. The variable name, type, label, value and explanation are used to describe each variable. Appendix B In addition, details pertaining to the number of leases containing certain development conditions are presented with frequency tables (Table 6).
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