Loft conversion anyone?

There's an interesting article by Cathy Holcombe in this week's Spike, discussing the reasons why Hong Kong doesn't have the loft-type apartments in disused industrial and commercial buildings that are commonly found in New York, London and many other large cities. It's not lack of supply, nor lack of demand, but a perverse consequence of the way the leasehold system works in Hong Kong. Yes, it's the government's fault.

If you "own" a building in Hong Kong what you actually own is a lease for a fixed period, and for a specific type of usage. So the owners of an industrial building cannot convert it to retail or residential use without paying a large premium to the government. The problem here is that in many cases the premium makes it uneconomic to change the usage, so the building lies empty (or at least under-utilised).

As manufacturing has moved across the border, there are many areas of Hong Kong where old factories or warehouses could be converted to commercial or residential use (Kwun Tong, Kwai Chung, Fo Tan, Cheung Sha Wan, etc.). This has already happened to a limited extent, but mainly by redevelopment rather than conversion (apart from manufacturing companies using their own factory or warehouse space for office use). What we haven't seen, and are unlikely to see, is the conversion of existing building to residential usage.

The problem with this is that it means that some of these areas are stagnating. The exceptions tend to be where the large developers already have a foothold. Quarry Bay is the prime example of this, with Swire able to re-develop the land where its Taikoo sugar processing plants were located and acquire adjoining plots to create Taikoo Place and Cityplaza ('Island East'). The point is that Swire had a great deal of land, a great deal of money and a strategic plan. This would be much more difficult for a smaller developer, and impossible for the owner of a single building.

It has to be said that there is some logic in the way this policy works. As Cathy Holcombe points out, Hong Kong generally has a mix of high density, high-rise, developments, green space, parks and mountains, rather than the featureless urban sprawl of cities such as Bangkok or Manila. Converting these previously industrial areas into low-rise yuppie developments would run counter to what passes for the government's land-use policy - in other words, Hong Kong would not be making optimum use of the land. Or rather it wouldn't be doing so if the price of the apartments was low, though it is arguable that if this were successful then the price would increase and so the government could increase the land premium for future conversions. This, however, would require rather more imagination and enterpreneurial thinking that we are likely to get from the government department concerned.

[Which leads me off into another more complex subject that I will leave for another day. Suffice to say that I think everyone would agree that Hong Kong needs more apartments, but the property developers restrict supply in order to keep prices high and maximise the profits they can derive from their huge land banks, and the government seems happy to play along with scheme.]

What is clear is that the present system isn't really working. The most radical solution would be to replace the current system of lease premiums with a profits tax, possibly on a selective basis for areas where re-development is socially desirable. Or I suppose the Urban Renewal Authority could be given more funding, but this is an expensive approach because of the generous compensation they pay to property owners, and, as this is a problem created by excessive government involvement, the answer cannot be more meddling.

One thing I can say for certain - problems such are this are one of the reasons why there was so much hollow laughter when Hong Kong was proclaimed as " the world's freest economy" by the Heritage Foundation. Even funnier was that 2nd place went to the socialist republic of Singapore, where 86% of the population live in public housing!

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