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Do we need to worry about land lease expiry after 2047?

In Hong Kong, land ownership is not freehold, but rather granted as right of use for a term ranging from 50 years to 999 years (excepting land designated for special purposes).

Prior to the Handover of Sovereignty, all land leases north of Boundary Street were set to expire on 27 June 1997. Under the Sino-British Joint Declaration and the Basic Law these leases were extended automatically for 50 years, until June 2047.

The Macau government recently took back a number of undeveloped land sites. It has sparked a lot of controversy and drawn Hong Kongers' attention to the question of land lease renewal arrangements after 2047.

As stated in Article 121 of the Basic Law, leases expiring between 1997 and 2047 are generally granted a right of renewal – a 50-year extension without premium. However, the article’s provision obviously doesn’t apply to leases that expire after 30 June 2047. The Pokfulam Garden lease cannot be seen as a precedent for post-2047 lease renewal arrangements, as it was renewed subject to the provision of the article.

This question of post-2047 lease renewals is generally of little concern to owners and prospective buyers on leases of more than 30 years, because it will not significantly impact those properties' values; a property whose lease expires in 50 years will be evaluated very similarly to one expiring in 60 years. However, properties with lease terms less than 30 years are more sensitive to this issue – the shorter the term of the lease, the lower the property's value. As a result, institutional real estate investors have understandably become concerned about how post-2047 lease renewals will be resolved. To ease the minds of citizens and investors alike, the government needs to announce how these will be handled as soon as possible.

In a recent post on his official blog, the Secretary for Development assured the public that the SAR government has the right to deal with the issue of land lease renewal after the Handover of Sovereignty, citing Article 123 of the Basic Law. I agree with the Secretary's view. However, having the right to deal with an issue is different from actually deciding how to deal with it. And what investors and citizens are worried most about is what the government intends to do.

When a businessman rents a property to open a restaurant, he need to invest a considerable amount in its decorations, which can hardly be recouped with a simple two- or three-year lease. In order to break even, he needs either a longer lease or the right to extend the initial lease, including terms on how the extension will be renewed when the first term lease expires. Imagine that businessman's landlord saying, "Don't worry, I'm fully entitled to grant you an extension, so you don't need an option to renew now!" No reasonable businessman would risk an investment or sign an agreement on a verbal assurance. Similarly, institutional investors' concerns over post-2047 lease renewal arrangements will not be allayed simply by the Secretary's assurance. Before an investor leases a property, they first employ a solicitor to conduct due diligence regarding the relevant terms and risks. Since no solicitors can currently provide a clear answer about post-2047 lease renewals, this remains a risk factor that investors must take into account. Any risk factor is reflected in the property's price depreciation – the higher the risk, the higher the depreciation.

 

On the flip side, mortgage terms and repayment periods are also affected by the term of a land lease. As 2047 draws closer, mortgage terms on leases will become correspondingly shorter. And shorter mortgage terms means lower marketability. Citizens and investors do not need the government to immediately renew all land leases expiring after 2047. What they need is for the government to announce what the relevant policies will be.

"As 2047 draws closer, mortgage terms on leases will become correspondingly shorter. And shorter mortgage terms means lower marketability."

Specifically, they need to know what leases can be automatically renewed, what the renewal terms will be, and whether additional premium will be required. Once the government announces a policy that provide clear guidance in these areas, landlords will be able to wait to apply for a renewal until one or two years prior to their lease's expiration. Since the number of leases in the New Territories is massive, the government can avoid processing individual applications by passing legislation to grant automatic renewals collectively.

The situation is complicated by Article 5 of the Basic Law, which states that Hong Kong's capitalist system and way of life shall remain unchanged for 50 years. Whether or in what way the system of governance changes after that is not at the SAR government's discretion. Thus, whether Hong Kong's existing land ownership system changes after 2047 also depends on whether its current governance mode continues. Even if the SAR government has the right to deal with the post-2047 lease renewal issue, it would be ill-advised to formulate any policies without a green light from the Central government.

Time flies, and 2047 draws ever nearer. The SAR government needs to consult with the Central government as soon as possible, so that post-2047 lease renewal arrangements can be confirmed and announced. Doing this will dispel market doubts and prevent property market fluctuations.

The article was published by  "????" column, Hong Kong Economic Journal on 28 September 2016.

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