South China Morning Post, 22 August 2008
By Yvonne Liu
A double-digit increase in construction costs, while narrowing profit margins for developers in the first half of this year, will result in lower land premium levies.
Recent land premiums charged for allowing rezoning applications were about 15 to 20 per cent lower than comparable premiums levied by the Lands Department last year, Charles Chan Chiu-kwok, managing director at Savills Valuation and Professional Services, said.
The declining trend was confirmed by a source in the Lands Department who said that in terms of unit rates land premiums would be lower this year because the construction cost element that went into the equation for calculating premiums had increased significantly.
The assessment of a land premium levy charged when allowing rezoning applications or land exchange also includes interest rates and the latest transactions of development sites and properties in the area.
The Centa-City Leading Index shows that property prices in 60 major housing estates jumped 31.15 per cent in the year to June.
According to a Tender Price Index kept by property and construction advisory firm Rider Levett Bucknall, tender prices were up 5.33 per cent in first quarter of this year or 16.7 per cent year on year, which was the steepest rise since 1997.
The firm said the growth was due to high commodity prices, a weak US dollar and an appreciating yuan.
Rider Levett Bucknall cited a 30 to 40 per cent increase in the price of steel reinforcement bars in the first quarter, followed by a rise of 40 per cent in the second quarter.
Construction costs of apartments built to basic quality standards ranged from HK$827 per square foot to HK$966 per square foot in the first quarter, the firm said, and it expected tender prices would rise no more than 12 to 15 per cent over the next 12 months.
Mr Chan said the willingness shown by the government to cutting the land premium was justified by the increase in construction costs, the decline in property prices, and higher investment risk.
In addition, he said developers were less willing to apply for land premiums because of the uncertain investment outlook, and growing public concern over environmental issues which could limit land availability and translate into even higher building costs.
"The public is getting more concerned with environmental conservation and as a result it is becoming difficult for the developers to win approvals for changes to land use or modifications to leases," he said.
Alnwick Chan Chi-hing, an executive director at Knight Frank, said developers had slowed applications for lease modification and land exchange because the property market was at a turning point.
"The outlook for the property market remains uncertain. Developers are concerned they may face higher investment risks," he said.
According to Knight Frank, government land revenues in the current financial year which began on April 1, amounted to just HK$1.28 billion from HK$27.51 billion in the same period last year.
The drop in land revenue was mainly because only two sites had been sold, for about HK$665 million, this financial year compared with five sites for HK$15.28 billion a year earlier. In addition only three development sites have completed land rezoning applications, paying a total of just HK$322.51 million in land premiums, versus seven applications by this time last year that netted HK$3.73 billion in premiums.