HK's hotel subsidy in SimCity
23 January 2014
Looking at the caption, you might wonder, "what subsidy"? Surely there isn't any in the Freest Economy in the Known Universe? Well, there is a huge, multi-billion dollar subsidy to the hotel sector, and it comes through the land system.
The HK Government plays SimCity with HK's land system. It decides what purpose particular bits of land should be used for, and therefor how much land should be allocated for each purpose, and then it leases them out (currently for 50 years) with leases restricted to that purpose. The narrower the purpose, the more interventionist this central-planning approach is.
Having set aside land for public-sector infrastructure such as schools, hospitals, prisons and sewage plants, the Government should, for all private-sector purposes, let the market decide what it needs, by auctioning the land supply without restrictions (other than plot ratio) and allowing the winner of each plot to build what she wants. Housing, offices, shops, hotels, or anything that doesn't involve emissions of noxious substances or excessive amounts of noise ought to be fair game. That would also allow the redevelopment of sites when an alternative use becomes more valuable, without having to negotiate with the Government to amend the lease by paying a premium.
But the Government decides and the market doesn't, and as a result, we have inefficient allocation of this scarce resource. The Government decides the purpose of land, and the market just bids for that purpose. Sometimes the Government chooses what the market would have chosen, to allow an office here or a residential project there, but other times, it doesn't.
Sometimes the failure of Government to choose the optimal use of land is just misjudgment, but other times, it is deliberate interference, when the Government knows that the land will fetch a lower price for its chosen purpose than if the market is allowed to choose. This is what Financial Secretary John Tsang Chun Wah did when he launched "hotel only" sites in the 2008-9 budget speech, a policy which persists to this day. In a press conference 2 days later, then Secretary for Development (now Chief Secretary) Carrie Lam explained:
"we have gauged the need for land supply for hotel development. We have received clear feedback that the current system of selling land for commercial use including office, retail and hotel could be a disincentive to hotel development. This is because under our established land valuation system, the land value is assessed on the basis of the maximum development potential of the site. This means that in locations where office use would attract a higher value than hotel use, the commercial site would be valued on the basis of office. Under such circumstances, it would be commercially unattractive for developers to buy a commercial site but develop it into hotel."
So they intervened, and allocated 10 sites for "hotel only" use, enough to produce another 9,000 to 11,000 hotel rooms. This pilot scheme was confirmed in 2011, when Mrs Lam said:
"The Government has also decided to turn the "hotel only" pilot scheme that was launched back in 2008-09 into a permanent arrangement. Under it, the reserve price for hotel sites on the [Application List] and the premium for lease modification/land exchange cases opting for "hotel only" development will be assessed and charged on a "hotel only" basis instead of their maximum permissible development potential irrespective of whether hotel use represents the optimal development.
"The decision is to continue to promote the development of hotels in Hong Kong in support of the tourism industry. The initiative to convert Murray Building into hotel use and to initiate the sale of two hotel sites at Sai Kung and Wan Chai will also be conducive to the development of tourism in Hong Kong".
If you subsidise something, then it becomes cheaper, and if you make something cheaper, then you get more demand - more visitors clogging up our streets and staying in hotels at lower cost. If the Government were to let the market function with unrestricted land leases, then less land would go to hotels and hotel room rates would rise until hotel developers could afford to win land auctions again in suitable locations. HK would develop as a premium tourism destination, with fewer but higher-spending tourists. HK should be a quality not quantity tourism destination.
As of 30-Jun-2013, the Buildings Authority has approved 99 hotel projects involving around 16,000 rooms to be completed by 2017, increasing the stock to about 84,000 rooms. Despite this, the Economic Development Commission is pushing for more. In a report dated December but published last week it said:
"The continuous tight supply of hotel rooms inevitably brings pressure on the upward adjustment of hotel room rates. It will not only reduce the desire of our visitors, including business and MICE (Meetings, Incentive Travels, Conventions and Exhibitions) visitors, for travelling to Hong Kong or they may shorten their duration of stay in Hong Kong, but will also weaken the overall competitiveness and appeal of Hong Kong as an international tourist destination. The long-term healthy development of the tourism industry of Hong Kong will be hampered."
Former Canadian and Secretary for Commerce and Economic Development Gregory So Kam Leung projected that visitor arrivals would increase from 48.6m in 2012 (of which 23.8m stayed overnight) to over 70 million in 2017, or about 10 times the population of HK. Imagine that in China - to match it they would need about 13.5 billion visits, so the 5.7 billion people who don't live in China would have to visit more than twice a year to match that, or about 100 times the 2011 figure. And still Mr So thinks that HK's tourism industry will be hampered without dishing out more land specifically for hotels (Singapore managed a measly 14.5 million visitors to Pleasantville in 2012).
Financial Secretary, Let the market function. Stop the "hotels only" land sales, and stop playing SimCity with the land supply. Sell unrestricted leases and let the market determine the best use of the land. And while you are at it, reform the land lease structure to higher ground rents and lower premiums, so that you can share in the future optimal usage of that land, as we recommended in 2010.
© Webb-site.com, 2014