Building Market Institutions for Transacting Public Leaseholds

World banks Urbanization Knowledge Platform Addis Ababa, June 24, 2011 Yu-Hung Hong Senior Fellow, Lincoln Institute of Land policy Visiting Assistant Professor, MIT

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The presentation is not about the choices between freehold and leasehold. It is about building institutions to secure land tenure and facilitate transactions of leasehold rights for urban development.
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Leasing Public Land: Policy Debates and International Experiences edited by Steven C. Bourassa and Yu-Hung Hong

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Analytical Framework
Coases Theory of Transaction costs Four types:  Delineation and Assignment Costs  Negotiation Costs  Enforcement Costs  Public Monopoly Costs (added by Hong specifically for public leasehold system)
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Delineation and Assignment Costs

Leasing is not a novel means of land right disposition. Its property relations are, in theory, advantageous for:  allowing a party (i.e. a government) to remain as the owner and leases different land rights to various entities,  sharing in growth and financial benefits,  facilitating development and redevelopment, and  affecting the price of land and moderating speculation.
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How should leasehold rights be assigned?

Two situations:  Land is unoccupied and still in the hands of the state.  Land is occupied by informal settlements.

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Assigning Leasehold Rights of Unoccupied Public Land

Public auction Ensure the "efficiency" of allocating land and raise public funds. Encourage industrial development by leasing land to industry with premiums at below market value. Facilitate the provision of affordable housing by granting land to housing agencies with either no or concessionary premiums.

Private treaty grant

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Assigning Leasehold Rights of Occupied Public Land A selectively used idea called: Land Readjustment/Pooling

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Before

After

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How Should Leasehold Payments Be Structured?

Initial payment Land rent Up-front payment. Annual payment Change whenever the government reestimates property values. Additional payment for lease modifications (100% of the estimated increase in land value due to the modification). Imposition of a new land rent for renewable lease. Additional premium at full market value is required for non-renewable leases.
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Modification premium

Lease renewal premium or rent

Major Revenue Sources of Hong Kong Government: 2008/2009

Other Revenue 10% Duties 2% Bets and Sweeps Tax 4% Profit Tax 33% General Rates 2% Utilities, Fees, and Cahrges 5% Land Fund, Properties, and Investments 16% Stamp Duties 10%

Salaries Tax, Personal Assessment, and Property Tax 13% Land Premium 5%
Source: Hong Kong Yearbooks, 2009.

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Significance of Lease Revenue in Hong Kong: 1997-2010

350% 300% 250% 200% 150% 100% 50% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Percent of Total Revenues

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Percent of Total Expenditures

Percent of Expenditures on Public Works

Potential Risks of Collecting a Lump Sum Lease Payment at the Beginning of the Lease Term
 Lead to high land and property prices?

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Source: HKSAR, Rating and Valuation Department http://www.rvd.gov.hk/en/publications/pro-review.htm

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Potential Risks of Collecting a Lump Sum Lease Payment at the Beginning of the Lease Term
 Lead to high land and property prices?  Hurt Hong Kongs competitiveness.  Create dependency on the performance of the real estate sector, and industrial development has not been diversified.  Fiscal dependence on lease reveunes
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How Long Should Lease Terms be?

It should depend on the land use: For residential: 75-99 years For industrial and commercial: Footloose industrieslong-term lease Location specific industriesshort-term lease Most importantly, all lease should be renewable.

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Negotiation Costs
 The transfer of leasehold rights should not be restricted.  Leasehold records should be public information.  Official leasehold deed search with liens and legal description must be available.  Auction prices of land use rights should be publicly available.  Trained professionals in real estate appraisal and contract law are needed to facilitate negotiation.
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Negotiation Costs
 There should be a title insurance-like system to safeguard unexpected claims on leasehold ownership to smooth transaction.

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Enforcement Costs
 Disputes over the possession of leasehold rights and compensation for public expropriation of leased land rights should be settled by a land tribunal.  Public education about the pros and cons of public leasehold systems is critical for their acceptance.

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Public Monopoly Costs

Create a quasi public agency to manage land leasing and development.
 It will be a custodian of public land working with the

government at arms length.

 Its prime objective is to maximize lease revenues

and land development potential.

 Its director will be accountable to a committee

composed of professional groups from the public and private sectors.

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Achieving Public Policy Goals under Different Public Leasehold systems

Canberra

The Netherlands

Sweden

Finland

Israel

Hong Kong

Raising public funds Reserving land for public development Regulating land use Facilitating urban redevelopment Promoting industrial development

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Yes

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Yes

Yes

Yes

Yes

Yes

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Yes

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No

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No

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No

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Yes

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Open Discussion

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