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Land Sales Programme | September Update

Hong Kong blog CIVAS Land Sale 2209 1536x1040

Kwai Chung Town Lot No. 531 post-sale analysis reveals a hitch regarding any underground parking GFA savings

On 20 July 2022, the government announced that ESR Group subsidiary Sunrise Victory Limited successfully acquired Tung Chung Town Lot 531 at a consideration of HKD5,256,999,999 (AV: HKD3,539/sq. ft). Mapletree and Goodman also bid on the lot.

The site is designated for logistics and freight forwarding uses with the provision of a public vehicle park (PVP). The transacted price reflects ESR's confidence in Hong Kong's logistics market. ESR plans to develop a seven-storey modern logistics facility comprising cold and dry logistics, stating that there will be virtually no new cold logistics supply in the next four years.

The site's particulars and significant restrictions:

Site Address Junction of Mei Ching Road and Container Port Road South, Kwai Chung
Lot Number Kwai Chung Town Lot No. 531
Zoning Other Specified Uses
(Container Related Uses and Underground Sewage Treatment Works with Ancillary Above Ground Facilities)
Site Area Approximately 594,657 sq. ft. (55,245 sq. m.)
Mean Spot Level 4.8 mPD
Permitted Uses
  1. Logistics and freight forwarding
  2. Consolidation and handling of container and break-bulk cargo.
  3. Container loading, unloading, and storage
  4. Cargo screening ancillary to the uses permitted under sub-clause (a)(i) – logistics and freight forwarding
  5. Other ancillary cargo handling facilities (subject to Director’s Approval)
  6. A combination of any of the above uses
  7. Public Vehicle Park
  8. Offices ancillary to any of the permitted uses stated above
Major Special Conditions

Building Covenant: on or before 30 June 2028

The Public Vehicle Park (PVP) is required to provide:

  • No fewer than 117 spaces for the parking of motor vehicles
  • No fewer than 634 spaces for the parking of goods vehicles.
    • No fewer than 433 spaces for the parking of goods vehicles with trailers
    • No fewer than 70 spaces for the parking of light goods vehicles
    • No fewer than 131 spaces for the parking of medium goods vehicles or heavy goods vehicles.
Minimum GFA Approximately 891,259 sq ft (82,800 sq. m.)
Maximum GFA Approximately 1,485,432 sq ft (138,000 sq. m.)
Consideration Noon on 26 August 2022

According to Colliers Research, in H1 2022, despite an economic slowdown, the logistics leasing market saw solid demand from third-party logistics players (3PLs). These players secured the lion's share of recent industrial leasing transactions, mainly seeking prime ramp-access warehouses. During Q2 2022, a few prime warehouses in Kwai Tsing and Tsuen Wan recorded 100% occupancy. Driven by tight availability with solid demand and no new warehouse supply, overall warehouse rents recorded a 1.1% QoQ growth in Q2 2022.

In the government's March 2022 announcement of Kwai Chung Town Lot No. 531's availability for tender, a Transport and Housing Bureau spokesperson remarked on the logistics industry's importance to Hong Kong. The government needs to support modern logistics development and strengthen Hong Kong's role as a regional hub by identifying more suitable sites and unleashing their full potential.

Hong Kong blog CIVAS Land Sale 2209 map

According to the Buildings Department's practice note APP-2 published in 2017, public carparks enjoy a complete Gross Floor Area (GFA) concession if constructed below ground, given that they enable electric vehicle charging. With the Public Vehicle Park (PVP) demands on the subject site amounting to 30%-40% of the development's GFA, it is logical and economical for developers to construct the PVP below ground to better maximise the land's potential.

"According to the Buildings Department's practice note APP-2 published in 2017, public carparks enjoy a complete Gross Floor Area (GFA) concession if constructed below ground, given that they enable electric vehicle charging."

However, the Lands Department issued a Supplementary Information Statement (SIS), not part of the Conditions of Sale, stating that if the PVP or any part thereof is constructed below ground level, its GFA can be excluded from the calculation of total gross floor area subject to the payment of additional premium and administrative fee determined by the Director.

It is clear that the Lands Department intends to charge a premium if ESR wants the GFA exemption for putting the PVP below ground. But what do the Conditions of Sale, which, unlike the SIS, are binding on the purchaser, imply about this issue?

Special Condition (27)(g) of the Conditions of Sale provides that ‘The Director may at his sole discretion in calculating the GFA … exclude the GFA of the PVP or any part or parts thereof that are constructed below the ground level of the lot.' Furthermore, Special Condition (49)(b)(i) provides that:

‘the Director at his sole discretion may – in calculating the GFA of any buildings on the lot … exclude-

  1. ... any floor space that he is satisfied is constructed or intended to be used solely for the parking or for the loading or unloading of motor vehicles ...
  2. any structure or floor space other than that referred to in sub-clauses (b)(i)(I) ... of this Special Condition, which has been excluded by the Building Authority from the calculation of GFA under the Buildings Ordinance provided that the Director at his sole discretion may require the payment by the Purchaser of an additional premium and administrative fee”.

The PVP requires the purchaser to provide at least 117 motor-vehicle parking spaces, and Special Condition (49)(b)(i)(III) mentions any space other than (49)(b)(i)(I) may require paying an additional premium. Based on the extracted conditions from the Conditions of Sale, it seems unclear whether the PVP requires an extra premium.

The Conditions of Sale should be compared to those of Inland Lot No. 9051, located on 2 Murray Road, which contains a similar condition. Inland Lot No. 9051's conditions explicitly state that excluding an underground PVP from the GFA is subject to ‘such other conditions as shall be imposed by the Director including, for the avoidance of doubt, payment of additional premium and administrative fee as shall be determined by the director.’

Since Kwai Chung Town Lot No. 531 Conditions of Sale do not explicitly address the payment of this additional premium, is it logical to assume the purchaser does not have to pay it? Does the SIS, non-binding upon the purchaser, carry enough weight to subject them to an additional premium?

If ESR constructs the PVP below ground, the project will be able to deliver extra logistic space. However, the uncertainty arising from the possible additional premium and its associated lengthy negotiation with the Lands Department might prevent ESR from harnessing the site to its full potential.

Such uncertainty also has a broader implication as the industry has no clear guideline on interpreting the Conditions of Sale – should they be read in conjunction with the non-binding SIS, or do they trump the SIS?

"To reduce this uncertainty, the Lands Department might consider amending the Conditions of Sale to clarify whether any premium is payable for a PVP GFA concession during the tender process."

To reduce this uncertainty, the Lands Department might consider amending the Conditions of Sale to clarify whether any premium is payable for a PVP GFA concession during the tender process.

In addition, we understand that based on the SIS, the Lands Department intends to charge the premium. Although such a premium increases government revenue, it also increases the development timeframe, subjecting developers to a lengthy negotiation process, slowing supply and decreasing profits.

The Lands Department may consider doing away with this payment. That way, the government will obtain a market premium that already reflects the PVP GFA concession, rather than spending time and manpower negotiating the application and hindering the developer from maximising the site's potential.

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