Is the HK$580 billion cost of creating artificial islands off Lantau worth it?

Ryan Ip, CFA, MRICS | 3 March 2023

IS IT REALLY WORTH IT?

The Government reported the latest progress of artificial islands to the LegCo earlier, with the cost estimate rising to $580 billion. Yet, society has remained divided on the project, and it is hard to draw a definite conclusion. In a bid to assess the benefits more accurately, this article reviewed three major questions raised by the public towards the construction of artificial islands.

QUESTION 1: IS RECLAMATION NECESSARY WITH A PEAKING POPULATION?

According to the Census and Statistics Department, Hong Kong’s population is expected to peak in the coming two decades. Thus, some contend that spending time and money on reclamation is superfluous when long-term housing demands will be tapering off. However, this assertion reflects an utter disregard for the current plight of city dwellers crammed in small flats of exorbitant rents. Also, the estimates have not considered the recent changes in population policies.

The 2022 Policy Address promulgated a multitude of measures to “complete for talents and enterprises” relentlessly. Given its stellar education and medical services, coupled with low tax rates and a favourable business environment, Hong Kong never ceases to draw international elites. The all-out initiatives to compete for talent will conceivably prompt more professionals to settle in Hong Kong. With reference to the Government’s goal, Hong Kong will take in a minimum of 35,000 talents staying for at least one year per annum between 2023 and 2025. The population structure may then change evidently, creating additional housing needs.

Moreover, population forecasts should be viewed with caution. While the baseline scenario indicates that the population will shrink to 7.35 million in 2069, the upper range suggests that the population could reach 8.75 million in 2069. The discrepancy between the two scenarios is an astonishing 1.4 million people. If the population growth reaches the higher end and land supply fails to increase immediately, Hong Kong will see a severe housing shortage. Hence, the Government must build up its land reserves to avoid reliving today’s housing nightmare.

QUESTION 2: IS IT APPROPRIATE TO MAKE AVAILABLE SITES FOR DIFFERENT INDUSTRIES DURING AN ECONOMIC DOWNTURN?

The vacancy rate of commercial buildings has risen amid the pandemic-induced recession, so some do not deem land creation for industries a priority now. Over the past three years, the vacancy rate of offices has tripled to 1.1 million sq. m., and such a staggering figure takes time to deflate. Compounded with the work-from-home trend, long-term demands for offices may change. Therefore, the authorities should consider these trends when planning commercial floor areas on the artificial island.

Nonetheless, Hong Kong’s economy is expected to rebound as business activities revive. Bloomberg survey results show that the median estimate of economists for Hong Kong’s GDP been raised to 3.3%. In addition, CBRE, a commercial real estate consultancy firm, estimates that after the reopening of the border with mainland China, demands solely from Chinese enterprises will grow at a scale of no less than 770,000 sq. ft. per year. With such a robust recovery, Hong Kong must be well-prepared for the imminent upturn in business activities by creating ample space.

Emerging industries, such as the I&T industry, had long been plagued by inadequate land even before the pandemic. In 2013, Hong Kong Science and Technology Parks Corporation promised to offer Google 2.7 hectares of land for its regional data centre. Lamentably, Google turned to Singapore for development lest Hong Kong’s lack of stable land supply hinders its business expansion. This example proves that Hong Kong must devise sustainable land development plans to boost enterprises’ confidence in making long-term investments in the city.

Land supply is just the first step. The Government should formulate industry policies with foresight and set clear goals for emerging industries to blossom in Hong Kong. Moreover, another large-scale project, Northern Metropolis, is introduced concurrently. Understandably, some citizens are confused about the positioning of these two projects. Therefore, the Government should clarify how the two complement each other.

QUESTION 3: HIGH RECLAMATION COST– MONEY GOING DOWN THE DRAIN?

Some are concerned that the high project cost of $580 billion will deplete Hong Kong’s fiscal reserves. Yet, the Government estimates that even in a bleak economy, land sales proceeds are expected to reach $750 billion. Not only can it offset the reclamation cost, but 270,000 jobs can be created through the project. Although some may deem this over-optimistic, such figure at least provides a basis for discussion. To alleviate public concerns, the Government should nevertheless reveal more details and explain the underlying assumptions.

Undeniably, huge resources have been allocated to fight covid-19 and large-scale relief measures. In the face of various challenges, the Government ought to balance its books and manage finance meticulously. Even so, the financial burden incurred by the artificial islands is still manageable. According to the official assumption where the cost of reclamation is to be spread across 20 years, the annual expense is merely around $30 billion, accounting for less than 1/20 of the Government’s total annual expenditure of over $800 billion.

Admittedly, land sales revenue can only be obtained upon the completion of reclamation. Thus, the Government should manage cash flow pressure properly, proactively encouraging market participation through public-private partnerships, Build-Operate-Transfer (BOT) and bond issuance. At the same time, the Government should prudently draft the schedules for reclamation and infrastructure works. Not only is this conducive to calculating the construction cost, but this can also facilitate the market to form reasonable expectations in financing arrangements.

Be it the Cross-Harbour Tunnel, Mass Transit Railway or Chek Lap Kok Airport, infrastructure projects are often dubbed white elephants during the planning stage. Yet, as time passes, the contribution of these controversial projects is beyond dispute. Had it not been for the far-sightedness back then, we would have had to rely on ferries to cross the harbour. That said, public concerns are not entirely groundless. It is hoped that the authorities will publicize more details in due course, shedding more light on cash flow management and industry development initiatives on the artificial islands. ■

THE AUTHOR

Ryan Ip, CFA, MRICS is Vice President & Co-Head of Research with Our Hong Kong Foundation 團結香港基金 . He is a member of the HKSAR government's Land and Development Advisory Committee, and the Advisory Committee on the Northern Metropolis. Ryan was named the Young Surveyor of the Year 2020 by the Royal Institution of Chartered Surveyors.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official position of Proptech Institute, including its directors, employees and affiliates.

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