An analysis of the policy on the revitalisation of industrial buildings in Hong Kong

Abstract

Industrial land use policies have successively been introduced to tackle problems of excessive industrial space and fire hazard due to infiltration of incompatible uses within industrial buildings, the latest being the revitalisation policy. It is arguably the most significant policy with concession on waiver fees payable for changing industrial into non-industrial uses. The thesis attempts to address two related research questions. First, what are the main difficulties involved in the wholesale conversion of industrial buildings under multiple ownership? Second, what factors influence owners’ decision to revitalise buildings under single ownership? Basically, the revitalisation policy is an offer to reassign property rights stipulated in the land lease, a contract between Government and the private owners, and an attempt to reduce transaction costs to facilitate change of use in industrial buildings. The research discovers that all the executed cases of wholesale conversion are not under multiple ownership. Based on transaction cost, incomplete contract and collective action theories, a host of difficulties namely knowledge asymmetry, wealth-constrained and risk-averse of minority owners vis-à-vis the majority owners, insufficient incentives, tedious bargaining and negotiation process, high cost of patrolling and enforcing against incompliant uses by Government, predicaments in entering into contracts with cost and profit-sharing ex ante, have been identified. All these are transaction costs of one kind or another, thus reaffirming the corollaries of Invariant and Optimality of Coase Theorems that positive transaction costs will affect resource allocation and Pareto optimality. With high transaction costs to reach a consensus among owners to convert buildings in fragmented ownership, the study concludes that collective actions requiring participation and cost sharing of all members of a group is a non-starter, if it is to be undertaken on a voluntary basis. This conclusion has wider implications in public policy formulation. A Probit Model analysing building age, number of street frontages, accessibility and size of building floor plates under single ownership in influencing owners’ decision to convert buildings has been conducted. Only accessibility is proven significant statistically. Accessibility is location specific and affects the value of alternative uses of the industrial building. For buildings with single owners, about one-third have been approved for conversion to higher valued uses, thus optimising the use of their buildings. Similarly, another 12% are used for high-in-demand facilities like storage, logistics and distribution centres. More than half of the industrial buildings in single ownership remain status quo even after the transaction cost for the change of land use has been lowered by the revitalization policy. These buildings are mainly in locations with poor accessibility and hence the benefit of converting the building to non-industrial uses is too low compared with the transaction cost involved and thus nothing happened to these buildings. Following Coase’s pathbreaking idea of studying the role of transaction costs in explaining real world phenomena, this research concludes that such costs are responsible for the lack of wholesale conversion for buildings under multiple ownership and to a lesser extent, those in single ownership. Future policies that intend to improving the efficiency of using the land resource should aim at reducing the relevant transaction costs.