Implication of positive covenants embedded in conditions of sales on developer’s profit and bidding behaviour for residential sites in land sale programme : an empirical study in Hong Kong

Abstract

The study addresses the impact of restrictions and conditions on bidding behaviour and outcome in a sealed-bid auction. The Hong Kong’s Land Sale Programme (LSP) was selected as the testing ground for the study. In view of the recent phenomena of the land market in Hong Kong, low participation rate, and frequent cases of tender withdrawal, this study explained the phenomenon using the correlation between Positive Covenants (PCs) and bidding behaviour and developer’s profit. This study reviewed 51 tender sites disposed of through the LSP from 2018 to 2023 and a total of 2614 residential units that were transacted to first-hand buyers. The multiple regression models failed to reject the initial hypothesis and underscored the significant role of PCs, alongside market factors, in shaping developers’ profit and bidding behaviour. The study reveals possible overbidding by developers in recent land auctions, as a substantial portion of transacted residential units fails to meet profit thresholds. 77% of units did not meet the 15% developer’s profit threshold. Tender sites with GAs were especially underperforming, they accounted for 99% of the underperforming units. Despite the notable effect of the interest rate, the role of GAs in influencing developer’s profit was not negligible. The presence of PCs, including government accommodations (GAs) and Impact Assessments (IAs) has significantly reduced the profitability attained by developers. Land associated with GAs and IAs contributed to the drop in the number of tender bids received. a 1% increase in LDR reduces the number of bids by 160%. The number of IAs also had a notable impact in reducing the bidding appetite. An additional IA lowers the number of bids by 14%. Positive correlations are observed between the LDR, number of IAs, and bidding dispersion, with a respective effect of 220% and 48%. GA that poses less or even a positive impact on the neighbourhood widens the spread while GA that is deemed undesirable reduces the spread. Meanwhile, this study shed light on the recent implementation of the Minimum Flat Size Requirement (MFSR). This new policy further restricted developer’s flexibility in development, thereby increasing their transactions cost. As a result, the MFSR reduced the developer’s participation rate in a land auction and created a greater divergence in the tender amounts submitted by bidders. This study uncovers the influence of PCs in reducing developers’ profit and bidding appetite, which in turn explains the current hurdles of the LSP. Policymakers and real estate practices can leverage on these implications to develop effective strategies for enhancing the effectiveness and efficiency of the land market.