Maximizing the financial returns by adopting the optimal composition of vertical mixed-use development : a case study on Kwun Tong town centre redevelopment project

Abstract

This paper explores how vertical mixed-use development (VMUD) can be optimized to maximize financial returns in Hong Kong's constrained urban landscape, focusing on the Kwun Tong Town Centre Redevelopment Project - the largest urban regeneration scheme in Hong Kong. Hong Kong's extreme land scarcity, with only 1,106 square kilometres of land for 7.5 million residents, coupled with high-density development pressures and stringent zoning regulations, urgently requires innovative strategies to balance profitability and spatial efficiency. The primary objective was to identify the most economically viable composition and vertical allocation of residential, office, hotel and retail uses in a 100-story building to address the dual challenges of creating a strong revenue stream and mitigating non-linear increases in construction costs. The study demonstrates that a diversified VMUD framework reduces the risk of over-reliance on a single sector, capitalizes on market synergies, and serves as a replicable model for urban regeneration in similarly dense environments. The approach incorporates a multifaceted analytical approach tailored to Hong Kong's unique economic and regulatory environment. The Logit model captures the diminishing marginal returns inherent in vertical expansion, using logarithmic revenue functions (peaks of HK$1.5 billion for residential, HK$1.58 billion for office, and HK$1.85 billion for hotels) to reflect revenue trends derived from local transaction data. A point-by-point maximum analysis identifies the optimal use of each floor by comparing marginal revenue (MR) to marginal cost (MC), while a segmental functional analysis translates these insights into a practical vertical layout. Construction costs were initially based on Indian benchmarks, then adjusted for higher labor costs, material prices and land scarcity in Hong Kong, and based on local projects such as the Central Station and Kowloon Hotel. This adjustment revealed significant cost differences, particularly for hotels, where the complexity of the upper floors resulted in a non-linear increase in costs and therefore the need for strategic allocation. The results of the study recommend a balanced Gross Floor Area (GFA) distribution through vertical subdivision: 1-10 floors for retail to take advantage of pedestrian traffic and high rental yields, 11-40 floors (39) for residential to take advantage of steady demand and moderate cost growth, and 41-65 floors (25) for office to optimize the mid-range of revenues. This configuration generates approximately HK$1,003,614,334 in profit for floors 11 to 100, combining MR and MC dynamics, which outperforms either the predominantly residential (e.g. 50% of the GFA) or commercial alternatives due to reduced revenues and cost inefficiencies on the higher floors. The retail base reinforces the original sequence - retail low, residential medium-low, office medium-high, hotel high as the re-ordering proves less feasible given the residential preference for lower floors and the hotel's reliance on exclusivity. Its impact is not limited to Kwun Tong, but also provides a data-driven blueprint for urban planners and developers in high-density cities to realize flexible GFA frameworks and vertical diversity. However, the limitations of relying on adjusted Indian cost data and the lack of precise retail cost estimates beyond the 10th floor highlight the need for a localized survey. This study highlights the importance of incorporating cost return analysis into VMUD planning, providing a sustainable approach to financial viability in Hong Kong's challenging urban environment.