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Land Use Planning for the Closed Area – Feasibility Study Appendix L - Financial Assessment
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Agreement No. CE 60/2005 (TP)
Land Use Planning for the Closed Area – Feasibility Study
Financial Assessment
Contents
Page
1 INTRODUCTION 1 1.1 Background 1 1.2 Objectives 1 1.3 Limitations 1 1.4 Report Structure 1 2 APPROACH AND METHODOLOGY 2 2.1 Methodology 2 2.2 Assumptions 2 2.3 Key Assumption Summary 5 3 ANALYSIS 7 3.1 Introduction 7 3.2 Land Revenue 7 3.3 FCA Whole Development Area 10 3.4 Visitor Revenue 11 4 DISCUSSION AND CONCLUSIONS 13 4.1 Discussion 13 4.2 Conclusions 14 A1 Construction Costs 16 A2 Property Transactions Record 22 A2.1 Eco-lodge Bungalows 24 A2.2 KNP Residential 24
Land Use Planning for the Closed Area – Feasibility Study Appendix L - Financial Assessment
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Tables
Table 1 Development Cost Variables and Data (2010 Prices) Table 2 Summary of Other Costs Table 3 Key information of the Eco-lodge Bungalow Table 4 Key information of Kong Nga Po Residential Development Table 5 Construction period Table 6 Key Assumption Summary – Base Case Table 7 Ma Tso Lung Eco-lodge Bungalows (Discount Rate 7%) Table 8 Kong Nga Po Residential (Discount Rate 7%) Table 9 Ma Tso Lung Eco-lodge Bungalows with Infrastructure (Discount Rate 7%) Table 10 Kong Nga Po Residential with Infrastructure (Discount Rate 7%) Table 11 Kong Nga Po Residential with Infrastructure and Environmental Mitigation (Discount Rate 7%) Table 12 Base Scenario Results (Discount rate 7%) Table 14 2008 Visitor Arrivals and Same-day In-town Visitors in Hong Kong Table 15 Same day In-town spending (HK$ per day) Table 16 Spending Category for Same-day In-town Tourism
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2 APPROACH AND METHODOLOGY
2.1 Methodology
2.1.1 Model
The cost-revenue analysis has been undertaken to evaluate the financial implication of the preliminary planning scenario for the FCA. It comprises two separate components:
- Estimating average land value for the Eco Lodge and Kong Nga Po Residential Development;
- Estimating a net cash flow for the entire FCA that includes both land revenue from sale of the Eco Lodge and Kong Nga Po Residential Development and remaining FCA infrastructure costs. Quantifiable cost and revenue components over the entire assessment period are identified and entered at the relevant time period in a discounted cash flow model to calculate Present Value (PV) costs and revenues. The total PV cost and revenues are compared against each other and the difference represents the Net Present Value (NPV) of the development plan. In outline, the approach is as follows:
- Estimate and phase over time the costs incurred over the duration of the assessment period which is until 2030;
- Phase the revenue generated from land sales over the same period at the appropriate interval;
- Calculate a time profile of net revenues (revenues less costs);
- Calculate performance measures of Net Present Value and Revenue-Cost Ratio;
- Compare and contrast the findings; and
- Undertake sensitivity analysis of key parameters (construction costs and discount rate). In addition to the above, revenues generated by visitors to the area were also estimated. 2.1.2 Residual Value Method The residual method of valuation is used to estimate land value based on estimates of the Gross Development Value (GDV), which is equivalent to the current market value of the development. The land value is represented by the difference between the GDV and the total costs involved (e.g. construction costs, professional team fees, finance costs, marketing costs, developer’s profit). Comparison with similar properties has been used to benchmark residential property prices and hotel room tariffs. Other variables such as construction period and void period are also taken into account. The land value estimate is dated February 2010.
2.2 Assumptions
The variables and assumptions underpinning the analysis are described further in the remainder of this section. 2.2.1 Construction Costs A summary of the assumed construction costs for the preliminary planning scenario are summarized in Table 1 and provided in detail in Appendix 1.
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Table 1 Development Cost Variables and Data (2010 Prices) Proposal Cost (HK$M)
1. Eco Lodge and KNP Residential Eco Lodge 239. KNP Residential Development 1,766. Eco Lodge and KNP Residential Total 2006. 2. FCA Infrastructure Adaptive Re-use of Public Schools 137. Drainage, Sewerage Treatment Plant, Pumping Stations and Associated works, and waterworks
Road Improvement including Cycling Track, Hiking Trail and Heritage Trail 467. Environmental Mitigation Measures 611. Total Infrastructure Costs 2208. Total Costs 4,214. Note: Costs for Eco-lodge Bungalows and KNP Residential Development included above are used for land valuation only. It should be noted that all costs include a 25% contingency to cover potential uncertainties at this preliminary stage. 2.2.2 Other Costs
In additional to the construction costs, the professional team fees, marketing costs and developers profit are summarized in Table 2. Table 2 Summary of Other Costs Item Data Professional team fees 6.0% of the Construction costs Marketing costs for Eco-lodge (hotel) 1.0% of the GDV Marketing costs for Residential 1.5% of the GDV Profit on Costs 25% of Costs Profit on Land 25% of the Land value
2.2.3 Revenue
Estimation of Gross Development Value (GDV) of the Eco-lodge Bungalows is based on the method of summation to perpetuity, which is GDV = Annuity / discount rate Where: Annuity = per night room tariff * total number of rooms * Occupancy * Eco Lodge The Hong Kong Tourism Board (2009) reports the average room tariff in full year 2008 for High Tariff B Hotels in Hong Kong was approximately HK$1,100 per night, with a fluctuation between HK$858 to HK$1,224, while the average room tariff for all the hotels in Hong Kong is around 1,200. The average annual hotel occupancy for hotels across Hong Kong was 85% while the average annual occupancy in districts other then Central/Admiralty, Wan Chai/Causeway Bay, Tsim Sha Tsui and Yau Ma Tei/Mong Kok was 84%. An average annual occupancy of 84% has been adopted in the analysis.
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2.2.5 Void Period
The length in void period (period between completion of construction and sale) for the KNP residential and Ma Tso Lung eco-lodge developments is assumed to be 1 year for both developments, with marketing occurring during the construction period. 2.2.6 Construction Period Table 5 summarizes the construction period of all the proposed developments. Construction of Kong Nga Po Residential and Eco Lodge are not scheduled to commence until 2020. Table 5 Construction period
Proposal (^) Commencement DateConstruction Estimated ConstructionCompletion Date
Construction Period for Kong Nga Po Residential 2020 2023 Construction Period for Eco-lodge 2020 2023 Construction Period for Lung Kai Public School - 2017 Construction Period for Sam Wo Public School - 2017 Construction Period for King Sau Public School - 2017 Construction Period for Kwan Ah Public School - 2017 Construction Period for Hiking Trail 2014 2017 Construction Period for Heritage Trail 2014 2017 Construction Period for Cycle Track - 2023 Construction Period for Drainage and Sewerage Works -^2023 Construction Period for Water Supply Works - 2023 Construction Period for General Road Improvement - 2023 Construction Period for Village Access Road - 2017 Construction Period for Traffic Restriction Works for Lok Ma Chau Spur Line BCP -^2012 Construction Period for Traffic Restriction Works for Man Kam To BCP -^2015 Construction Period for Sha Tau Kok BCP - 2011 Construction Period for Traffic Restriction Works for Lo Wu Station BCP -^2015
2.2.7 Land Sale
It is assumed that the land sales of the KNP residential development and Ma Tso Lung eco- lodge will take place 1 year in advance of the construction period, i.e. 2019. 2.2.8 Discount Rate
The base scenario discount rate is 7% real. It is referenced to the current HSBC HK best lending rate as at 10 th^ Nov, 2008, which is 5%, plus an additional 2% risk premium incurred by the developer.
2.3 Key Assumption Summary
A summary of the key assumptions adopted in the analysis are listed below
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Table 6 Key Assumption Summary – Base Case Item Assumptions Real Discount Rate 7% Capital expenditure profile Year 1 – 34%, Year 2 – 33%, Year 3 – 33% Assessment period 20 years - 2010 (Year 0) to 2030 (Year 20) Land Sale Date for Tso Ma Lung Eco-lodge-proposed land 2019 Land Sale Date for Kong Nga Po residential-proposed land 2019 Construction Period of Tso Ma Lung Eco-lodge 2020- Construction Period of Kong Nga Po Residential 2020- Costs Price Year 2010 Construction Costs for Eco-lodge and Residential HK$2,006 Million Construction Costs for other Development Proposals and Road Improvements
HK$2,208 Million
Professional team fee 6% of the total Construction costs Marketing costs for Eco-lodge (hotel) 1% of the GDV Marketing costs for Residential 1.5% of the GDV Profit on Costs 25% of Construction costs and Professional team fee Profit on Land 25% of the Land value Revenue Per night Room Tariff (Bungalow) HK$1, Bungalow Occupancy 84% HK$ per m² (Residential) HK$36,
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Table 8 Kong Nga Po Residential (Discount Rate 7%) Item $ $
Gross Development Value (GDV) 3,402,000, Saleable Area (105,000 sq.m)*90% ER Price per sq.m 36, PV@ 7% for 3 years 2,777,045,
Less Marketing Costs (1.5% of GDV) 41,655, 2,735,389, Less Costs Construction Costs 1,766,062, Professional Team Fee (6% of construction costs) 105,963, Profits on Costs (25%) 468,006, 2,340,032, PV@ 7% for 2 years 2,043,875, 691,514, Profit on Land (25% of land value) 138,302,
553,211, Land Value, say 553,000, AV ($/sq.m) 5,
3.2.2 Sensitivity Tests Sensitivity tests were undertaken to assess the implications if various infrastructure costs were assumed to be borne by the developer. 3.2.2.1 Eco Lodge
Sensitivity test for the Eco Lodge as shown in Table 9 was undertaken by assuming some of the infrastructure costs (approximately HK$30 Million including minor road improvement, drainage, waterworks, sewerage and STP) were borne by the developer. Under the assumptions adopted, the government would need to subsidize the full value of the land compared to the base case in order to make the Eco Lodge attractive to a potential developer if they had to bear the additional infrastructure construction costs. Table 9 Ma Tso Lung Eco-lodge Bungalows with Infrastructure (Discount Rate 7%) Item $ $
Gross Development Value (GDV) 385,440, Number of Rooms (80) Occupancy per year (84%) PV@ 7% for 3 years 314,633,
Less Marketing Costs (1% of GDV) 3,146, 311,487, Less Costs Construction Costs 269,417, Professional Team Fee (6% of construction costs) 16,195, Profits on Costs (25%) 71,528, 357,640, PV@ 7% for 2 years 307,169, 4,318, Profit on Land (25% of land value) 863, 3,454, Land Value, say Nil AV ($/sq.m) 0
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3.2.2.2 KNP Residential Development
Sensitivity tests for KNP Residential Development were undertaken by assuming some of the infrastructure costs are borne by the developer. These include:
- Related infrastructure costs valued at approximately HK$124 Million including road improvement, drainage, waterworks, sewerage and STP (Table 10); and
- Related infrastructure costs together with environmental mitigation measure costs valued at approximately HK$ 252 Million (Table 11). Under the assumptions adopted, the government would need to subsidize approximately 20% of the land value compared to the base case in order to make the KNP Residential Development attractive to a potential developer if they were to bear the additional infrastructure costs (Table 10). The land value would need to be subsidised by around 40% compared to the base case if the developer was to bear both the infrastructure and environmental mitigation costs (Table 11). Table 10 Kong Nga Po Residential with Infrastructure (Discount Rate 7%) Item $ $
Gross Development Value (GDV) 3,402,000, Saleable Area (105,000 sq.m)*90% ER Price per sq.m 36, PV@ 7% for 3 years 2,777,045,
Less Marketing Costs (1.5% of GDV) 41,655, 2,735,389, Less Costs Construction Costs 1,879,662, Professional Team Fee (6% of construction costs) 112,779, Profits on Costs (25%) 498,110, 2,490,552, PV@ 7% for 2 years 2,175,345, 560,044, Profit on Land (25% of land value) 112,008,
448,035, Land Value, say 448,000, AV ($/sq.m) 4,
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3.4 Visitor Revenue
Visitor revenue^1 has been calculated by the estimated per visitor expenditure multiplied by the estimated number of visitors. Table 13 summarizes the estimated number of visitors within the whole development area. The estimated number of visitors for the planned cemetery on both Ching Ming/Chong Yeung Festivals has been excluded. Table 13 Summary of Tourism Items Item Development Total no. of visitors per year Eco-lodge Bungalows 47, Adaptive Re-use of Public School Holiday Camps 73, Agri-tourism Farms 40, Recreational - 110, Country Park - 270, Hiking Trail - 220,000* Bicycle Trails - 500, Heritage Trail - 270, Total 1,530, *Section of the hiking trail is contained within the country park. Therefore the number of visitors in the hiking trail has been reduced to avoid double counting as they are already included in the country Park estimates.
Information from the Hong Kong Tourism Board in 2009 is presented in Table 14 which shows that the total visitor arrivals in 2008 was 29,506,616, of which 41.3% (12,186,231) were classified as “same-day in-town” visitors. Table 14 2008 Visitor Arrivals and Same-day In-town Visitors in Hong Kong
Market Region 2008 Visitor Arrivals Same-day In-town Visitors Mainland China 16,862,003 6,964, Australia, New Zealand and South Pacific 763,206 315, South and Southeast Asia 2,936,207 1,212, Europe, Africa and Middle East 2,094,039 864, North Asia 2,229,117 920, The Americans 1,684,734 695, Taiwan 2,240,481 925, Others 696,829 287, Total 29,506,616 12,186,
Source: Monthly Report – Visitor Arrivals Statistics: Dec 2008, Hong Kong Tourism Board (2009)
(^1) The revenue figure represents gross receipts, which include the intermediate inputs of the businesses
concerned in addition to the value added they produce. Moreover, as spending by both local residents and incoming tourists in the Closed Area will crowd out part of their other expenditure, the overall increase in business receipt for the whole Hong Kong economy will be smaller than the visitor revenue generated in the Closed Area
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Information from the Hong Kong Tourism Board and shown in Table 20 suggests that the average same day in-town spending for overseas visitors from different part of the world arriving in Hong Kong was HK$770 per day. Table 15 Same day In-town spending (HK$ per day) Market Region HK$ per day Mainland China 2, Macau SAR 1, Australia, New Zealand & South Pacific 574 South & Southeast Asia 458 Europe, Africa & the Middle East 409 North Asia 394 The Americans 339 Taiwan 268 Average 770 Source: Press Release on 9 th^ April, 2009, Hong Kong Tourism Board The Hong Kong Tourism Board also provides a breakdown of tourism related expenditure which is shown in Table 16. Between 2003 and 2007, expenditure on meals outside hotels and other items (travel, tours, recreation etc) accounted for 15.1% on average of the total same-day in-town tourism spending. This suggests from an average expenditure of HK$770 per visitor, HK$116 is spent on outside meals and other expenses which has been used to represent both local and international tourists. Table 16 Spending Category for Same-day In-town Tourism Category / Year 2003 2004 2005 2006 2007 Average Meals Outside Hotels 7.6% 7.4% 7.3% 5.9% 6.2% 6.9% Others 9.4% 8.9% 8.9% 7.5% 6.7% 8.2% Hotel Bills 1.2% 0.9% 1.2% 1.1% 6.2% 2.1% Shopping 81.8% 83.1% 82.6% 85.5% 86.2% 83.8% Source: Tourism Expenditure Associated to Inbound Tourism 2007, Hong Kong Tourism Board (2008) In estimating the total expenditure from visitors to the FCA, the following assumptions have been made:
- Total visitors per year is 1,529,900, spending HK$116 each;
- One in two of the 46,720 pay for accommodation at the Eco Lodge at HK$1,100 per night. The estimated visitor revenue generated in the whole development area is approximately HK$201 Million per year.
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FCA will create employment opportunities for suppliers of goods and services. Employment opportunities will also be created over the longer term for businesses associated with tourism.
4.2 Conclusions
The financial assessment of the preliminary land use planning of the Closed Area is based on current conditions which reflect the estimated costs, real estate values and borrowing rates. The results suggest that development of the eco lodge and KNP residential area is theoretically feasible at this preliminary stage. The actual attractiveness of the land to the private sector in the future will depend on conditions at that time, including costs for construction, financing, demand and type of such developments that in turn influence the expected price and room tariff structures. The cost for land could also be examined as a further means for enticing interest from developers. A number of proposed developments are underway in the area including NENT, Lok Ma Chau Loop and Sha Tau Kok. Once completed, these developments will have positive implications for transport infrastructure, economic connectivity with the mainland, and the local population and businesses. All of these factors will have an influence on the demand and supply for residential and hotel type developments. Finally, there are further benefits from the development of the Closed Area to the community including substantial visitor revenues.
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REFERENCE
(1) Arup (2009) Land Use Planning for the Closed Area – Feasibility Study Working Paper No.4 – Board Technical Assessments. Hong Kong (2) Arup (2009) Land Use Planning for the Closed Area – Feasibility Study Working Paper No.5 – Draft Development Plan, Hong Kong (3) HSBC HK (2008) Best lending rate since 10 th^ Nov, 2008 (4) Hong Kong Tourism Board (2008) Tourism Expenditure Associated to Inbound Tourism 2007 (5) Hong Kong Tourism Board (2009) Monthly Report – Visitor Arrivals Statistics: Dec 2008 (6) Hong Kong Tourism Board (2009) Press Release – Tourism Spending Exceeded HK$158 Billion in 20080, 9 th^ April, 2009 (7) Midland Realty (2009) Transaction Record – Royal Palm, One Hyde Park, Rolling Hills and Green Crest, May 2008 to April 2009 (8) Southwark Property Development & Regeneration Business Unit (2005) Southwark Affordable Housing Valuation Research. Council Offices, London
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Item Location Proposal Cost Estimate(HK$M)
19 Hung Lung Hang Residential development
150mm Twin Rising Main from Hung Lung Hang Residential development
20 Kong Nga Po CDA 300mm Gravity Sewer from Kong Nga Po CDA to PS3 at Man Kam To Road
21 From Chow Tin and Fung Wong Wu to junction of Lin Ma Hang Road with Ping Che Road
250mm Twin Rising Main from Chow Tin and Fung Wong Wu to junction of Lin Ma Hang Road with Ping Che Road
22 Along Ping Che Road 750mm twin rising main along Ping Che Road conveying sewage flows from PC/TKL NDA and Tong Fung village
23 From Ping Che Road to new STW in PC/TKL
900mm Gravity Sewer from Ping Che Road to new STW in PC/TKL
24 From San Kwai Tin to Lin Ma Hang village
150mm Gravity Sewer from San Kwai Tin to Lin Ma Hang village
25 From Lin Ma Hang to Pak Fu Shan
375mm Gravity Sewer from Lin Ma Hang to Pak Fu Shan
26 From Heung Yuen Wai/Ha Heung Yuen to Lin Ma Hang Road
150mm twin rising main from Heung Yuen Wai/Ha Heung Yuen to Lin Ma Hang Road
- From Pak Fu Shan to STW along Lin Ma Hang Road
375mm Gravity Sewer from Pak Fu Shan to STW along Lin Ma Hang Road
- Along Lin Ma Hang Road to STW
450mm Gravity Sewer along Lin Ma Hang Road to STW
- Shek Wu Hui STW Expansion/upgrade of Shek Wu Hui 177.
- New STW at PC/TKL NDAs
New STW at PC/TKL NDAs 322
- Sha Tau Kok STW Expansion/upgrade of Sha Tau Kok STW (ADWF – 1296m^3 /s)
- Hung Lung Hang Residential Development and San Uk Ling
New Pumping Station at Hung Lung Hang Residential Development and San Uk Ling
- Bicycle track, heritage and hiking trials
Sewage Treatment Facility for sewage generated from Bicycle track, heritage and hiking trial users
- Village Village Sewer – 150 mm 29.
- Village Village sewer – 225mm 36.
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Item Location Proposal Cost Estimate(HK$M)
Road Improvement 36 Modification work of the Sha Tau Kok Road to match with the traffic restriction plan for the Sha Tau Kok Control Point
Relocation of police checkpoint, provision of roundabout and the associated traffic signs at Sha Tau Kok Road
37 Modification works of the existing roads to match with the traffic restriction plan for the Lok Ma Chau Spur Line Control Point
Provision of hammerhead at Lung Hau Road, roundabout at Ha Wan Tsuen Road, relocation of police checkpoint and the associated traffic signs
38 Modification work of the existing roads to match with the traffic restriction plan for the Man Kam To Control Point
- Provision of mini roundabout and signalized junction and the associated traffic signs (except widening of Man Kam To Road).
- Expansion of vehicle holding area and removal of the existing police check point
39 Modification work of the existing Lo Wu Station Road to match with the traffic restriction plan for the Lo Wu Station Control Point
Provision of roundabout at existing Lo Wu Station Road
40 Improvement of Kong Nga Po Road (1.9km)
- Upgrading of the existing single 2 carriageway (1.2km) to TPDM standard (the section near Man Kam To Road) and widening the existing single track carriageway to Single 2 lanes Carriageway (2 way) (0.7km)(the section between the Kong Nga Po development and OU(rural use) area)
- Provision of footpath on both sides of the carriageway
- Sloping works
- Road repaving
41 Improvement of Lin Ma Hang Road (section between San Uk Ling and Ping Che Road) (about 0.55km)
- Provision of footpath
- Provision of 4m wide cycle track (between Ping Che Road and Wang Lek)
- Extensive slopeworks
- Widening the carriage to Single-2 (about 550m)
42 Improvement of Lin Ma Hang Road (section between Ping Che Road and Pak Fu Shan) (about 1.9 km)
- Provision of footpath
- Extensive slopeworks
- Widening the carriage to Single-2 (whole length)
- Provision of 4m wide cycle track (between Ping Che Road and Wang Lek)
