LCQ4: Ocean Terminal Lot

     Following is a question by the Hon Li Wah-ming and a reply by the Secretary for Development, Mrs Carrie Lam, in the Legislative Council today (June 20):


     It has been reported that the Government has reached an agreement with a developer on the lease renewal for the Ocean Terminal lot by way of in-situ land exchange for a lease term of 21 years at a land premium of $7.9 billion and an annual rent of 3% of the rateable value, and approval has been given for the permitted gross floor area of the lot to increase 40% to 920 000 square feet. In this connection, will the Government inform this Council:

(a) of all the information concerning this land exchange and lease renewal, including the terms of the original lease of the Ocean Terminal lot (Kowloon Permanent Pier No. 83); among the terms of the old and new leases of the Ocean Terminal lot (Kowloon Inland Lot No. 11178), the area and size of the lot (illustrated in plans), the lease commencement and expiry dates, user restrictions of the lot, permitted gross floor area of the lot, land premium and rent for the leases, arrangements upon the expiry of the leases, as well as the total floor area for commercial use and that for government use in the new lease of the Ocean Terminal lot (including a new four-storey building permitted to be built), as well as the annual revenue from Government rent expected to be brought to the Government by the new lease;

(b) since it has been learnt that the former Director of Lands had proposed that the Government should lease out the aforesaid lot by way of open bidding upon expiry of the lease, whether the authorities had conducted discussion on that; if they had, of the results; if not, the reasons for that; and

(c) why the authorities have included the operation of the cruise terminal and that of the Ocean Terminal in the new lease of the Ocean Terminal lot instead of separating them into a government lot and a commercial lot, calling for tenders to run the cruise terminal by way of open bidding, and continuing to lease out land for commercial use; how these two approaches compare with each other in respect of their impact on the Government's land revenue; which approach will be adopted for the operation of the Kai Tak Cruise Terminal in the future?



     In accordance with well-established arrangement, the Government in the capacity of lessor (landlord) may, at its discretion, approve an application from a lessee (land owner) for an in-situ land exchange during the validity period of the lease. However, such applications must generally meet certain criteria, including that the government land involved is incapable of reasonable separate alienation or development; that there is no foreseeable public use for the government land concerned; and that developers are required to pay full market value premium.

     The original lease regarding the grant of the Ocean Terminal Lot (originally the Kowloon Permanent Pier No. 83 (KPP83)) to a company owned by the Wharf Holdings Limited (Wharf) expired on June 16, 2012. In 2008, Wharf, without prejudice to its position that it had an alleged entitlement to a renewal of the lease for 50 years at nil premium, submitted an application for an in-situ land exchange by surrendering the KPP83 Lot for the regrant of the same together with a piece of land leased to Wharf under a Short Term Tenancy since 1995.

     The Lands Department (LandsD) processed the land exchange application in a landlord capacity on a basis without prejudice to the interests of the Government (including disagreeing to Wharf's alleged entitlement to a renewal of the lease for a term of 50 years at nil premium). After examining the application at the District Lands Conference and consulting the departments concerned in accordance with the established procedure, LandsD offered Wharf the basic terms of the Conditions of Exchange in July 2010. Subsequently, both sides negotiated the detailed lease terms of the land exchange for implementing the basic terms and the full market premium. On June 4, 2012, Wharf accepted LandsD's offer. The lease of land exchange was executed on June 12, 2012, and Wharf has paid in full the premium of $7.9 billion.

     Regarding the three parts of the question raised by Hon Li, my reply is as follows:

(a) The lease of the KPP83 Lot had long been registered at the Land Registry. The executed lease of the land exchange has been arranged to be registered at the Land Registry for public inspection. The information requested in the question is set out below.

     The lease governing the KPP83 Lot was formally executed on April 17, 1968 for a period of 25 years with effect from June 17, 1966, subject to the payment of an annual rent of $100,000. The lease conditions provided an option of renewal for a period of 21 years. In 1991, upon the lessee's lump sum payment of $400 million of rent, the lease term was extended to June 16, 2012. The lot under the original lease had a site area of about 320 229 square feet (sq. ft.) (about 29 750 square metres (sq. m.)). According to the lease conditions, the lessee shall operate within the lot a commercial ocean terminal, and at the same time provide an area on the ground and first floors not more than 1 000 sq. ft. (about 93 sq. m.) to the then Commerce and Industry Department (i.e. presently the Customs and Excise Department) for accommodating its Revenue Office. Currently, the Ocean Terminal has a gross floor area (GFA) of 61 130 sq. m., comprising 46 001 sq. m. for commercial use (including the 93 sq. m. for the aforesaid Revenue Office) and 15 129 sq. m. for carpark.

     According to the lease of land exchange, the regranted lot, known as Kowloon Inland Lot (KIL) No. 11178, has a site area of about 31 750 sq. m.. Apart from the land under the original KPP83 Lot of about 29 750 sq. m., the site area also includes about 2 000 sq. m. of land let to Wharf by LandsD under a Short Term Tenancy since 1995 (please see Annex). The lot shall be used for a commercial ocean terminal and a vehicular access ramp. Its maximum developable GFA (including a four-storey building to be built mentioned below) is 85 672 sq. m., including not more than 53 632 sq. m. GFA for the commercial ocean terminal; not more than 3 900 sq. m. GFA for the vehicular access ramp; and not more than 28 140 sq. m. GFA for the toll carpark. The above 53 632 sq. m. GFA for the commercial ocean terminal also includes customs office, immigration hall and quarantine facilities to be provided by the lessee for the Government. A minimum net operational floor area of about 1 444 sq. m. is required for these government facilities. According to the information provided by Wharf, in order to meet the above-mentioned request of the Government, the 3 000 sq. m. included in the commercial GFA will be used for government and cruise terminal facilities (including customs and immigration facilities, a quarantine area and a baggage area, etc.). These facilities will be accommodated in a four-storey building to be built by Wharf.

     After deducting about 3 000 sq. m. for government and cruise terminal facilities, the GFA of the regranted lot for commercial use is about 50 632 sq. m., representing about 59% of the maximum developable GFA of the entire lot. Compared with about 46 001 sq. m. commercial GFA currently built by Wharf under the original lease, the additional commercial GFA under the new lease of land exchange is 4 631 sq. m. As can be seen, the site is different from sites used solely for commercial development, whereby about 41% of its maximum developable GFA is actually for non-commercial use. The GFA used for such non-commercial purposes does not attract for Wharf the level of rents equivalent to that used for commercial purposes. Also, the Government will not pay Wharf any rent or fees for using the about 3 000 sq. m. GFA for government and cruise terminal facilities.

     Regarding the lease term, notwithstanding Wharf's wish to have a lease term of 50 years after the land exchange which is the case for ordinary commercial sites, LandsD only granted a term of 21 years, the main consideration being that the lot would be used not only for commercial purposes, but also for cruise terminal facilities. A 50-year term is really too long, as the cruise industry is undergoing development. Certainly, LandsD had also considered that a 21-year lease term would not be an unviable commercial investment option for Wharf.

     The Government had all along insisted that a full market value premium must be paid by Wharf. The premium of this case was professionally assessed in accordance with the established applicable procedure by a Valuation Conference chaired by the Deputy Director of Lands/Specialist and consisted of a team of Estate Surveyors. During the process, the valuers employed professional valuation principles and took into account the terms of the land exchange (including the GFA which could be used for commercial purpose, investment to be made under the terms, a 21-year lease term, etc.) before arriving at the full market value premium of $7.9 billion.

     In addition, Wharf will be required to pay an annual rent of 3% of the rateable value of the lot. According to Wharf's estimate, the ratetable value of the lot for the financial year from April 2012 to March 2013 is about $491 million.

(b) LandsD has looked into its records but cannot find any to show that its former Director ever openly proposed disposal by open tender upon the expiry of the lease on June 16, 2012.

     When dealing with this case, the Government had also considered other options (including open tender), and finally concluded that the land exchange for a 21-year term was appropriate. This is because it could definitely remove the industry's worries about any possible disruption to the operation of the Ocean Terminal and ensure the continuity of the Ocean Terminal's operation. Moreover, the new four-storey building to be constructed by Wharf will provide better cruise terminal facilities in the next 20 years. I notice that according to media reports, many industry practitioners are supportive of the arrangement.

(c) Under the new lease of land exchange, the lot can be used for cruise terminal and commercial purposes. The arrangement is the same as that in the original lease, ensuring the operational viability and continuity of the development of the lot in its entirety.

     As for the new cruise terminal at Kai Tak, it was designed and built by the Government, and leased to an operator for operation by open tender. Before the invitation to tender, the Government consulted the tourism industry and the Legislative Council Panel on Economic Development on the key terms of the leasing arrangements. The tenancy was awarded in March 2012. The tenancy has a term of 10 years, and can be extended by five years subject to the operator's satisfactory performance. The operator is required to pay the Government a fixed rent and a variable rent during the tenancy.

Ends/Wednesday, June 20, 2012
Issued at HKT 15:52