Sluggish property revenues hit Hong Kong fiscal reserves

Read RFA coverage of this topic in Cantonese.

Falling revenue from land auctions — once a mainstay of the city’s fiscal strength — has hit Hong Kong government coffers hard in recent months, resulting in a spike in the fiscal deficit and dwindling fiscal reserves.

Government expenditure between April and July topped HK$242.6 billion (US$31 billion), with revenue at just HK$90.1 billion (US$11.5 billion) over the same period, resulting in a cumulative year-to-date deficit of HK$135.4 billion (US$17.4 billion), the government said.

The government reported a budget deficit of about HK$100 billion (US$12.8 billion) for the fiscal year that ended in March 2024, almost double its earlier estimate.

The latest figures from April through July suggest it could be on track for an even larger hole in public finances in the fiscal year ending March 31, 2025.

Hong Kong reported a budget deficit of HK$257.6 billion for the 2020-21 fiscal year, the largest deficit in 20 years, reflecting huge government expenditures during the early years of the COVID-19 pandemic.

But the deficit, which analysts say is mostly the result of reduced revenues from land auctions and recently cut stamp duties, hasn’t disappeared since then, largely due to a flagging property market and a post-lockdown economic slump.

Fiscal reserves stood at HK$599.2 billion (US$76.8 billion) as of July 31, their lowest level in 14 years. However, the figures have taken into account proceeds and payouts on recent government bond transactions, the government said in an Aug. 30 statement.

Fiscal obligations

Hong Kong is obliged under its constitution, the Basic Law, to avoid deficits by keeping spending within revenue limits, yet the city has reported four deficits in the past five years.

“The government has slowed down the supply of land to give the market time, but the Hong Kong property market is facing structural changes,” Joseph Ngan, former finance channel chief at i-CABLE News, wrote in a recent commentary for RFA Cantonese.

“The effect of the stimulating measures at the beginning of this year has now worn off, and real estate prices have seen further downward pressure in recent months,” Ngan wrote.

“This has impacted developers’ willingness to invest in land, and will eventually mean a huge fiscal deficit.”

The situation has left some government departments charged with managing affordable housing and cultural assets in dire financial straits, including the Housing Authority, which runs the city’s public housing estates, and the Urban Renewal Authority, which spearheads urban redevelopment and refurbishment projects.

Such departments are now in need of fresh injections of capital, analysts said.

The Housing Authority, which relies on public housing rentals and the sale of premium-free Home Ownership Scheme housing as its main income, is in a similar situation. 

Revenue in recent years has been lower than expected, leaving the body with an operating surplus that shrank from HK$12.6 billion (US$1.6 billion) in 2023 to HK$2.6 billion (US$330 million).

Public rental housing revenue is expected to move into the red this fiscal year, with a projected deficit of around HK$2.143 billion (US$276 million) next year. 

Housing construction promised

At the same time, the Hong Kong government has pledged to speed up construction of more than 10,000 subsidized housing units within the next five years, boosting annual construction expenditure by HK$10 billion (US$1.2 billion) to HK$40 billion (US$5 billion). 

The authority has tried to staunch the losses by slashing discounts to its affordable Home Ownership Scheme private sector apartments from 62% last year to just 30% this year, but the move has made it harder to sell the apartments in what was already a difficult market.

Financial commentator Simon Lee said the authority was forced to sell off some of its public housing assets in the wake of the Asian financial crisis of 1997.

“The Housing Authority was the first to be affected when the real estate market froze during the 1997 financial crisis,” Lee said. “Public housing rentals can carry on when the market is strong, but Hong Kong is tied into the public policy model of real estate subsidies.”

He said the government also holds a stake in train and subway operator MTRC, and subsidizes it to build housing and other developments on its land, and around stations.

Meanwhile, the Urban Renewal Authority has been issuing bonds in a bid to raise enough funds.

“Exorbitantly high construction costs and high interest rates, coupled with high prices for previously acquired land … have put considerable pressure on the [Urban Renewal] Authority,” Joseph Ngan told RFA Cantonese’s Free to Talk Finance show.

“The reversal in the real estate market has left a lot of property-related public bodies under tremendous pressure,” he said.

Bond sale

The Urban Renewal Authority’s recent triple-tranche HK$12 billion (US$1.5 billion) senior bonds offering under its US$3 billion Medium Term Note Programme will help to fund its capital expenditure on urban renewal projects and for general corporate purposes, the authority said in an Aug. 21 statement.

The offering was well-received by a diverse group of high-quality local and overseas investors, including banks, asset managers, corporations, insurance companies, hedge funds, central banks, official institutions, family offices and private banks. 

It had a peak combined orderbook of over HK$22.8 billion (US$2.9 billion), representing an oversubscription rate of around 2 times, the statement said.

The bond sale came after the authority suffered its first loss in nine years in 2022/23, totaling more than HK$3.9 billion last year. Projected construction costs this year will run to HK$64.3 billion (US$8.2 billion), but current cash reserves are only HK$18 billion (US$2.3 billion).

The authority has also been allowed to borrow up to HK$25 billion (US$3.2 billion) under government guarantees.

Translated by Luisetta Mudie. Edited by Malcolm Foster.