Understanding Hong Kong’s new land premium policy

The Scheme is likely to have a selective impact, rather than a broad catalyst for non-residential development.

The Lands Department has introduced a three-year pilot scheme on “Pay for What You Build” (the Scheme), effective from 1 June 2026. The Scheme applies to lease modification and land exchange applications for non-residential developments.

Applicants must undertake an Initial Phase comprising at least 60% of the permissible gross floor area (GFA) of the whole development, to be completed in time in accordance with the building covenant. The land premium is assessed on the market value of GFA attributable to the Initial Phase and the "preferred use" of the land proposed by lot owners.

The remaining development potential may be realised through another lease modification within 10 years following completion of the Initial Phase, with premiums assessed at prevailing full market value. Any unutilised development capacity after the 10-year period may be redeployed to elsewhere by the Government.

The Northern Metropolis and policy intent As highlighted in the 2025 Policy Address, the Scheme is linked to the Northern Metropolis. Many planned economic clusters in the Northern Metropolis, particularly industrial and innovation and technology hubs such as the San Tin Technopole, face uncertain and evolving occupier demand. This is further compounded by high vacancy rates and substantial new office supply in urban areas.

Demand uncertainty is further evidenced by the limited number of land exchange and lease modification cases for non-residential uses. According to the Lands Department, only eight non-residential cases were completed between January 2025 and May 2026, excluding technical modifications involving nil premium. Most involved land premiums below $10m, suggesting a cautious investment environment.

Under the conventional land premium assessment mechanism, premiums are assessed based on the maximum permissible GFA and the highest market value as assumed by the Lands Department. Whilst suitable for mature districts, this approach may overstate land value in emerging locations where demand is expected to materialise gradually.

This creates a mismatch between substantial upfront premium payments and uncertain future income streams. High financing costs further increase project risk and may discourage developers from proceeding with investment.

Against this backdrop, the Scheme seeks to recalibrate the risk-sharing framework between the Government and developers. By deferring part of land premium payments, it reduces initial capital commitments, borrowing requirements, and associated interest costs.

The Scheme also facilitates a phased development approach, allowing developers to align construction with actual market demand. This provides flexibility to test tenant uptake before committing to full build-out, mitigating demand uncertainty intrinsic to new economic zones.

Developers may also retain the option not to proceed with the remaining development if market conditions remain weak, avoiding over-commitment of capital, and penalty for breach of the building covenant under lease. These features are intended to incentivise earlier project commencement and enhance market responsiveness in the Northern Metropolis.

Case study – URA option scheme in SingaporeA comparable reference case is Singapore’s Urban Redevelopment Authority (URA) option scheme, first introduced in 2004 for the Marina Bay Financial Centre (MBFC) site. The project comprised approximately 438,000 square metres of mixed-use GFA and formed part of the planned extension of Singapore’s Central Business District. As a reclaimed site, it faced significant uncertainty over future demand.

Under the option scheme, the developer was required to commit initially to at least 100,000 sq. m. of GFA, which is approximately 23% of the total GFA. The developer will purchase an option for the right to acquire subsequent phases at prices fixed by a formula linked partly to market indicators based on the tender bid for the initial phase. The developer has a choice of option periods of six, eight, and 10 years, subject to the payment of corresponding option fees.

This framework shares conceptual similarities with the “Pay for What You Build” approach.

Both aim to address demand uncertainty and high upfront capital requirements by facilitating phased development and deferring financial commitments. In both cases, the Government shares part of the market risk, enabling developers to align investment more closely with actual demand. The Singapore scheme has been widely regarded as successful, facilitating the establishment of Marina Bay as a major extension of Singapore’s CBD.

A key difference lies in the treatment of future land pricing.

Hong Kong assesses premiums for later phases based on prevailing market conditions at the time of subsequent lease modification. In contrast, the Singapore model provides a partially pre-agreed pricing mechanism through its formula-based adjustment. This will provide the developer with some certainty in the price for the subsequent phases and allow the Government and the developer to share the risk of land price volatility.

In short, the Hong Kong approach places greater exposure on developers to future price fluctuations.

Policy considerations Despite its merits, the Scheme may achieve only limited market uptake in the near term given continuing uncertainty over occupier demand in the Northern Metropolis.

First, the requirement for developers to commit at least 60% of the maximum permissible GFA substantially weakens the extent of phased development. In typical urban redevelopment scenarios, where sites are relatively small and projects are often undertaken in a single phase, this threshold necessitates a near full-scale upfront commitment. As a result, the Scheme may offer only modest cash-flow benefits rather than fundamentally altering development risk.

In contrast, large-scale sites within New Development Areas involve significant upfront investment, longer absorption horizons, and heightened demand uncertainty. The requirement to undertake at least 60% of total GFA in the Initial Phase remains substantial relative to demand, particularly in the context of large-scale land supply in the Northern Metropolis. A lower threshold, potentially 20% to 30% of total GFA for some designated areas in the Northern Metropolis, could better accommodate phased development and improve feasibility.

A further issue is the Scheme’s practical applicability. Land within NDAs is now primarily supplied through government land sales, whilst many developers have shown a preference for accepting ex-gratia compensation under government land resumption rather than pursuing lease modifications or land exchanges.

Taken together, the Scheme is likely to have a selective and case-specific impact, rather than serving as a broad-based catalyst for non-residential development. Its success will depend less on the ability to defer land premiums and more on whether it addresses the underlying mismatch between development scale, market demand and investment timing.