A rare 999-year leasehold in world's costliest city makes US government one of Hong Kong's biggest foreign real estate owners

By Sandy Li sandy.li@scmp.com

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June 30, 2020 4:45 PM SGT

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In April 1999, less than two years after Hong Kong returned to Chinese sovereignty, an unusual real estate deal was signed between the city's administration under then Chief Executive Tung Chee-hwa and the US government.

The contract extended the 75-year leasehold land at 26 Garden Road in Central " provided in 1950 by the former British colonial government to the United States as the American Consulate General's office in the city " into a 999-year lease for a lump sum of HK$44 million, according to a document from Hong Kong's Lands Department.

An option stated in the 1950 lease that could allow the US to buy the plot as freehold property was scrapped in 1999 and replaced with the long fixed lease, the government said in response to a South China Morning Post query.

US government offers to sell six Hong Kong mansions valued at US$645 million

"It is rare to see such long land leases in Hong Kong after 1997," said Lilian Chiang, senior partner at law firm Deacons. Almost every plot in the city is a leasehold, except for the St John's Cathedral, she said. The city government's land sales are for 50-year leasehold terms.

A leasehold title that lasts almost a millennium in the world's priciest commercial property district values the US Consulate General's office at HK$24.7 billion, the crown jewel of a real estate portfolio estimated at up to HK$41 billion (US$5.3 billion). That makes the US government one of the biggest foreign property owners in Hong Kong, with its holdings of villas and flats " mostly bought while Hong Kong was a British colony " more than 10 times larger than the HK$3 billion of property registered under Beijing's representative office in the city.

Image of the Consulate General of the United States of America (US Consulate) (centre front) and the Department of Justice Building (centre back), at the Cotton Tree Drive in Central on 18 August 2018. Photo: Roy Issa alt=Image of the Consulate General of the United States of America (US Consulate) (centre front) and the Department of Justice Building (centre back), at the Cotton Tree Drive in Central on 18 August 2018. Photo: Roy Issa

The value of the US government's holdings in Hong Kong underscores what's also at stake for America, as President Donald Trump threatens to eliminate special policy exemptions for Hong Kong in retaliation for the Chinese legislature's draft of a national security law for the city.

US Secretary of State Mike Pompeo said the proposed law undermines Hong Kong's "autonomy from China", a description that calls for the city to be given the same trade and customs treatment as China. The special treatment for Hong Kong must be preserved despite mounting pressure to change that status, the American Chamber of Commerce said.

Six months before Hong Kong's 1997 official handover to China, the US government notified the city's administration that it wanted to exercise the option in its 1950 lease, and buy its Consulate General site as a freehold plot. That offer was rejected. Two years later, the city government under the first Chief Executive Tung proposed to remove the freehold option and replace it with a 999-year lease, according to the Lands Department.

"The grant of freehold was contrary to the land administration policy prevailing at that time. After consulting legal advice and with due respect to the spirit of the contractual obligation under the lease, the Hong Kong government, upon obtaining the endorsement of the Executive Council in 1999, agreed with the grantee that in lieu of the purchase of freehold interest, a lease modification of the lease was made to provide for a long but fixed term in place of "freehold" without an end date," the Lands Department said in an email response to South China Morning Post.

"The subject lease modification was the only case handled by Lands Department since 1999, and it was the only case involving the grant of a new lease term of 999 years to replace the original contractual option of purchasing freehold interest."

US consulate land deal was started just before handover in 1997

The plot, squeezed between the official residence of Hong Kong's Chief Executive and the local government's main office building, measures 61,700 square feet (5,700 square metres).

If it is rebuilt into high-rise homes, the plot can yield 617,000 sq ft in gross floor area valued at HK$24.7 billion. As offices, the site can yield 925,500 sq ft valued at HK$32.4 billion based on current market prices, said Vincent Cheung, managing director of Vincorn Consulting and Appraisal.

"Valuation of the plot will be boosted significantly as it is literally free to sell on the market," Cheung said. "It can be redeveloped into residences or offices once it secures the approval from the Town Planning Board."

An aerial view of the cluster of six multistorey mansions at 37 Shouson Hill Road on Hong Kong Island on 30 May 2020. Photo: Martin Chan alt=An aerial view of the cluster of six multistorey mansions at 37 Shouson Hill Road on Hong Kong Island on 30 May 2020. Photo: Martin Chan

In addition to the Garden Road site, the US government owns six multistorey mansions at 37 Shouson Hill Road, valued at between HK$3.1 billion and HK$5 billion. A sale by tender closes on July 31. It offered little new comment for this story.

"The State Department's Bureau of Overseas Buildings Operations regularly reviews the US Government's overseas real estate holdings as part of its global reinvestment programme," a US State Department spokesperson said on May 30 in a written reply. "As part of that programme, the State Department has decided to sell the Shouson Hill property, and at the same time, invest in enhancing other US Government-owned assets in Hong Kong, including the Consulate General's office building."

Another property is 3 Barker Road, near the German-Swiss International School and the residence of the city's secretary of justice. Valued at HK$3 billion, it is now the official residence of the US government's top representative in Hong Kong.

The official residence of the US Consulate General on 3 Barker Road, The Peak, on 19 June 2020. Photo: Winson Wong alt=The official residence of the US Consulate General on 3 Barker Road, The Peak, on 19 June 2020. Photo: Winson Wong

Separately, consular staff are housed in 13 flats at the 25-storey Wilshire Park building on 12-14 MacDonnell Road at the Mid-Levels, completed by Henderson Land Development in 1989. The flats, each measuring 2,250 sq ft, were bought for a combined HK$106 million in 1992, including 14 car-parking lots. Now they are valued at HK$700 million in total, according to Pruden, a local property consultancy.

A short drive away, the US government also owns a 3,340 sq ft flat at Grenville House on 1 Magazine Gap Road, valued at HK$140 million, more than 80 times the HK$1.7 million purchase price in 1979. The project, completed in 1972, was a venture between the now-defunct Goodyear Group and National Developments of the late Henry Fok.

At 43 Cloud View Road near the Shue Yan University and the Tin Hau Temple Road Garden, the US government is the registered owner of a 2,000-sq ft flat at Hangking Court valued at HK$40 million. It was bought in 1976 for an undisclosed price.

Grenville House on 1 Magazine Gap Road at the Mid-Levels, on 19 June 2020. Photo: Winson Wong alt=Grenville House on 1 Magazine Gap Road at the Mid-Levels, on 19 June 2020. Photo: Winson Wong

Asked about the US government's total real estate holdings in Hong Kong, a consular spokesman directed the Post to the May 30 email statement about Shouson Hill, referring to the regular reviews by the Bureau of Overseas Buildings Operations.

To be sure, the US government was not merely a net buyer over the years, disposing of some property to lock in its earnings. Five homes were sold for a total of HK$120 million in 1982 and 1983, according to Lands Department records. They included 11 Coombe Road, 1 Peak Road on The Peak, and 2 Island Road at Deep Water Bay.

Wilshire Park, on 12-14 MacDonnell Road at the Mid-Levels in Hong Kong on 19 June 2020. Photo: Winson Wong alt=Wilshire Park, on 12-14 MacDonnell Road at the Mid-Levels in Hong Kong on 19 June 2020. Photo: Winson Wong

"It is not surprising that the US government has a larger property interest in Hong Kong compared with other foreign countries," Vincon's Cheung said.

The Central Liaison Office, the Chinese government's official representative in Hong Kong, owns 722 flats, 12 offices, eight commercial sites, 10 buildings and 15 car-parking lots in the city valued at HK$3.4 billion, local activist group Demosisto said in April, citing its own research.

Lands Department data showed a smaller portfolio, after the liaison office paid HK$257.53 million in February 2019 for 20 flats in Kwun Tong at the Grand Central complex, a venture between Sino Land and the Urban Renewal Authority. That took the registered residential property holdings by the liaison office to 280 units, the data showed.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

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