PAPER NO. HA 10/2015 Minutes of the Regular Open Meeting of the HONG KONG HOUSING AUTHORITY Held on Monday, 19 January 2015 in the Housing Authority Chamber, 10th Floor, Block 2, Housing Authority Headquarters PRESENT Prof the Hon Anthony CHEUNG Bing-leung, GBS, JP Secretary for Transport and

Housing (Chairman) Mr Stanley YING Yiu-hong, JP Director of Housing

(Vice-chairman) Ms Angela LEE Wai-yin, BBS, JP Prof Raymond SO Wai-man, JP Mr Michael CHOI Ngai-min, JP The Hon IP Kwok-him, GBS, JP The Hon WONG Kwok-kin, SBS Mr Albert AU Siu-cheung, BBS Mr WONG Sing-chi Prof Edwin CHAN Hon-wan Mr LEE Ping-kuen, JP Mr Winfield WONG Wing-cheung Mr Barrie HO Chow-lai, MH Dr LAU Kwok-yu, JP Mr Stanley WONG Yuen-fai, SBS, JP Ms Serena LAU Sze-wan, JP Mr WAN Man-yee, BBS, JP Mr CHUA Hoi-wai Ms SO Ching Ms Iris TAM Siu-ying, JP Mr Alvin YUEN Wong-che Principal Assistant Secretary

for Financial Services & the Treasury (Treasury) (Management Accounting)

Mr Jeff LAM Yun-tong, JP Deputy Director of Lands (General)

Mr Ivan LEE Kwok-bun, JP Deputy Director (Corporate Services) (Secretary)

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ABSENT WITH APOLOGIES The Hon Vincent FANG Kang, SBS, JP (Out of Hong Kong) The Hon Alan LEONG Kah-kit, SC Mr Leo KUNG Lin-cheng, BBS, JP Ms Julia LAU Man-kwan Miss Anita FUNG Yuen-mei, BBS Ms Virginia CHOI Wai-kam, JP Ms Tennessy HUI Mei-sheung, JP (Out of Hong Kong) Prof Bernard Vincent LIM Wan-fung, JP (Out of Hong Kong) IN ATTENDANCE Miss Agnes WONG Tin-yu, JP Deputy Director (Strategy) Ms Ada FUNG Yin-suen, JP Deputy Director

(Development and Construction) Mr Albert LEE Kwok-wing, JP Deputy Director

(Estate Management) Mrs Kitty YAN LAM Kit-yi Assistant Director

(Legal Service) Ms Brenda CHENG Miu-ling, JP Assistant Director (Finance) Mr John HUNG Leung-bun Assistant Director

(Strategic Planning) Ms Fony LUI Sau-fong Committees’ Secretary

(Meeting Secretary)

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OPENING ADDRESS The meeting began at 2:31 p.m. 2. The Chairman thanked Members for attending the meeting. 3. The Chairman remarked that according to Section 4(3) of the Housing Ordinance, the Housing Authority (HA) should submit a programme of proposed activities and estimates of its income and expenditure for the next financial year to the Chief Executive (CE) for his approval. Based on this requirement, the 2015/16 HA Corporate Plan and Budgets had been prepared and would be discussed under Agenda items 2 and 3. 4. The Chairman continued to remark that the Corporate Plan was formulated after deliberation by the committees and consolidation of Members’ views put forward at the brainstorming session. In December last year, the Government issued a report on the Long Term Housing Strategy (LTHS). Based on the latest projection of housing demand, a total housing supply target of 480 000 units, with a 60:40 public-private split, was set for the ten-year period from 2015/16 to 2024/25. The public housing supply target was 290 000 units, including 200 000 public rental housing (PRH) units and 90 000 subsidised sale flats. LTHS had also proposed some new strategic directions for subsidised home ownership, including expanding the forms of subsidised home ownership and exploring the use of the private sector’s capacity to increase and expedite the supply of subsidised sale flats. As the primary provider of public housing in Hong Kong, HA definitely played an active role in this regard. Two years ago, the Government had appointed the Long Term Housing Strategy Steering Committee (the Steering Committee) to study LTHS. The Steering Committee issued the Consultation Paper after a long period of discussion and comprehensive consultation, and after another three months of public consultation, submitted the Consultation Report which included the views of HA. Housing was one of the major issues in the Policy Address announced by CE last week. The Policy Address further set out the specific details to implement LTHS. With a view to further improving the housing ladder, it proposed that suitable flats be identified by HA among its PRH developments under construction for sale to Green Form (GF) applicants in the form of a pilot scheme, with prices set at a level lower than those of Home Ownership Scheme (HOS) flats. Target buyers were mainly sitting PRH tenants and PRH applicants who had passed the detailed vetting and were due for flat allocation. This Scheme, temporarily named as the Green Form Subsidised Home Ownership Pilot Scheme, would help GF applicants achieve home ownership while releasing more PRH units for allocation to families on

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the PRH waiting list (WL). Since the Scheme was a new idea, HA had to carefully consider the details, including eligibility criteria, price setting mechanism, resale arrangements, site selection principles, etc. and take into account the affordability of GF applicants, financial commitment of HA, as well as fairness of the subsidised housing policy. In order to kick-start the investigation work as soon as possible, the Chairman suggested that the Strategic Planning Committee (SPC) should start discussing the principles of the Green Form Subsidised Home Ownership Pilot Scheme in the next meeting. The Department would then formulate detailed implementation proposals based on the views of SPC and submit them to the Subsidised Housing Committee (SHC) for consideration. AGENDA ITEM 1 Confirmation of Minutes of Regular Open Meeting Held on 18 July 2014 (Paper No. HA 21/2014) 5. The minutes of the meeting held on 18 July 2014 were confirmed and signed. AGENDA ITEM 2 Housing Authority’s 2015/16 Corporate Plan (Paper No. HA 2/2015) 6. Mr John HUNG Leung-bun, Assistant Director (Strategic Planning), briefed Members on the 2015/16 Corporate Plan with the aid of PowerPoint. 7. The Chairman said that although Mr Vincent FANG Kang could not attend the meeting, he had submitted his opinion in writing (See Annex 1). 8. Dr LAU Kwok-yu was concerned about the average turnaround time for vacant flat refurbishment. There seemed to be targets for accelerated flat refurbishment in the past, but he was not sure if such targets had been cancelled. Since more PRH tenants might return their flats after the Green Form Subsidised Home Ownership Pilot Scheme was implemented, he proposed that key performance indicators be set for the time between a flat was surrendered and its successful allocation. He pointed out that this issue was once a matter of concern to the Audit Commission. There were pressing demands for public housing in society currently. If the time between a flat was

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surrendered and its allocation could be shortened at the administrative level, PRH applicants could be offered a flat earlier. 9. Mr Albert LEE Kwok-wing responded by saying that the average turnaround time for vacant flat refurbishment was 44 days, and such a target had been set for years. If new tenants indicated that they did not need the Housing Department (HD) to refurbish the flat, they could receive subsidies to do it themselves flexibly and move in earlier. Moreover, since there was a shortage of manpower in the market, 44 days was the most basic requirement and a feasible target. He said that vacant flats would be immediately handed back to the Allocation Section for reallocation after refurbishment works were completed. 10. Mr WONG Sing-chi said that HA had discussed only the Tenants Purchase Scheme (TPS) but had not studied the Green Form Subsidised Home Ownership Pilot Scheme before. Hence, he held that it would be too rushed for HA to launch the Scheme as proposed in the Policy Address and he doubted if the Scheme could indeed enable the recovery of more PRH units. He considered that the Scheme was unfair as some well-off tenants or tenants who had to vacate their own flats on account of other reasons would be allowed to move to new PRH flats while WL applicants would be allocated the old vacated PRH flats. He enquired if HA had to launch the Scheme and opined that the Scheme needed to be studied thoroughly. 11. The Chairman said CE suggested in the Policy Address that HA should explore the pilot scheme, so HA had to discuss the specific details. As it was a pilot scheme, its effectiveness would also have to be assessed. At HA’s Annual Special Open Meeting held in last June and its brainstorming session in last October, some Members had also proposed to set aside a whole block of PRH flats for sale to PRH tenants. Hence, it was not that HA did not have such ideas. He said that CE could, strictly speaking, instruct HA to implement Government’s housing policies pursuant to the Housing Ordinance. 12. Mr WONG Sing-chi further said that PRH tenants were not required to vacate their PRH flats in the past after they had purchased private properties. They were only asked to pay additional rent when their incomes were found to exceed the corresponding maximum limits after undergoing a means test. In fact, tenants who could afford to buy private properties were well-off tenants already. If the problems of such tenants could be dealt with, the situation of public housing abuse could be substantially improved. Currently, not only were the problems not taken care of, the tenants who abused public housing resources would even be given the opportunity to purchase new

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PRH flats, which ran counter to the proper way of resolving the issue. He expressed that if the Green Form Subsidised Home Ownership Pilot Scheme was indeed to be implemented, sufficient public discussion should be conducted. 13. The Chairman added that he mentioned earlier similar ideas had been put forward by Members during the brainstorming session, but that did not mean CE made such a proposal merely on account of that particular meeting. Some members of the public also expressed that subsidised sale flats could be sold to GF applicants at prices lower than those of HOS flats, while similar opinions were raised during the public consultation conducted by the Steering Committee. As for the tightening of the “Well-off Tenants Policies”, SHC had discussed the issue last October. As Members had divergent views, further exploration of the issue was required. 14. Mr WONG Kwok-kin said that the public housing production target for 2014/15 was 12 700 units as stated in the document but as at 30 September 2014, only about 1 000 PRH units had been constructed, so he was worried about the possibility of slippage. Furthermore, as contractors should know the manpower situation when they assessed the works, they should not, after the works had commenced, blame manpower shortage for the delay. He also gave his support for the Green Form Subsidised Home Ownership Pilot Scheme, and pointed out that PRH residents in the communities wished for the re-launch of TPS, which was similar to the recently proposed pilot scheme, providing an option to well-off PRH tenants who could not afford private properties, yet without reducing the PRH stock. 15. Ms Ada FUNG Yin-suen said that in some cases of slippage, such as So Uk Estate Phase 1 and some of the units at Hung Shui Kiu Development, the completion dates would be postponed for one month. The delay was mainly due to reasons such as the longer-than-expected period of rainy days, sluggish progress on some contractors’ works and insufficient construction workers. The Department would closely monitor the progress of the works projects. The 2 800 units involved in the slippage would be completed in 2015/16 and 9 938 units should be completed this year. On the one hand, contractors had to recruit skilled workers in the labour market, while on the other hand they needed to step up efforts to train new workers to replace the retired workers. Currently, a large number of major infrastructure projects and many private construction projects were underway at the same time in Hong Kong, generating a great demand for construction workers but the application for the importation of labour had yet to be approved. We did our best to streamline work processes and made use of pre-fabricated parts, etc. in a bid to

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reduce the number of skilled workers required. Despite multi-pronged efforts, there would not be any increase of construction workers for the time being. Furthermore, the rainy season had extended from one month to 49 days a year, thereby prolonging the construction period and causing one to two months of delay, with the completion dates of units being postponed to the next financial year. She said that 23 252 units would be completed in 2015/16. 16. Mr IP Kwok-him welcomed the Green Form Subsidised Home Ownership Pilot Scheme as it could provide PRH tenants who had the financial means with one more housing option. The Scheme deserved to be thoroughly discussed, including the study of any possibilities that tenants might enjoy double housing benefits, an issue of controversy. Yet, there was no doubt that the Scheme would speed up the turnover of PRH units. Furthermore, he expressed concerns over the vacancy rate of PRH units and the turnaround time for vacant flat refurbishment. If 1.5 % of the flats were vacant, it would mean that around 9 000 units were vacant at any time. Processes such as refurbishment and allocation also took time. He wondered if the vacant period could be shortened so as to avoid wasting public housing resources. 17. Miss Agnes WONG Tin-yu said that the performance indicator for vacancy rate was set at 1.5 % by HA, but in fact the vacancy rate was below the set target most of the time. The public thought that there was a large number of vacant flats because they mistakenly counted also the allocated flats to be confirmed for intake by WL applicants (“under offer” flats for short), and some unlettable flats such as former flats for the elderly that were being converted to flats for ordinary families. In fact, the Department would allocate the flats as soon as practicable when there were new flats soon to be completed or when there were refurbished flats available. If it was found that some flats were left vacant for a comparably long period, the Department would conduct a review every one and half months to see if the allocation process could be expedited. Furthermore, some flats which had been vacant for a prolonged period would be included in the Express Flat Allocation Scheme. According to the statistics as at September 2014, the number of lettable vacant flats was around 3 900. 18. The Chairman asked the Department to provide after the meeting the response to the Director of Audit’s Report on “Planning, Construction and Redevelopment of Public Rental Housing Flats” to explain why some vacant flats could not be let out (For the supplementary information provided after the meeting, please refer to Annex 2).

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19. Mr Stanley WONG Yuen-fai had concerns about the recently adopted initiative in the Corporate Plan of using waste charging as a means to achieve the goal of waste reduction at source. As the largest landlord in Hong Kong as well as the owner of the most complicated housing portfolio, HA had the major task this year to devise ways to implement waste charging for achieving waste reduction at source, the work of which was more comprehensive than that of collecting items for recycling, another initiative in the Corporate Plan. As it would be a lengthy process to carry out the initiative, the relevant work had to commence in 2015/16. 20. Mr Albert LEE Kwok-wing said that the related agenda item would be thoroughly studied at SHC meetings in the coming few months. HA would give its full support to facilitate Government’s work in this respect. (Mr IP Kwok-him left the meeting at this juncture.) 21. Mr WAN Man-yee said that 22 aged PRH estates had been previously earmarked for exploring the feasibility of their redevelopment and hence it would not be necessary to identify more aged estates for such a purpose in 2015/16. Among these 22 identified estates, HA should assess if resources were available for redevelopment and the net increase in the number of flats after their redevelopment. He was also deeply concerned about the time required for redevelopment. For example, it took 12 years to redevelop Pak Tin Estate. The redevelopment period would take even longer if the financial provision for the local community hall was not endorsed. He hoped that the Department would look into ways to shorten the redevelopment period of PRH estates, say limiting the maximum period to ten years. 22. Ms Ada FUNG Yin-suen responded that the Public Works Subcommittee of the Legislative Council (LegCo) had just endorsed the redevelopment plan of the Pak Tin Community Hall, which would then be submitted to the Finance Committee for consideration. Upon funding approval, the redevelopment works could commence immediately while the slippage time should be less than one year. For every redevelopment project, it was important to construct reception flats first so as to rehouse the residents and kick-start the redevelopment. Given that each cycle took around five years, every estate redevelopment should commence only after careful arrangements had been in place. This was also why some Members had mentioned that the redevelopment of 22 aged estates was subject to suitable resources and their demolitions could not be carried out at the same time. The Department would identify estates with high development potential that were available for redevelopment, which would be carried out in phases. Pak Tin Estate was an

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example, while another site being studied was Wah Fu Estate. 23. The Chairman said that as advised in the Director of Audit’s Report, the Department should not carry out too many redevelopment plans at the same time given that some of the PRH stock would be held up during redevelopment. Although it was mentioned in the report that the results of the preliminary review showed that 22 aged estates had redevelopment potential, it did not imply that HA was going to redevelop all the 22 estates. Further study would be required, and the redevelopment plan for Wah Fu Estste was now being studied. 24. Mr CHUA Hoi-wai said that on promoting community cohesion, HD would conduct satisfaction surveys in newly occupied PRH estates. In view of the elderly respondents’ wishes for the provision of more fitness equipment, he hoped that the Department could respond to the request as such equipment was suitable for residents of all ages. He pointed out that many PRH residents often sought assistance from Integrated Family Service Centres for problems such as transfer and overcrowded living conditions, thus bringing about a significant increase in the workload of such service centres in PRH estates. He wondered whether the work could be handed back to HD so as to ease the relevant workload of the Social Welfare Department (SWD) and non-government organisations (NGOs). He welcomed HA’s study on the Green Form Subsidised Home Ownership Pilot Scheme, but stressed that PRH supply should not be affected by any schemes. 25. Mr Albert LEE Kwok-wing admitted that there had been a rise in the number of elderly residents in PRH estates and said that the Department had all along ascertained whether additional facilities for the elderly should be provided and their respective locations through Estate Management Advisory Committees. In addition, the Department often liaised with SWD and NGOs on housing allocation issues such as transfer. Although such issues appeared to be housing-related, many of them actually involved problems like family disputes. The Department was, however, willing to work out the solution with SWD and NGOs. 26. Ms Serena LAU Sze-wan expressed concern over the issue of quality homes mentioned in paragraph 3.4 of the document. She was worried that HA would focus on delivering more small flats in pursuit of greater PRH production, thereby neglecting the demand for large flats. She hoped that the Department could pay attention to a balanced supply of different flat types.

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27. Ms Ada FUNG Yin-suen clarified that the homes mentioned in the paragraph were about HOS flats. She admitted that the first batch of HOS flats was mainly comprised of 1-bedroom and 2-bedroom flats. However, more 3-bedroom and 2/3-person flats would be provided in the future. Generally speaking, there were reference indicators for PRH flat type for newly built PRH flats in addition to the one for the annual total PRH production. The deviation allowed among different flat types was around 10%. There was no such reference indicator for HOS flats. 28. Ms SO Ching remarked that in view of the significant increase in HA’s workload arising from a boost in public housing production in the next decade, a rise in the number of first-hand property transactions and increased procedures involved in the handover of buildings etc, she hoped that HA could make a staffing plan early. In particular, the construction progress of public housing projects should be made known to the public as early as possible for their consideration in making decisions on home ownership. 29. Mr Ivan LEE Kwok-bun said that the Department recognised the importance of manpower resources and had carried out regular review of its establishment. While 462 civil service posts were created over the past three years under the central resource allocation exercise, arrangements for the employment of contract staff on a time-limited basis were also reviewed. In future, the Department would be more flexible in making use of manpower resources outside the civil service establishment. 30. The Chairman said that the Department submitted a paper to the LegCo Panel on Housing last November, setting out the respective numbers and districts of PRH units to be offered and HOS flats to be sold in the next five years. The public might refer to the LegCo paper for more details. 31. Ms Ada FUNG Yin-suen said that the Department would consider whether flat production figures should be released earlier. 32. Dr LAU Kwok-yu enquired again whether there were any performance indicators or open pledges regarding three different periods, i.e. when the units were left vacant, under refurbishment and were allocated. He hoped that the Department could consider the feasibility of developing indicators. The Director of Audit’s Report pointed out that while HA had pledged to keep the average waiting time at around three years, it did not mention the “demand” factor. He wondered whether the Corporate Plan had taken account of the “demand” factor. He understood that the terms of reference for SPC included dealing with the projected housing demand and

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supply scrutinised by the Government, and he wondered whether such issues of demand and supply had been discussed by HA or its committees. He considered that the big discrepancy between the demand and supply had resulted in an intensification of social grievances. Moreover, some of the more controversial issues like the Green Form Subsidised Home Ownership Pilot Scheme should be brought up for discussion by interested HA Members so as to exchange and gather views. Lastly, he pointed out that the Department had indicated that it could accomplish a performance target in response to media’s enquiries. In his exchange with the media, however, he was told that the Department’s replies in recent years were not concrete enough. The Department would get a clearer idea if it asked the media to rate its replies. He said he had made enquires with the Department quite a number of times and it was always slow to respond. 33. The Chairman responded that the Department had reported to the Public Accounts Committee (PAC) on a new method for calculating the supply, and the relevant reply to PAC had been forwarded to Members for information. 34. Miss Agnes WONG Tin-yu said that the current projected demand was derived using the methodology proposed by the Steering Committee. This had been explained in detail in the progress report of LTHS released by the Government. The projected demand would be rolled forward and updated annually. She stressed that the Department had done its best to respond to the enquiries from the media and Members but since some involved complex statistics which required longer time for consolidation, it was unable to give a prompt reply. 35. Mr Albert LEE Kwok-wing said that SHC had developed a performance indicator on the average void period of both new and refurbished PRH units, which should be ten weeks on average. 36. The Chairman said that the Government had now set down the targets and supplied land for HA to work towards the targets and meet the demand for public housing in the community. Of course, HA would consider the issue of resources and discuss it at SPC meetings. The committees under HA were operating independently and dealing with matters within their purview. Any Member who was interested and wanted to sit in on other committees’ meetings might apply to the chairman of the committee concerned. (Mr WONG Kwok-kin left the meeting at this juncture.)

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37. Members unanimously endorsed the 2015/16 Corporate Plan. The Chairman said that the Corporate Plan would be submitted to CE by the end of January 2015. AGENDA ITEM 3 Housing Authority’s Revised Budget 2014/15, Proposed Budget 2015/16 and Financial Forecasts 2016/17 to 2018/19 (Paper No. HA 3/2015) 38. Ms Brenda CHENG Miu-ling presented the Budgets and the Financial Forecasts 2016/17 to 2018/19 with the aid of PowerPoint. 39. Prof Raymond SO Wai-man said that FC discussed and endorsed the Budgets on the 6th of this month. Similar to the practice in past years, this Budgets and Forecasts consolidated comments from the business Committees and was drawn up according to prudently made and balanced bases and assumptions all along. As shown in the preceding presentation, HA was expected to have sufficient financial resources to meet its recurrent expenditure and implement its current public housing construction programmes during the budget and forecast period. However, Members probably noted that a significant drop in HA’s cash and investment balances was expected in the coming years. To achieve the new housing production target, HA would come under increasing fiscal pressure and would require Government funding support in the long run. At the beginning of this month, when FC discussed this Budgets and Forecasts and during the post-meeting press conference, there were concerns when Government funding injection would be required, including the amount and the mode. The Department had been in communication with the Government. They fully appreciate the complexity of this financial assessment. As a number of variables were involved, it is not possible for HA to simply approach the Government for an arbitrary lump sum injection, and the Government could not seek funding approval of the LegCo on the basis of some rough estimates. HA should continue to assess its medium-term financial requirements through its established five-year rolling budget and forecast mechanism. The request for funding injection should be submitted closer to the time of need so that the assessment could reflect the most-up-to-date situation. In fact, the Housing Reserve just established by the Government has demonstrated its long-term financial commitment to public housing development.

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40. Prof Raymond SO Wai-man continued that as regards HA’s investments, in view of the latest financial market situation and risks, FC conducted an annual health check on the Strategic Asset Allocation (SAA) in 2014. On the recommendations made by the independent investment consultant, FC decided to maintain the current SAA by allocating about 55% of the funds on Principal Protection Placement in the Exchange Fund, 17.5% on investment in equity, 12.5% on global bonds, 10% on Renminbi deposits and bonds as well as 5% on Hong Kong dollars / US dollars and bonds as liquidity. Prof Raymond SO Wai-man pointed out that the prevailing general view in the market was that the debt levels in advanced economies remained high, while the economic growth and monetary policy of the United States of America, Europe and Japan were not consistent in pace. This would affect the global investment environment. The outlook for the global economic growth was expected to be moderate, while the financial market might from time to time experience greater fluctuation in the short term. While the average investment return of HA over the past five years was about 7% per annum, future returns from the financial market were expected to be moderate. Having taken into account the asset class return assumptions of HA’s investment consultant and the latest market situation, the assumed annual investment return of 5% on average on investment funds during the budget and forecast period would be maintained. FC would remain vigilant and continue to adhere to the principles of financial prudent and diversified investments to ensure that there was adequate liquidity to meet the operational needs of HA and to put the rest of HA’s funds into longer-term investments to yield better returns in the long run. Having taking into account HA’s expected downward trend in its cash and investment balances and to help maintain relatively steady investment returns, the Department had recently obtained the in-principle agreement from the Hong Kong Monetary Authority for the extension of a Principal Protection Placement in the Exchange Fund due for maturity in October 2015. 41. Prof Raymond SO Wai-man remarked that FC and its Funds Management Sub-committee would continue to closely monitor the conditions of the investment market, and regularly review the need to rebalance the asset allocation or to revise HA’s investment strategy. The Committee had also agreed to launch the 2015 review of the investment and the asset allocation strategies under the established mechanism. He fully agreed that HA should, in the face of various challenges, continue to remain vigilant, exercise strict economy, optimise the use of resources, and seek Government funding in a timely manner, so as to achieve the new public housing production target. He took the opportunity to thank HA Members for their support, and FC Members for their unceasing efforts in giving valuable opinions and making contributions.

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42. Mr Stanley WONG Yuen-fai was concerned about the huge capital expenditure as the construction expenditure would increase from $12.6 billion in 2014/15 to $28.3 billion in 2018/19. As far as the current ten-year housing production target was concerned, flat production had to be doubled in the next five-year period starting from 2020, and the construction expenditure would probably soar to $40 billion or even $50 billion. While a number of factors would result in higher construction costs, increases in housing production target also led to a drop in cash and investment balance from $70 billion at present to $23.6 billion in five years. Despite prudent and reasonable investment return, investment surplus was expected to drop from $3 billion this year to $1.3 billion in 2018/19. Compared to an annual construction expenditure in the range of $20 billion to $30 billion, HA’s annual projected surplus was only a drop in the ocean. Recently, the Government provided $27 billion for the establishment of a Housing Reserve, which might be sufficient to meet the construction expenditure for one year. He was worried about the acute problem arising from the construction expenditure in the future. With the production target set, the construction expenditure could not be reduced. Besides providing adequate land resources, the Government should also take heed of this financial alarm, and set aside sufficient financial resources for achieving the housing production target. 43. The Chairman remarked that the Government established the Housing Reserve to support the public housing development programme. HA would assess its medium-term financial requirement under the five-year rolling budgeting mechanism. When an agreement on the quantum and the timetable of funding injection from the Government was reached with HA, the Government would seek funding approval from LegCo for utilising the Housing Reserve under the established mechanism. 44. Ms Brenda CHENG Miu-ling responded that in the face of the huge construction expenditure in the future, HA would have to take all feasible measures to achieve cost savings and enhance revenue. The Government had indicated that the provision of $27 billion in the Housing Reserve was earmarked for meeting expenditure on public housing. In future, the Government would consider further provisions in the light of actual circumstances. (Mr WONG Sing-chi left the meeting at this juncture.) 45. Dr LAU Kwok-yu was concerned about the operating deficit in rental housing as the deficit per unit per month would soar from $20 in 2013/14 to $74 in 2014/15, and he believed that the deficit would aggravate in 2018/19.

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He wondered if HA would put in place any arrangements to maintain fiscal discipline, so as to achieve appropriate savings in resources, hence a lesser extent of the deficit. Regarding the Housing Reserve, there had been remark that this sum could amount to $100 billion. He wondered whether it would be a provision or a loan. Should it be a loan, he was worried about the interests to be incurred. Therefore, he hoped that the Department would clarify this. 46. The Chairman said that the Financial Secretary had planned forward to establish a Housing Reserve to bridge the projected funding gap of over $100 billion in the long run. The move demonstrated the Government’s financial commitment to public housing. HA would discuss with the Government the amount, financing mode and timetable of the funding injection. CE stated in his 2014 Policy Address that the Government would provide HA with sufficient manpower and financial resources to implement its large scale public housing development projects. As the Government made itself very clear about its commitment to this task, Members needed not over-worry. 47. Ms Brenda CHENG Miu-ling remarked that the Department had all along observed strict fiscal discipline and endeavoured to consolidate revenue increases and cost savings. The Budgets and Forecasts for all businesses had been drawn up prudently and reviewed by relevant business Committees. In the 2014/15 Revised Budget, the monthly average operating deficit per unit of rental housing was $74, which was higher than that in 2013/14. This was mainly attributable to the lower maintenance cost in 2013/14 as compared to 2014/15. In the coming years, as the rent level of PRH was assumed to remain unchanged, with the projected increase in various operating expenditure items as a result of the increase in housing stock and projected increase in price level, the overall deficit was expected to rise to $3 billion in 2018/19. At that time, there would be a total of about 810 000 rental units, therefore the monthly average operating deficit per unit was estimated at about $310. She added that as the base figures of income, expenditure and deficit were different, it might not be appropriate to make a comparison just between the percentage changes in the deficit. (Prof Raymond SO Wai-man left the meeting at this juncture.) 48. The Chairman and Mr Stanley YING Yiu-hong requested the Department to provide supplementary information on operating deficits in the Rental Housing Operating Account after the meeting. (For the supplementary information provided after the meeting, please refer to Annex 3.) (Mr Albert AU Siu-cheung left the meeting at this juncture.)

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49. Ms Iris TAM Siu-ying appreciated the investment return as stated in the budgets. Considering the need to seek LegCo approval for funding injection from the Housing Reserve while the production targets had already been set, she asked if an alert level would be set for the Cash and Investment Balance to indicate when submission of funding papers to LegCo was required. 50. Mr Stanley YING Yiu-hong said that HA would assess its medium-term financial requirements based on the current five-year rolling budgeting and forecasting process. The Department would closely monitor the progress and requirement in this respect. 51. The Chairman said that FC would continue to follow up the future financial budgets and forecasts of HA. (Mr Michael CHOI Ngai-min left the meeting at this juncture.) 52. Prof Edwin CHAN Hon-wan was concerned about the home ownership assistance operations being the main source of income as stated in the budgets and asked if this forecast was made assuming property prices would remain stable, go up or go down. Besides, as the income of home ownership assistance operations mainly came from land premium payment, and owners only sold their flats when property prices went up, the situation would be different if property prices fell. In view of this, he wished to know the percentage of land premium payment in the total income. At present, a selling rate of 98% for HOS flats was estimated, and he wanted to know the rate at worst. He hoped that HA could forecast its income under the worst scenario. 53. Ms Brenda CHENG Miu-ling responded that for the purpose of preparing the budgets and forcasts, SHC endorsed adopting the assessed market price in 2014/15 as the basis with the assumption of an annual increase at a general inflation adjustment of 3.5% per annum in the subsequent years to project the HOS sale prices at time of sale. Regarding the opting rate for alienation premium payment for HOS and TPS flats, based on the past data, it was assumed that 0.28% HOS flat owners and 0.13% TPS flat owners would opt for such payment per annum, that made about some 1 000 applications for premium payment per year, amounting to an estimated yearly income of $1 billion or so. From past experience in the sale of HOS flats, it was assumed that 98% of the new HOS flats would be sold at pre-sale while the remaining 2% would be sold in the following year. Of course, if the response was good, it might be possible that all flats could be sold out when they were first launched

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for sale. 54. The Chairman said that past experiences showed that HOS flats were generally sold out in each selling exercise except for one batch in 2008, still the remaining flats were all sold out later on. In addition, he reminded that the term “alienation premium payment” should be used in place of “land premium payment.” He pointed out that HA sold HOS flats at a discounted price. If households wished to sell their HOS flats, they had to pay an alienation premium as calculated according to the discount rate at the time of sale, and all these had nothing to do with the land premium. (Ms Angela LEE Wai-yin left the meeting at this juncture.) 55. Mr WAN Man-yee said that the building of 200 000 PRH units required about $250 billion. If 90 000 to 100 000 HOS flats were sold at a profit of $500,000 each, that would make an income of $50 billion. It arrived at a total expenditure of $200 billion, and after deducting the $70 billion in the current Cash and Investment Balance, there was still a shortfall of $130 billion. In comparison, the fund at $27 billion as recommended by the Financial Secretary was minimal. With the operating expenditure increasing every year creating a heavy burden, HA needed to seek solutions as soon as possible. Non-residential areas were HA’s assets, it was imperative to optimise their utilisation to reduce recurrent expenditure, and also the income from such could help lower HA’s deficit. In this regard, he hoped that HA could utilise every square feet when vetting future projects. In the Corporate Plan, it used the word “enhancement” when referring to the upgrading of development potential. In fact, the word “maximisation” would be more appropriate for the purpose of offsetting the deficit incurred in public housing operation. Regarding the construction spending at $250 billion, the Building Committee (BC) had agreed to work with the Tender Committee to further control the construction cost through procurement and design. He further expressed concern over HA’s parking spaces which were not for sale but for rent only, which contributed to their exceedingly high cost. Added to this, due to the requirements laid down by the Buildings Department, the parking spaces had to be placed in the basement, which increased the construction cost and lengthened the building process. He hoped that the Buildings Department could relax this regulation to avoid wasting time and money. 56. The Chairman clarified that Mr WAN Man-yee came up with the figure of $250 billion on his own and it was not by HA as HA did not have such data at the moment.

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57. Ms Ada FUNG Yin-suen remarked that optimising site utilisation had been fully discussed by BC and SPC. Owing to the stipulations in determining domestic and non-domestic gross floor area (GFA) in certain regions, HA was unable to fully utilise the non-domestic GFA. This problem would not appear in developments with a composite plot ratio, in which case HA would need to optimise the domestic GFA. In regions like Kowloon, provision of additional non-domestic GFA might be required on special grounds, thus preventing the full utilisation of GFA. To fully utilise such GFA, one way was to comply with the building height restrictions or build a basement, but this would increase the construction cost and time. She cited Cheung Sha Wan Wholesale Food Market Phase 2 as an example, and said that the site might seem large but it was a non-building area designated for drainage and other purposes. Therefore, with limited space for housing production and constrained by building height restrictions and breezeway requirements, the Department could not fully utilise the GFA of the site. She welcomed Members’ views and pointed out that the GFA would be utilised as far as practicable, especially when SWD expected HA to provide sites for social welfare purposes. If SWD could come up with the necessary funding, HA would certainly build such facilities. She further remarked that it might not be feasible to build major shopping centres on under-utilised sites. For locations with unfavourable conditions and insufficient footfall, trying to fully utilise the plot ratio for non-domestic facilities would only create management and lettings problems in future. Therefore, the Department had to strike a balance in such cases. She pledged that HA would optimise the non-domestic GFA as far as possible and practicable, but the primary objective was to fully utilise the domestic GFA for the construction of residential blocks to safeguard HA’s interests. She added that building underground car parks would be avoided at best, but would make use of such need to exchange for additional GFA to increase flat production. In such cases, the natural ventilation and daylight would be fully utilised in the architectural design for the construction of some underground car parks to minimise the use of mechanical ventilation or ventilation ducts, thereby reducing the future management work. 58. Mr Stanley YING Yiu-hong added that HA would not deliberately lower the utilisation of non-domestic GFA, but it did not mean that HA would disregard the cost in pursuit of optimising the non-domestic GFA in every development project. The Department would explain the cases at the Committee meetings so that Members could have thorough discussions. For instance, if the full utilisation of non-domestic GFA would arouse more objections from the local community against the whole development, then the Department would need to strike a balance on the matter.

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(Mr CHUA Hoi-wai left the meeting at this juncture.) 59. Dr LAU Kwok-yu believed that the Department would not deliberately reduce the development of non-domestic GFA. In fact, recent cases showed that Members’ concern had prompted the Department to further enhance the utilisation of non-domestic GFA from the original 35% to 55% to optimise the development of such spaces to meet the need of certain services, including the demand of HD for office accommodation. As unremunerated volunteers, Members had the duties to ensure the maximum protection of public interest and the optimisation of HA’s resources. While expressing concern over the operating deficit of public housing, Dr LAU enquired whether the parking spaces in HOS courts could be sold in batches. He further suggested that the parking spaces should not be allowed to sell in the open market, but could only be sold to other HOS flat owners or HA. 60. The Chairman said that it was not suitable to examine the issue of parking spaces in detail on that day. He stressed that the subject should be considered carefully by the related Committees, but controversy similar to that of The Link should be avoided. 61. Members unanimously endorsed the Revised Budget for 2014/15 and the Proposed Budget for 2015/16, and noted the Financial Forecasts for 2016/17 to 2018/19. AGENDA ITEM 4 ANY OTHER BUSINESS 62. There were no other businesses. DATE OF NEXT MEETING 63. The Chairman informed Members that the next meeting would be held on 8 June 2015 (Monday) at 2:30 p.m.

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CLOSURE OF MEETING 64. The meeting was adjourned at 5:05 p.m. CONFIRMED on 2015. Anthony CHEUNG Bing-leung (Chairman) Ivan KB LEE (Secretary) File Ref. : HD 1-7/COMM1/HA-2 Date of Issue : 7 May 2015

Annex 1 19 January 2015

Mr. Chairman, Despite my absence from today’s Housing Authority (HA) meeting due to other engagements, I would like to express my opinions on HA’s Corporate Plan 2015/16 as follows. The last decade has seen a ruptured path to home ownership stemming from the freeze in the Home Ownership Scheme (HOS) and Tenants Purchase Scheme (TPS), with private property prices soaring to a level unaffordable to the public. In view of this, I support the increase in subsidised housing production to facilitate home ownership. As at last Thursday, the new HOS which had attracted more than 70 000 applications was oversubscribed 32 times. The overwhelming response underscores the huge demand for HOS flats. However, HA’s meagre supply of 2 700 and 2 000 HOS flats in the respective financial years 2015/16 and 2016/17 can hardly quench people’s thirst for homes. HA is expected to play a bigger and more proactive role in the enhanced provision of subsidised housing. The Policy Address just delivered promises to actively explore ways to increase the supply of sale flats through a multi-pronged approach to provide low and middle-income families with more property choices and home ownership opportunities. It is suggested, among others, that HA should further improve the housing ladder by identifying suitable flats among its public rental housing (PRH) developments under construction for sale to Green Form applicants in the form of a pilot scheme (hence the Green Form Subsidised Home Ownership Pilot Scheme). Prices will be set at a level lower than that of HOS flats, and target buyers will include sitting PRH tenants and PRH applicants who have passed the detailed vetting and are due for flat allocation. A staunch supporter of the Pilot Scheme, I consider it instrumental in killing several birds with one stone. First, it will expedite the supply of subsidised sale flats to satisfy in no time the home ownership aspirations of Green Form applicants. Meanwhile, since the overall supply of subsidised rental flats will not be compromised, even though time is needed for the renovation of vacated flats, the waiting time for allocation is not likely to be lengthened. Furthermore, the sale of the entire block under the Pilot Scheme ensures that multiple ownership and hence management difficulties seen in TPS can be avoided. On the one hand, HA can increase its financial income by selling the PRH flats, the reduced maintenance fees, on the other, will substantially ease its financial burdens in the long run. In this connection, I contend that HA should not only embrace the early implementation of the scheme, but consider increasing the number of PRH flats for sale. A greater number of Green Form applicants can then have their home ownership dream come true.

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That said, prudence should be exercised when it comes to pricing and resale restrictions of the flats. This is especially true as far as sitting PRH tenants are concerned, who have already enjoyed subsidised rent. It will be no different from giving them double benefits if the price of the flats is set too low. After all, the sale of PRH flats should be seen as a measure facilitating home ownership instead of profit making. Stringent resale restrictions are therefore vital. Since the implementation of TPS, more than 180 000 flats in 39 estates have been put up for sale. As at end-September last year, about 129 000 flats, or 70 per cent, have been sold. Around 55 000 unsold flats scatter in different TPS blocks, causing multiple ownership and management problems due to the co-existence of owners and tenants in the same block. HA should not evade its responsibility but root out the problem of multiple ownership in TPS by, for instance, giving concessions within a time frame to encourage remaining tenants of a TPS block to purchase their flats. Tenants who refuse to do so by the end of the concessionary period are required to move to other flats to unify the ownership in a single block and facilitate building management. I am also concerned about the land supply for future construction of subsidised flats. It is laid down in the Long Term Housing Strategy that the public housing supply target will be 290 000 units between 2015/16 and 2024/25. According to government information on land supply, as of now, the Government has secured necessary land sites for building 254 000 public housing units. I am very impressed by the Government’s efficiency to have secured land supply in less than three years of its current term for the construction of public housing developments for the next ten years. I am thus confident that the current-term Government can probably source more land than estimated. As HA may need to increase its production, planning and preparation in advance are essential. Last but not least, I have been worrying about the labour shortage in the construction industry, which is poised to pose a big obstacle to housing production. I am glad to learn that measures have been put forward in the Policy Address to further relax our labour importation mechanism. Individual contractors can now apply to import workers to work across various construction sites for enhanced flexibility of deployment. I hope that HA can take advantage of the new mechanism to ensure that the construction remains well on track, with a view to providing the public with quality homes. Vincent FANG Kang Member of Housing Authority

Annex 2

Supplementary Information on Updated Situation on Unoccupied Flats of Public Rental Housing

Unoccupied public rental housing (PRH) flats are classified into flats which are ‘under offer’, ‘unlettable’ and ‘lettable vacant’ flats. The number of these flats changes frequently according to the allocation progress, any figures provided are only snapshot figures indicating the situation at a given point in time. As at end December 2014, the number of ‘lettable vacant’ flats stood at 2 829, representing a vacancy rate of 0.4% against the total lettable PRH stock of 740 985 flats. This was well below Hong Kong Housing Authority (HA)’s Key Performance Indicator of 1.5%.

2. Besides, as at end December 2014, there were 2,431 flats which were ‘under offer’, and 2,920 were ‘unlettable’ flats. For those ‘under offer’ flats, they are being offered to applicants and are expected to be taken up shortly. As for the ‘unlettable’ flats, they are reserved for a particular purpose (e.g. for relocating tenants affected by redevelopment, awaiting for the conversion works in Housing for Senior Citizens (HSC) Type I and Converted one-person (C1P) etc.). As they cannot be used to satisfy the housing demand, both ‘under offer’ and ‘unlettable’ flats should not be classified as vacant flats.

3. The Administration has taken the following measures to speed up the letting of ‘lettable vacant’ flats –

(a) Half-rent reduction of 8 to 12 months will be offered as an

incentive to boost up acceptance rates for flats fallen vacant for more than 12 months; and

(b) Less popular flats including prolonged vacant flats, flats with

adverse Environmental Indicators, flats of less popular design (Housing for Senior Citizens and Interim Housing converted flats) and flats in estates with high refusal rates will be included in Express Flat Allocation Scheme (EFAS) exercisesNote to speed up letting. For those flats which have been offered to the applicants but are subsequently refused by them and if such flats also meet the EFAS flat pooling criteria, when EFAS flat pooling is in progress, we will cease their re-letting and immediately include them in the pooling list.

Note EFAS exercise is launched once a year. The aim is to speed up the allocation of less popular flats to reduce their vacancy rate and to provide an avenue for applicants for fast-track access to PRH.

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4. As at end December 2014, out of the 182 ‘lettable vacant’ flats that have become vacant for more than one year, 86 flats have been reserved under the Express Flat Allocation Scheme (EFAS) exercise. The whole EFAS exercise takes 10 months to complete and flats reserved under the exercise will remain “vacant” until they are selected and accepted by the applicants concerned. 38 flats were reserved for government clearance projects while 8 flats were situated in the relatively remote Lung Tin Estate in Tai O. The remaining 50 flats were reserved for various rehousing categories and for operations of other government departments. 5. As at end December 2014, out of the 2,371 ‘unlettable’ flats that were vacant for over one year, 1 916 flats were Housing for Senior Citizens (HSC) Type I and Converted one-person (C1P) flats that still have other occupants, conversion work could only be conducted after the moving out of all remaining tenants. 317 flats were reserved by the Urban Renewal Authority, 132 flats were frozen from letting mainly due to estate clearance projects. The remaining 6 flats were undergoing conversion and major structural repairs that required longer conversion period. 6. In addition to the measures mentioned at paragraph 3, in view of the unsatisfactory vacancy rate of Tin Lee House, Lung Tin Estate in Tai O, the Housing Authority decided in February 2013 to convert Tin Lee House into Housing Ownership Scheme units for sale. Apart from a unit being retained for the management office and the office of the Owners Corporation, all the remaining 85 units were sold. 7. Besides, shortening the vacant period of those ‘unlettable’ flats, Housing Department (HD) has implemented the following measures –

(a) Estate staff must state the expected ‘available date’ in reservation of the ‘unlettable’ flats. Regional Chief Managers would review the position of ‘unlettable’ flats every 1.5 months to monitor whether there is a further need for the reservation.

(b) The progress of vacant flats refurbishment works is under the

monitoring of Senior Works Professional and Works Professional in the Bi-monthly Contract Meeting and Weekly Meeting respectively. To further tighten the monitoring, cases involving long refurbishment period are reported and monitored in an internal committee chaired by Assistant Directors.

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(c) Starting from mid 2013, HD has been arranging management transfer for all non-elderly tenants of HSC Type I flats to further expedite the flat recovery for conversion to PRH flats.

(d) Computer system enhancement was completed in October 2013

to generate batch report for monitoring the conversion progress of HSC Type I and C1P flats.

(e) For those elderly tenants living in HSC Type I and C1P units and

less adapted to new environments, HD will continue to adopt a pragmatic yet persistent manner in encouraging them to apply for transfer.

Annex 3

Supplementary Information on Operating Deficits in the Rental Housing Operating Account

1. Operating deficit is the difference between operating income and

operating expenditure. To understand changes in deficits in the rental housing operation, we need to analyse changes in income and expenditure. Such figures for 2012/13 to 2018/19 are at Appendix.

2013/14 as compared to 2012/13 and 2014/15

2. One major factor in HA’s rental housing operating income is the biennial

rental adjustment in accordance with the Housing Ordinance. This has brought major ups and downs to the annual income, partly because the exercise is done every two years and not annually.

3. It is worth noting that the operating deficit in 2013/14 is the lowest in

recent years. Compared to 2012/13, the following is relevant :

a. Rent was increased by 10% with effect from September 2012. This led to an increase in income for only 7 months in 2012/13, but for 12 months in 2013/14. This factor in itself led to more income (hence less deficit) in 2013/14 than 2012/13; and

b. At the same time as the rental adjustment in September 2012,

HA decided to waive one months’ rent. There was no such waiver in 2013/14. This factor in itself also led to more income (hence less deficit) in 2013/14 than 2012/13.

4. On expenditure, one factor is that M&I expenditure, being recurrent

works expenditure, fluctuates from year to year and may not follow a trend. Compared 2013/14 to 2014/15, while there is an increase in income for 7 months in 2014/15 as a result of the biennial rental adjustment of 10% with effect from September 2014, the projected increase in expenditure due to more Maintenance and Improvement (M&I) as well as price adjustments in various expenditure items contribute to the relatively higher deficit in 2014/15. The M&I expenditure was $2.5bn in 2012/13, $2.6bn in 2013/14 and $3.1bn in 2014/15.

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2015/16 and after

5. While the 2012/13 and 2013/14 figures are actual figures and the 2014/15 figures are revised estimates that should reflect the latest position, the figures for 2015/16 onwards are estimates derived by established methods for projection that we have explained in the papers. To recap, we have NOT assumed any rental adjustments during the period. For M&I expenditure and other expenditures, we have assumed a trend growth. Given these assumptions, projected deficit will grow, and will grow along a trend.

Appendix

Rental Housing Operating Account

Actual

2012/13 Note 1 Actual

2013/14 Note 1 Revised Budget

2014/15 Note 1 Proposed Budget

2015/16 Forecast 2016/17

Forecast 2017/18

Forecast 2018/19

Income ($M) 10,413 11,899 13,750 15,476 15,858 16,099 16,307 Expenditure ($M) 11,647 12,078 14,412 16,473 17,319 18,295 19,344 Operating Deficit ($M) (1,234) (179) (662) (997) (1,461) (2,196) (3,037) Average Operating Deficit per weighted average unit per month ($)

(140) (20) (74) (109) (157) (232) (317)

Note 1: Full-year rates concession for 2012/13 and 2013/14 and 6-month rates concession for 2014/15 by the Government were passed to tenants on a no-loss-no-gain basis;

the corresponding decrease in income and expenditure has no impact on the operating deficit in the year.