Hong Kong Transit-Oriented Development Model: What Can We Learn From?

Cities around the globe, particularly in emerging markets and developing economies (EMDEs), face a strong need for infrastructure development to meet the rising demand driven by rapid population growth and urbanization. 

Yet with transportational infrastructure, the cost of keeping up with demand, especially in these economies, is never cheap. For example, the development of roads or metro lines would not only incur substantial costs for construction and land clearance, but also require a large team of urban planners, engineers, and accountants to ensure the project is executed to the highest standard. Hong Kong's 'Rail + Property' Transit-Oriented Development (TOD) model was an innovative solution in balancing the monetary cost of railway development, yet also allowed for the government's land value capture to the greatest extent. This essay will review the model to understand it and what we could learn from it for future TOD development. 

Mass Transit Railway (MTR) in Hong Kong, widely known for its great success, not only allows for a proper integration of Hong Kong's people with the transport network, allowing for better connectivity and stronger economic development, but also for being one of the few transport network in the world that use little to none of tax payer's money. 

MTR Corporation Limited is a government-owned public transport operator and property developer that operates the MTR system. Despite being a listed entity on the Hong Kong stock exchange, the government still holds a ~75% stake in the corporation. However, for most of the MTR operation, it operates on a commercial basis, through a model called the 'Rail + Property' (R+P) model, allowing it to self-operate sustainably without much government subsidy and funding. 

What 'Rail + Property' Model?

The R+P model was an innovative solution to solve the funding problem of constructing and operating a railway. Rather than funding this infrastructure through bonds or tax increases, under this model, the government grants MTR land 'development rights' at stations and depots along the route. To then build on this land, the MTR must pay the government a land premium, which was paid before the construction of any railway. After the railway is constructed, these sites appreciate in value due to improved connectivity, and the MTR captures the uplift in land value after the railway opens by actively leasing and developing these properties. 

The area that was granted the development right was not to be left dormant. For some areas of land, private developers developed. After the development, MTR then receives a share of the profit, a lump sum, or a portion of these properties. For other areas, the MTR retains ownership of the commercial spaces (malls, offices, and residential towers), acting as a long-term lender. By using the R+P model, MTR allow themselves to focus on the construction of the railway (which runs on schedule 99.9% of the time) and also a diversify stream of income from commercial properties, allowing MTR to sustain a strong financial position. 

With its proven success, the MTR has applied the R+P model extensively. Buildings sit over about half of the system’s 87 stations, amounting to 13 million square meters of floor area. New projects being planned or developed will add another 3.5 million square meters. A large proportion of MTR’s current investment properties portfolio of more than 267,000 square meters came from the sharing of assets. Financially, MTR was able to generate funds for new projects as well as for operations and maintenance, without needing to compete for public funding.

Furthermore, with planners and government agencies seeking to construct railway lines into a well-planned and high-quality network where communities can prosper, the R+P model allows MTR to build into an undeveloped area, as the property development that goes along with it creates the demand for the railway, allowing it to generate value, not just capturing it. 

This model is highly unique in Hong Kong, as despite MTR having overseas operations in franchised contracts to operate in countries such as China, Australia, and Sweden, MTR does not get the land development rights within these cities, and thus, the development model was not implemented; MTR here just acts as a contract operator. 

The Hong Kong Advantage

1. Land Policy

Under Chinese sovereignty, all public land in Hong Kong is owned by the state, and all properties are under leasehold contracts. With this, it is relatively easy for the Hong Kong government to terminate the lease and compensate the people with a fair amount (with pre-railway valuation) for the MTR construction or stations to be developed. Furthermore, this also allows the government to be able to give the land development rights on top of the MTR stations for the R+P model. This is one of the largest advantage that Hong Kong have, and allows it to implement this model with relative ease, whereas in countries with freehold landowners, compensation and legal bottlenecks from negotiating for parcels would escalate the cost substantially.

2. Densely Populated City

Hong Kong's urban density is around 6,300 people per km square, up to 20,000 in the CBD, making it one of the most densely populated areas on Earth. Along with this, with MTR's operating partly similar to a real estate company, with income stream coming from station commercial property leasing, property leasing and management, and property development, together with scarce land, real estate prices are highly valuable, which allows for the R+P model to generate a reasonable share of profit.

3. Transportational Culture

Despite a large part of the MTR revenue coming from property-related income streams, the MTR 2024 annual press release still shows that nearly 40% of the revenue actually comes from transport operations - which are passenger fares. For the R+P model to work, a large volume of ridership is critical; in light of this, Hong Kong essentially has a very weak private car culture. Due to the geography of the region, highway-dependent zoning or urban sprawl are simply not possible, and therefore, easy transit is a critical necessity here. Bearing this in mind, as MTR provides an efficient transport system, with an affordable fare (through far concessions, the Fare Adjustment Mechanism formula, which links CPI, transport sector wages, and MTR's own profitability), allowing for strong ridership to sustain the MTR system. 

Conclusion

Hong Kong's R+P system proved to the world that the government does not spend loads on constructing an efficient and financially sustainable railway. Hong Kong authorities can collect the land premium and profit from the ~75% stakes in MTR, all the while, for Hong Kong citizens, they can enjoy the high-quality communities built around the station, but also not get wet while commuting in the rainy season. 

This model is not universally replicable. Its success very much depends on the Hong Kong's specific advantages listed above. However, I still personally believe construction of transportational infrastructure coming from the state funding and bond issuance, in this economy is simply not enough. The innovative solution that Hong Kong have allow for a financial model to be built, recognizing railway as what creates value allow for strong urban development with very limited financial constraints.