Enacted in late 2024, the updated Land (Compulsory Sale for Redevelopment) Ordinance (commonly known as the New Compulsory Sale Ordinance) has lowered the compulsory sale thresholds and allowed for the consolidation of adjoining lots in applications. Henderson Land’s Whampoa Street project in Hung Hom has just become the first approved case under the new regime, successfully resolving the “nail house” (holdout) issue with a reserve price set at HK$580 million. The new ordinance brings more flexible redevelopment and acquisition opportunities for investors in old buildings, industrial, commercial, and retail properties.

1. What is the Compulsory Sale Ordinance?

The Land (Compulsory Sale for Redevelopment) Ordinance (Cap. 545) is legislation enacted by the Hong Kong Government to address the aging of dilapidated buildings and accelerate urban renewal.

Simply put, when a developer or majority owner acquires a statutory percentage of undivided shares in a lot, they can apply to the Lands Tribunal for a “Compulsory Sale Order.” Once approved, all undivided shares of the lot (including units owned by minority owners who have not yet sold) will be sold via public auction for redevelopment purposes. The auction proceeds are then apportioned to all owners based on an independent valuation report.

This mechanism was established primarily to prevent a minority of owners from obstructing the redevelopment of dilapidated buildings due to refusal to sell, disappearance, or unclear property titles.

Old vs. New Compulsory Sale Ordinance: Key Rule Changes Investors Must Know

The biggest highlights of the new ordinance are the lowered compulsory sale thresholds and the allowance for consolidating adjoining lots in a single application. This significantly reduces acquisition resistance for investors holding old buildings, aging industrial buildings, or retail shops.

Item	Old Compulsory Sale Ordinance	New Ordinance (Effective late 2024)	Impact on Investors
Threshold	Uniformly 80%	Lowered to 70% or 65% based on building age and district.	Reduces acquisition time and costs, especially for properties in designated old districts.
Lot Application	Ownership percentage must be calculated on a single-lot basis.	Allows consolidation of adjoining lots to calculate the overall ownership percentage.	Can “average out” lower-ownership lots with higher-ownership lots, diluting the impact of holdout owners.
Scope	Residential and some industrial buildings.	Covers more aged residential and non-residential properties.	Drives the investment and redevelopment value of industrial, commercial, and street-level shops in old districts.

How are auction proceeds calculated and distributed to minority owners?

Under the Ordinance, the distribution mechanism for auction proceeds is highly rigorous. Its core principle is: “Apportionment of the total auction proceeds based on the pro-rata ‘Existing Use Value’ (EUV).”

Many minority owners mistakenly believe that the proceeds are calculated directly based on the “redevelopment value” of their own units. In reality, the law mandates a “pro-rata apportionment” mechanism. Here is the specific workflow:

1. Independent Surveyor Assesses the “Existing Use Value” (EUV): Focuses solely on the current state, ignoring redevelopment potential.
   When applying to the Lands Tribunal, the majority owner must submit a valuation report prepared by an independent professional surveyor. The report assesses the EUV of every unit (i.e., the market value assuming the building will not be redeveloped, based purely on its current age, size, floor, orientation, and state of repair).
2. Calculating Each Owner’s “Apportionment Ratio”:
   The surveyor sums up the EUV of all units to determine the building’s total EUV. The EUV of the minority owner’s unit is then divided by the building’s total EUV to calculate the percentage share they will receive from the future auction proceeds.
3. Lands Tribunal Sets the “Reserve Price”: Reflects the lot’s “redevelopment value.”
   When granting the Compulsory Sale Order, the Lands Tribunal sets a “Reserve Price” based on the lot’s redevelopment potential (e.g., its value if redeveloped into a brand-new high-rise). This reserve price is typically much higher than the total EUV of the existing building.
4. Public Auction and Deduction of Administrative Fees:
   The lot is auctioned publicly by a trustee (usually a surveying firm). If the developer wins the bid at or above the reserve price, the trustee will first deduct statutory and administrative expenses (e.g., advertising fees, auctioneer commissions).
5. Pro-rata Distribution of Net Proceeds to Minority Owners:
   Finally, the trustee multiplies the “net auction proceeds” by the minority owner’s “apportionment ratio” (from Step 2) to determine the final compensation amount, and issues a cheque to the minority owner.

Simplified Example of the “Apportionment” Mechanism:

• Total EUV of the building: HK$100 million
• EUV of your unit: HK$5 million
• Your Apportionment Ratio: 5M ÷ 100M = 5%

Assuming the Lands Tribunal sets the reserve price at HK$300 million, and the developer wins the lot for HK$300 million:

• Total Auction Proceeds: HK$300 million (assuming fees are negligible)
• Your Final Distributed Amount: HK$300 million × 5% = HK$15 million

Key Takeaway: The compensation you receive is a fraction of the lot’s overall redevelopment value (auction price), and the size of this fraction depends on the proportional value of your old unit within the entire old building.

2. Breakdown of the First Approved Case Under the New Ordinance: Henderson Land’s Hung Hom Project

As the first approved case since the implementation of the new Compulsory Sale Ordinance, Henderson Land’s (0012) Whampoa Street project in Hung Hom perfectly demonstrates the power of “consolidating adjoining lots”:

• Project Location: Nos. 18-20A & 22-24 Whampoa Street, and Nos. 88-90A Baker Street, Hung Hom.
• Surge in Reserve Price: The approved reserve price is HK$580 million, representing a massive 66% premium over its valuation of HK$349 million upon application in late 2024. This reflects the significant increase in redevelopment potential and commercial value of the consolidated site.
• Key to Success (Overcoming the Toughest Holdout):
  • Background: Henderson Land unified the ownership of the Baker Street site for HK$482 million back in 2021. However, the Whampoa Street site could not be compulsorily sold under the old ordinance because a roast meat restaurant owner held over 20% of the undivided shares.
  • Strategy: On the very first day the new ordinance took effect in December 2024, Henderson Land immediately submitted an application to consolidate the two sites.
  • Result: By leveraging the fully acquired Baker Street site, they successfully “averaged up” the overall ownership percentage to meet the new statutory requirements, officially securing approval and dislodging the holdout owner.

3. Implications for the Industrial, Commercial, Retail, and Old Building Markets

• “Consolidated Acquisition” Becomes the New Trend: Developers and consortia will become more proactive in acquiring adjoining old commercial/residential buildings or industrial buildings, stimulating transaction volumes for surrounding street-level shops and commercial properties.
• Decreased Bargaining Power for Holdouts: The previous strategy of blocking redevelopment by merely holding 20% of the ownership is no longer effective. Minority owners must reassess their timing for selling.
• Faster Returns and Higher Profits: Investors can strategically target adjoining lots with consolidation potential, utilizing the new ordinance to expedite the compulsory sale process and achieve earlier capital recovery.

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Frequently Asked Questions (FAQ)

Q1: What is the most significant change in the new Compulsory Sale Ordinance implemented in late 2024?
A1: The biggest change is the lowering of the compulsory sale ownership threshold (down to a minimum of 65% or 70%) and allowing developers to consolidate adjoining lots to calculate the ownership percentage, which drastically reduces the difficulty of property acquisition.

Q2: Why is the reserve price for Henderson Land’s Hung Hom Whampoa Street project 66% higher than its valuation upon application?
A2: The project utilized the new ordinance to apply for the consolidation of two sites, successfully overcoming the issue of insufficient ownership in a single site. The consolidated site boasts a larger footprint, significantly enhancing its redevelopment potential and planning flexibility. Consequently, the approved reserve price reached HK$580 million, a substantial 66% increase from the original valuation.

Q3: What are the benefits of the new Compulsory Sale Ordinance for investors in industrial, commercial, and retail properties?
A3: The new ordinance accelerates the pace of urban renewal in old districts. Investors holding street-level shops or adjoining industrial buildings with redevelopment potential are more likely to attract interest from consortia and be acquired at reasonable market prices. It also mitigates the risk of a minority of “holdouts” stalling an entire redevelopment project.

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