> Why the Hong Kong Metro is Hugely Successful…and Sort of Cheating

Hong Kong has one of the world’s most successful transit systems. Public transport accounts for 80% of all journeys. Metro trains boast 99.9% on-time service. Perhaps most notably, the city’s transit agency turns a hefty profit. This is largely due to enormous revenues from real estate properties above rail stations. The company is viewed as a unicorn in the transit world: a system that needs no subsidy! It has evoked case studies from the World Bank, United Nations, and McKinsey & Co. Yet, while the success is real and the praise deserved, the model is nearly impossible to replicate elsewhere.

Hong Kong’s 7.3 million residents live in one of the world’s most densely-populated cities.

This is how we do it…

Rail and bus services in Hong Kong are overseen by a public transit agency, Mass Transit Rail (MTR). The operator of these services is MTR Corporation (MTRC), a private and publicly-traded company — of which the Hong Kong government owns 76%. The real estate subsidiary of MTRC works with the government to deliver a program creatively named Rail+Property (R+P).

Via this R+P program, MTRC acquire land above and adjacent to new MTR stations. It partners with commercial developers to build mixed-use highrises. The company extends the model into mainland China as well. Because land near rail stations is particularly valuable, the results are lucrative.

According to its 2017 financial statements, MTRC’s property portfolio generated about HK$17 billion ($2.17 billion) in annual revenues. This figure is larger than the revenues from operating Hong Kong’s public transport. Unsurprisingly, this large proportion of revenues from sources other than transit service (non-operating revenues) is rare among transit agencies. And here’s a graph to prove it…

Data sources: glossy annual reports from each of the listed agencies.

Don’t go chasing cash waterfalls…

If R+P is such an easy financial win, why haven’t other cities capitalized on the model? Simply put: the system is rigged in Hong Kong’s favor. And there are three key reasons why.

Most importantly, private property rights in urban China are…unique. Since 1982, all urban land has been owned by the state and requisitioned when desired. The Hong Kong government acquires property with powers of eminent domain, with any necessary compensation paid at artificially low prices (based on the value before any transit investment). Then the government gives the land to MTRC, granting them development rights to build at high densities and sell at market rates. In few countries does the government have such free reign over urban land.

A second reason the R+P strategy is out of reach for most cities is that MTRC’s commercial arrangement is impractical or illegal in many countries. American transit agencies, for example, are often statutorily prevented from holding equity positions in real estate developments or subsidiary firms.

The third reason is that Hong Kong is the world’s most expensive property market, making real estate development uniquely lucrative. Per-square foot costs in Hong Kong are even higher than in New York and London; if you are a transit agency in Addis Ababa or Warsaw, betting on real estate doesn’t make as much financial sense.

Although the idea of financing transit with property development might be En Vogue, I suggest you Free Your Mind of the urge to directly replicate MTRC’s commercial success.

Dont let go…

It’s true that Hong Kong’s MTRC does incredibly well in the real estate market. But they play by different rules. The upshot is that the MTR is actually cash-positive even without its property portfolio, suggesting that sound operations, policies, and transit-oriented development (TOD) can drive commercial efficiency. I would argue, frankly, that urban transport need not make a profit to be considered valuable. But local authorities would do well to follow Hong Kong’s entrepreneurial approach to improve transit efficiency.