Rail services around the world are often plagued by disruptions, delays and fare increases as a consequence of insufficient profit and to cope with maintenance requirements. One example is Transport for London, where revenue from transport covers only £4.8 billion of its £10.2 billion budget. It should be mentioned that many of today's’ rail services suffer from ageing infrastructure which demands more investments in maintenance, whereas Hong Kong’s metro system is much younger – but, MTR manages 99.9% on-time rate with around 5.8 million daily passengers at relatively low ticket fares whilst still generating 170% of the systems operating costs. How is this possible?
The answer is a business strategy called “rail plus property”, where MTR tender for private developers to build residential and commercial properties above its stations and then take a share of their total sales and rental earnings. That profit brings valuable coverage for operations and maintenance as well as funding for new projects. In 2018, MTR’s property management and rental in Hong Kong generated revenue of HK$5 billion (roughly £500 million). In addition to being a successful source of income, this system improves the city’s urban development according to Jacob Kam, director of MTR. “The model gives us the incentive to make good use of the land,” he says. “If we design well, plan well and build well, then we get that increase in value.”
With the government as MTR’s main shareholder, they are allowed to buy new land for railway expansion for the greenfield price (the price of the land before railway is built), which is a critical enabler of the rail plus property model.
However, apart from the economic success of this business strategy, MTR has met complaints regarding their priority of private housing. Currently, all construction is directed towards privately owned properties, and critics urge the government to reconsider favouring a company that does not focus on the public interest. There are ongoing discussions on whether the government should assign a share of new residential properties to public housing instead.
This business model poses a new way of thinking, where MTR and private developers work together to drive urban development based on the expansion of the railway. It would be interesting to see how this strategy can be spread to other areas with other urban development challenges. Can it be adapted to alternative modes of public transport, like bus services in smaller cities and rural areas? Could it become an effective strategy to connect the construction of new residential areas to sustainable transport and thus decrease the need for privately owned vehicles?
Written by Hampus Alfredsson, RISE Viktoria.
1. 2019-04-02. How public transport actually turns a profit in Hong Kong.