Hong Kong: Working and Living
Buying and Renting Real Estate
Hong Kong is in the middle of a property boom, although the government has taken various steps to try to rein it in. Financial Secretary, Mr John C Tsang said in November, 2010, that local property prices were some 15% above the level of only eight months ago, and a “staggering” 47% above their low levels of 2008.
He disclosed that “property transactions in the first ten months of this year increased by 17% compared with the same period last year. The rate of increase in the number of transactions in small and medium sized units is even greater than those in the luxury market. This suggests that the exuberance has begun to spread to the mass market.”
Furthermore, “short-term resale transactions are increasing rapidly,” Tsang added. “In the first nine months of this year, the number of re-sales within 12 months of acquisition increased by 114%.”
Following a significant inflow of hot money, leading to substantial increases in asset prices in Hong Kong, he said the government had to take action, especially as the United States’ recent US$600bn addition to its quantitative easing programme was likely to lead to a further inflow of capital into Asia.
Therefore, to curb such speculation, Tsang proposes to introduce a Special Stamp Duty (SSD) on residential properties, on top of the current ad valorem property transaction stamp duty. Any residential property acquired on or after November 20 - either by an individual or a company, listed or unlisted, and regardless of where it is incorporated - and resold within 24 months will be subject to the proposed SSD.
The SSD will be payable jointly and severally by both the buyer and the seller in the resale transaction, and will be calculated based on the consideration for the resale transaction at regressive rates for different holding periods.
It will be charged at 15% if the property is held for six months or less; 10% if the property is held for more than six months but for 12 months or less; and 5% if the property is held for more than 12 months but for 24 months or less.
It is also proposed to disallow deferred payment of stamp duty, including SSD, for residential property transactions of all values, while, to deter non-compliance, the existing statutory sanctions will be extended to cover the SSD. Any person who fails to pay the SSD by the deadline for payment shall be liable to penalties up to 10 times the amount of the SSD payable.
In addition, and simultaneously, the Hong Kong Monetary Authority (HKMA) issued a circular to Hong Kong’s banks requiring them to implement further measures to strengthen risk management in their residential mortgage lending business.
The HKMA is lowering the maximum loan-to-value (LTV) ratio for residential properties with a value at HKD12m (US$1.55m) or above from 60% to 50%, while reducing the maximum LTV ratio for residential properties with a value at or above HKD8m and below HKD12m from 70% to 60%, but the maximum loan amount will be capped at HKD6m.
The HKMA is maintaining the maximum LTV ratio for residential properties with a value below HKD8m at 70%, but the maximum loan amount will be capped at HKD4.8m. It is also reducing the maximum LTV ratio for all non-owner-occupied residential properties, properties held by a company and industrial and commercial properties to 50%, regardless of property values.
The above measures took effect immediately, but loan applications in respect of transactions where a provisional sale-and-purchase agreement for the property was signed on or before November 19 were not affected.
The Chief Executive of the HKMA, Norman Chan said: "Under the present environment in which interest rates are exceptionally low and there is a huge amount of excessive liquidity, many investors may easily overlook the fact that the income level of Hong Kong people is increasingly trailing the property prices. We are very concerned that the housing market and consequently the mortgage market will become even more exuberant, thereby exposing the banking system to higher risks.”
“The HKMA must introduce appropriate prudential measures in a timely manner to ensure that our banks adopt the necessary risk management standards and practices, and to make our banking system more resilient to shocks, so as to dampen the damage that would be inflicted by the bursting of the asset bubble."
In reply to a question in the Legislative Council in late November, the Secretary for Transport and Housing, Eva Cheng, reviewed the measures that the government had already introduced in the last few days to dampen the rise in Honk Kong’s property prices, particularly the special stamp duty and the lowering of maximum loan-to-value ratio by the Hong Kong Monetary Authority.
“We believe,” Cheng said, “that the expectation on the property market will be changed because of the newly introduced measures. With diminished prospect for quick profits from speculating in the property market, there will be less speculation in different forms.”
However, she added that, “to ensure the healthy and stable development of the property market, the government will continue to closely monitor the development in the property market, and will introduce further measures when necessary.”
Given that much of the funds being invested in Hong Kong’s property market are originating from abroad, she was also asked if the government was conducting studies on measures taken by other countries to restrict non-citizens from purchasing local residential properties.
In her reply, she confirmed that the government had considered the proposal of banning non-Hong Kong residents from buying flats in Hong Kong. “However,” she said, “such a proposal would bring about a very fundamental change to our system, would affect the status of Hong Kong as one of the freest market economies in the world.”
It would, she continued “undermine the confidence of overseas companies or investors in Hong Kong as a global financial centre and preferred place for doing business with its so far consistent policies in enabling free flow of capital and barrier-free environment for investment. This would have read-across implications on the overall economy of Hong Kong."
Property tax is levied annually on the owner or occupier of real estate located in Hong Kong. Since ownership may be split (eg an entity with a 100 year lease may grant a 50 year sublease to a 3rd party) separate assessments may be made on the same parcel of land. Property tax which is governed by the provisions of the Inland Revenue Ordinance has the following characteristics:
- The annual assessment to property tax is based on 100% of the annual rental income of the property less any rates paid, any bad debts, a repairs and outgoings allowance constituting a maximum of 20% of the annual rental income (irrespective of whether or not more was actually spent) and other allowable deductions. In determining "rental income" the Inland Revenue will include any premiums, service charges, management fees, rates, repairs and outgoings paid by the tenant either to the owner or on behalf of the owner under the terms of the lease. In order to assist the inland revenue to assess the rental income the owner is obliged to keep records for up to 7 years and inform the tax authorities of the actual sums received.
- Property tax is based on the territorial principle and is levied on buildings, parts of buildings, wharves, piers and other structures located in Hong Kong. The fact that the owner is non resident, non domiciled or a national of a foreign country is completely irrelevant and does not exempt him from having to pay this tax.
- The tax rate is 15% (2008/9 onwards) of the assessed annual rental income.
- Property tax is levied on a provisional assessment basis which takes into account the previous year's rental income with a tax credit being granted where the previous year's rental income exceeds the current year's rental income. Relief is also given where part of the assessed rental income is a bad debt.
- The following types of property are exempted from this tax:
- The properties of foreign governments;
- Charitable bodies exempted from taxation;
- Business entities who derive profits from and pay profits tax on rental income derived from ownership of real estate are entitled to a set-off of property tax against profits tax with a tax credit being granted where the property tax exceeds the profits tax;
- A corporation which purchases a property for its own occupation does not pay property tax on the deemed rental income which it could have earned if it had rented out the building.
- It is advisable for properties to be owned by Hong Kong corporate entities since property tax does not make allowances for either depreciation or interest costs on a loan to finance the purchase, while such costs are deductible for corporate profits tax purposes. A foreign company cannot own real estate in Hong Kong unless it is registered as a foreign company under the provisions of the Companies Ordinance.