Hong Kong: Related Information
Hong Kong: The Commercial Property Market
Hong Kong has everything going for it at the moment: its special links with Mainland China, enhanced by the Closer Economic Partnership Agreement (CEPA); its status as one of the free-est business centres in the world; the floods of capital and companies exiting the over-regulated markets of Europe and the USA. And the commercial property market reflects this bonanza; it is booming, and so are its prices.
In November, 2010, a director of major commercial agency Centaline reported the sale of a 79th floor office in The Centre HKD338m (US$44m), at HKD25,580 per square foot. "This is the highest commercial property price per square foot in Hong Kong's history," he said.
While the government constantly attempts to dampen down the matching boom that is taking place in the residential market, it does little to restrain the commercial market, unless you count measures to restrict inflows of 'hot' money, which have the perverse effect of limiting lending and thus development, further increasing prices. The secure future for this asset class just serves to increase its attractions.
Hong Kong: Commercial Property Prices
According to a recent report from Colliers International, Hong Kong had the world's most expensive office rents at US$161 per square foot in the first half of 2010. London is in second place at US$130 per square foot, and Tokyo is third at US$101 per square foot.
Following a significant inflow of hot money, leading to substantial increases in asset prices in Hong Kong, the Financial Secretary, Mr John C Tsang, announced new anti-property speculation measures in November 2010; but these are directed at the residential market, and are unlikely to dent the growth of the commercial property market.
Tang said that, with Hong Kong’s local property prices some 15% above the level of only eight months ago, and a “staggering” 47% above their low levels of 2008, 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.
Hong Kong: Commercial Property Law
There are no restrictions on the ownership of commercial property in Hong Kong, other than the fact that 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.
The Hong Kong Land Registry administers recording of real estate parcels and their owners under the Land Registration Ordinance and the Building Management Ordinance.
All land in Hong Kong belongs to the government and is leased to occupiers or developers on terms varying from five to 999 years.
The key piece of legislation relating to real estate transactions and leases is the Conveyancing And Property Ordinance. Also of importance is the Land Titles Ordinance 2004.
A widely reported case in 2010 will have the effect of improving the supply of real estate for office development. Pre-existing law allowed developers to acquire a building compulsorily when they already owned 90% of the units it contained; under the new judgement, this ceiling is lowered to 80% in respect of buildings over 50 years old. There are about 4,000 of these, many in what were then residential but are now commercial areas of the city.
Hong Kong: Commercial Property Taxation
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.