Staying High And Stable
Foreseeing The Hong Kong property market
Besides Penang, do you know which country is also known as the Pearl of Orient? It is the Hong Kong Special Administrative Region of the People’s Republic of China, one of the world most densely populated regions.
Even though Hong Kong is only 1,104 sq. km., its population has grown steadily and as of 2014, it stood at a total of 7.2 million.
Hong Kong is a city generally considered to be an important node in the global economic system. The Heritage Foundation Index of Economic Freedom named Hong Kong as one of the countries with the freest market economies, due to laissez-faire economic policies, low taxation, and free trade.
There are still lots of opportunity in the Hong Kong property market. In the residential market, investors have begun to absorb the impact of property cooling policies and transaction volume has rebounded since 2014.
“Mass residential prices are expected to increase 5-10% in 2015. For the office sector, growing demand from the expanding Chinese firms will support office rental growth and price appreciation,” Hong Kong Knight Frank senior manager Pamela Tsui.
“The upcoming challenge include US interest rate hike, which will have a negative impact on investment sentiment in the property sector. The recent stock market volatility in Hong Kong and China may negatively impact the property market as well. Meanwhile, the retail sector outlook is still uncertain,” said Tsui.
According to Knight Frank, Hong Kong sees the strongest price growth in the region, while China is expected to further liberalise outbound investment.
It said that “house prices in Hong Kong defied the ongoing cooling measures by rising a staggering 18.4% in the 12 months to Q1 2015. This is the highest annual price growth in the overall market since the second quarter of 2013.”
The number of residential sales transactions, after having dropped to 4,329 in March, affected by the credit tightening measures implemented in February, has since rebounded for two consecutive months, reaching 4,549 in April and 5,168 in May.
The number of mass residential sales transactions worth below HK$10million rebounded to 4,444 in May, a figure still lower than the over-5,000 levels reached during the first two months of the year. Meanwhile, the number of luxury residential sales worth KH$10million or above exceeded 700 in May, the highest level thus far in 2015, reflecting a shift of some buyers from the mainstream to the luxury segment, as the government’s latest measures target small to medium-sized homes.
During the first four months of the year, primary residential sales represented 25% of total sales, a higher proportion than in previous years, as developers remained active in launching new units at competitive prices with attractive, beneficial packages.
As stated by Knight Frank, more new projects will be launched in the coming months, including Skypark in Mong Kok and Grand YOHO in Yuen Long.
For the first five months of 2015, luxury home prices rose 1.4% and are expected to increase up to 5% over the year, due to sustained demand and limited supply. Mass-residential prices, having increased about 7% during the first five months, are set to rise by a total of 5-10% over 2015, considering strong end-user demand.
PRIME OFFICE MARKET
In its report, Knight Frank stated that both the Grade-A office sales and leasing markets remained robust in Hong Kong. “While prices hit a new record high, rents increased in the CBD and decreased in CBD2.”
“In the housing market, the number of sales transactions rebounded for two consecutive months, despite the implementation of new mortgage measures in February. Meanwhile, the retail property leasing market remained subdued, except for a few transactions in prime retail spots.”
It is mentioned that Hong Kong’s office sales market remained heated in May, with numerous major transactions being recorded in the month.
“For example, a high floor at Nine Queen’s Road Central sold for approximately HK$480million or HK$34,861 per sq. ft., a record-high unit price in Hong Kong. The price was 15% higher than the previous record set in the same building one year ago, demonstrating positive market sentiment for office property investment.”
In the leasing market, Manulife has renewed the lease on 340,000 sq. ft. of its office space at Manulife Financial Centre in Kwun Tong. The lease on another 160,000 sq. ft. of space has not been renewed, as the company has decided to relocate part of its offices to One Bay East West Tower in the same district, which is scheduled for completion by end of 2015.
With abundant available space in Kowloon East, Knight Frank expects office rents in the area to experience mild drops in the coming months, although leasing activity will remain active, given robust demand.
In May, China and Hong Kong regulators jointly announced the ‘Mutual Fund Recognition Scheme’, which allows funds domiciled in Hong Kong and China to be sold in each other’s markets, effective from 1 July 2015.
In the long term, this arrangement is expected to boost office leasing demand in Hong Kong from related firms, such as funds, banks, and asset management.
Capital values made some minor headway across most sectors in the second quarter, with the exception of prime street shops which recorded a 2.5% decline.
Luxury apartments in particular posted a spectacular performance as values increased by 6.2% on the back of buoyant stock markets in both Hong Kong and mainland China.
We doubt this rate of growth will be repeated in the second half, however, given recent uncertainties. The industrial market, and warehouses in particular, managed to hold on to price gains but after a long bull run, it may be time to see some slowing of price growth,” said Hong Kong Savills head of research Simon Smith.
Rents overall also showed modest growth during the second quarter with Grade A office rents outperforming, pushed upward by demand from financial services firms as a result of the Stock Connect schemes.
As vacancy rates rose in the warehouse market, rents drifted and we expect further weakness over the second half. Logistics has been hit by the slowdown in the retail market where prime street shop rents dipped by 5.5%. We remain moderately bullish on shopping mall rents, however. “The expanding office market took the luxury apartment along with it and budgets of HK$100,000 to HK$150,000 per month were again active. Rents rose by 3.2% over the second quarter,” said Smith.
“The number of visitor arrivals to Hong Kong rebounded 0.9% year on year in April, compared with the 8.7% drop in March, from a year ago. However, the retail sales value fell another 2.2% in April from a year earlier, with the fall continuing to be led by the sales of the government’s classification of ‘Jewellery, Watches and Clocks and Valuable Gifts’,” said Knight Frank.
The retail leasing market remained subdued in May, except for a few transactions involving prime retail spots. According to Knight Frank, an electronics appliances retailer reportedly took up a ground floor space measuring about 2,000 sq. ft. at 537 Lockhart Road in Causeway Bay.
The previous tenant, a mid-tied fashion retailer, relocated to ground floor shops 1-3 Excelsior Plaza in the same district, covering a total of 2,353 sq. ft.
Amid a challenging retail environment ahead, Knight Frank expect prime street shop rents to drop a further 5% in the second half of 2015.
Shopping centres will remain relatively resilient, with prime mall rents expected to remain flat and non-core shopping centre rents to slightly increase over 2015.
We are definitely seeing more land sale opportunities, given the government’s eagerness in increasing supply in the market.
With chances of an upcoming correction amplifying, ahead of the imminent interest rate hike and uncertainties on the external front, more developers are taking the current opportunity to build cash reserves and reduce gearing, in preparation to acquire development land upon tipping of prices. We have seen more small-to-medium-sized developers as well as Mainland developers participating in government land sales.
“Given the housing shortage and affordability being a growing issue in Hong Kong, developers have been building more small flats in the city, to meet the genuine demand from end-users. Going forward, mass residential units should take a huger slice of the pie,” said Jones Lang LaSalle head of research Dennis Ma.
TRANSACTION COSTS INVOLVED IN HONG KONG PROPERTY
According to Mayer Brown JSM, nine times winner of Real Estate Law Firm of the Year, by Asian Legal Business Awards, the transaction costs in buying and selling Hong Kong’s property are as follows:
a) Stamp duty
Stamp duty is chargeable on a property transaction at a sliding rate with reference to the purchase price or the market value of the property. Currently, the maximum rate is 4.25%, if the purchase price or market value of the property is over HK$21,739,120. Both seller and buyer are liable to pay stamp duty but market practice is that the duty is typically borne by the buyer.
b) Special stamp duty
Effective from 20 November 2010, any residential property acquired on or after 20 November 2010 and resold within 24 months, will be subject to a special stamp duty calculated with reference to the purchase price or the market value of the residential property, at a sliding rate depending on the length of time between acquisition and resale.
The maximum rate is 15% if the residential property is resold within 6 months from the date of its acquisition. Both seller and buyer are liable to pay special stamp duty and it is open for the parties to negotiate who will pay it and/or the proportion of payment.
c) Broker/estate agent’s fees
Broker/estate agents’ fees have historically been charged at a usual rate of 1% of the purchase price (often payable both by the seller and the buyer) but, these rates are open to negotiation depending on market conditions. This is particularly so in the case of larger transactions.
d) Legal fees
The amount of legal fees is subject to negotiation by the parties and to some extent depends on the size of the transaction, but unlike brokers/estate agents the price is not directly based on a percentage of the purchase price.
PAYABLE TAXES IN AND AFTER THE PURCHASE TRANSACTION
Mayer Brown JSM also explained the payable taxes for purchasing property in Hong Kong as below:
a) Profits tax
Corporations (whether incorporated in Hong Kong or overseas) which carry on a business in Hong Kong will be subject to Hong Kong profits tax at the current rate of 16.5%.
It is possible for a company which buys and sells real estate in Hong Kong to be treated as trading in real estate and have any gains arising on a disposal of such real estate assessed to Hong Kong profits tax. In order to avoid profits tax the real estate must be held by way of a long-term investment. As a rule of thumb, a property owned for 3 years or more typically is treated as a long-term investment, and not part of any trading stock. As a result, any gain on its disposal should not be subject to profits tax.
b) Property tax
Property tax is charged at the current rate of 15% on 80% of gross annual rentals less rates generated by real estate. Companies that own real estate generally avoid this tax by electing to be assessed for profits tax on this income instead.
c) Stamp duty
An agreement for sale or a conveyance on sale of immovable property in Hong Kong has to be stamped. The time for stamping is normally 30 days after the execution of the agreement for sale or the conveyance. A penalty of up to 10 times of the amount of stamp duty payable may be imposed for late stamping.
An unstamped agreement or conveyance is not admissible as in evidence in civil proceedings and cannot be filed or acted upon by any public officer or any body corporate.
d) Capital gains tax
There is no capital gains tax in Hong Kong.
e) Withholding tax
There is no withholding tax in Hong Kong on dividends paid by companies to their shareholders whether local or foreign.
f) Estate duty
Estate duty was abolished in Hong Kong with effect from 11 February 2006.
Colliers International, on the other hand, predict home prices in Hong Kong will stay at a high and stable level in 2015. Since the market absorbed much of the end-user demand last year, it maintain its forecast that prices for both mass and luxury properties will see slower growth of 3% in 2015.
There are several factors supporting the residential market. Interbank liquidity is still at a high level of HK$239 billion, vacancies hover at a low 4% to 5% and supply in the secondary market remains low.
There will be no oversupply, with 15,000 new flats due for completion in 2015, which matches the primary-sales absorption rate of about 15,000 units in 2014. It foresees rents rising 7%, faster than the 3% increase in prices, so yields should edge up 10 basis points in 2015.
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