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Property Investment for Expats in Hong Kong

Submitted: August 2013

Foreign nationals are not restricted from buying property in Hong Kong, and property rights are strongly protected in Hong Kong. Round-trip property transaction costs in Hong Kong are traditionally low (around 3%) excluding taxes. Property investment may be made through companies.

Hong Kong housing market generally

As a general rule, property prices in Hong Kong are very volatile. Hong Kong has experienced a tremendous house price boom since 2004, with year-over-year increases regularly surpassing 20%. Key contributing factors include:

This has pushed the Government to gradually impose some fiscal tightening in order to slow down demand and avoid a potential real estate crash.

In late 2012, radical measures have been introduced. This includes a 15% Buyer Stamp Duty (BSD) on property purchases made by foreigners. In addition, a Special Stamp Duty (SSD) of 20% is now levied if a property is sold within six months (10% if sold within three years), as opposed to 5% to 15% prior to the reform. These proposals have yet to be enacted, but they would have retroactive effect from 27 October 2012. This is on top of the standard Ad-Valorem Stamp Duty (AVD) of up to 8.5% (see below).

In 2013, some downturn has been reported but it has yet to be sustained. So far, it’s primarily a dramatic plunge in the volume of transactions (around -50%, as foreign demand has dried up).

An assessment of the Hong Kong housing market must include many additional macroeconomic factors, including:

AVD rates

From 22 February 2013, the AVD rates are as follows:


Property value (HKD)

Rate (%)

Cumulative AVD (lower end of the band, in HKD)

0 – 2,000,000

1.5

 

2,000,001 – 2,176,470

20

30,000

2,176,471 – 3,000,000

3

 

3,000,001 – 3,290,330

20

90,000

3,290,331 – 4,000,000

4.5

 

4,000,001 – 4,428,580

20

180,000

4,428,581 – 6,000,000

6

 

6,000,001 – 6,720,000

20

360,000

6,720,001 – 20,000,000

7.5

 

20,000,000 – 21,739,130

20

1,500,000

21,739,130 and above

8.5

 

Leaseholds in Hong Kong

An expat should understand the concept of “leasehold” prior to going ahead with a property purchase. In some countries, the residential real estate market consists almost exclusively of freeholds. Conversely, all residential properties in Hong Kong are leaseholds. This is because the Hong Kong Government remains the ultimate owner of each property in Hong Kong. Leaseholds are common practice in Asian markets.

When you own leasehold property, you are only the lessee of the ultimate owner. Thus, a leaseholder must pay ground rent to the Government (“Government rent”), at a rate of 3% of the property’s annual value. For more inflation of land ownership policy in Hong Kong, click here.

Although leaseholds are like tenancies, they spread over a very long period (typically 50 to 999 years), and Government rent is very low. Therefore, leaseholders may have the illusion that they are the ultimate owner of their property, even though it will eventually return to the Government unless they have a right to renew their lease.

You should always check your property tenure. Don’t forget that the value of a leasehold property erodes over time. Typically, you enter red territory when your lease matures within less than 70 years.

Mortgaging

Get your documentation right before applying for a mortgage, and do it early to avoid disappointment.

It might be tricky for expatriates to take out a mortgage in Hong Kong, as lenders require documentation which isn’t necessarily available for non permanent resident individuals. However, some lenders appreciate that there is high demand from individuals who have an overseas element in their application. Therefore, the first thing to do is to look for a lender who is willing to offer its services to you.

Typically, you can expect an interest rate of between 2.2 to 2.8%, a mortgage term of around 20 years, a loan to value ratio (LVR) of 70%, and a repayment ratio of 50%.

Remember that:

Property taxes

A rating tax is due by property owners to fund certain local services such as waste disposal. The tax rate is 5%, and is assessable on 100% of your property’s annual value.

Additionally, there is a land value tax in Hong Kong. It is levied at a rate of 15% on:

0.8 * (property annual value – irrecoverable rents – rating tax)

Higher land taxes mechanically shrink property values and rental yields. Prior to purchasing property, it is essential that you check how much property taxes you can expect to pay.

Letting your property

On average, you can expect a gross rental yield of no more than 3% with rents possibly going up.

If you decide to let your property, you must be aware of the applicable landlord and tenant law. Do not attempt to evict your tenant illegally. For an overview of landlord and tenant responsibilities in Hong Kong, click here.

Stamp duty is payable on property leases, at the following rates:

Term

Rate

0 – 1 year

0.25% of total rent payable

1 – 3 years

0.5% of annual rent

3 years and over

1% of annual rent

Undefined

0.25% of annual rent, rounded up to nearest HKD100

Key money, construction fees, etc., mentioned in the lease

4.25% of the consideration

 

 

 




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