Hong-Kong Real Estate : CG & Tax Heaven – Cashflow Nightmare

2

Hong-Kong is obsessed with property. There’s really no other way to put it.

Local media outlets run a multitude of property-related items on a daily basis, residents and ex-pats alike are constantly evaluating, re-evaluating, umming and urring on whether to rent or buy, live in or rent out, sub-divide and sub-let, and so on and so forth, and it seems like every time you speak to a Hong-Kongese, the subject of property is bound to surface at some point or another in the conversation.

A slightly larger and more Asian-oriented version of Singapore, Hong-Kong seems, at first glance, to be a foreign investor’s heaven. Banks are more than happy to lend against the property itself (providing it’s not too old – more on that later), taxes are low, realty agent fees are even lower, and there’s a multitude of licensed, reliable, English-speaking agents to choose from. These guys also share the same limited database, in similar fashion to Singapore, but the size of the market they deal in is far larger, since only about 50% of residential properties are government housing units, as opposed to more than 80% in Singapore. Hong Kong is also slightly larger than Singapore. As a result, deal-mining is a bit more readily available.

This mentality results, as you may have guessed, in a highly speculative and volatile property market, with ups and downs that would make a manic-depressive psychiatric patient seem mellow and mild in comparison. Prices are sky-high – so much so that HK often finds itself at the top of global comparison charts for a few months or years at a time – and it’s all but impossible to find a rentable investment property in reasonable condition and age for anything less than 2.5M HKD (app. 333K USD).

“The Numbers”

While there’s been some uncertainty and concern when China took control of HK back from the British, in 1997, the city has since been verified as a “Special Administration” zone, similar to Macao, re-acquired by the Chinese from Portugal. Hong-Kong is a far more regulated and safe environment, though, and all realtors must be fully licensed, adher to strict standards and regulations, and generally do a pretty good job, in much similar fashion to Singapore.

Prices, as a result, have been sky-rocketing as a rule of thumb, with developers competing on who will charge the highest prices on new sites. Following the last historical sharp drop of app. 50% between 2001-2003, prices have been on the up, up, up, have gained an additional 140% on their starting point in the last decade, and have only started to drop (more like plateau, really) in mid 2011.

General sentiment seems to be that the market has “topped out”, and that prices will most likely drop 30% at the very least, if not more, in the next 1-3 years. Whether or not that’s indeed the case remains to be seen, but rent, which has been rising far less sharply, is typically 2-3% (can you say “bubble”?), and unless you’re planning to live there, or considering possible capital gain (for which you’d probably prefer waiting for that forecasted price drop to occur), now really doesn’t seem like the right time to buy. Hong Kong is definitely NOT a cash-flow environment, many mortgagees have found themselves paying more than they rent the property out for in recent years, even before inflation is taken into account, and this is probably one of the most significant facts one should be aware of prior to purchase.

HK Real EstateThe Foreign Real Estate Investor

Here’s the best bit of news though – Hong Kong is one of the industrialized world’s easiest and most tax-convenient places for foreign investors to purchase in. It’s also relatively hassle and risk/realty-crime free (that is, provided you don’t consider capital loss potential coupled with bad cash-flow a risk – I know I certainly do).

* There’s almost no limitation on property purchases, both for individuals and companies. Companies have to register in Hong Kong prior to purchasing property, but the process is quite easy and affordable (particularly compared to the high purchase price, which makes it negligible really), and new properties are being built at a hectic pace (pictured on right – “making land out of water” in preparation for yet another new development)

* Banks will lend (almost) freely to non-residents, in particular international banks like HSBC. Interest rates aren’t as attractive as their Singapore counterparts, but long term fixed rates are quite easily achievable, providing some further protection. The only limitation seems to be the age of the property – it’ll be hard to get a mortgage for a property older than 10 years in HK. On the upside, the bank will conduct title searches and confirmations, and even building inspections on the higher-priced properties for you, so a mortgage may be a good idea even if you’ve got all the cash required for the purchase readily available (but, let’s face it, if you have that sort of liquid cash, there are better things to do with it than buying HK property, at least until prices go down a bit, which may very well be already happening, or will happen in the next few years).

* Property tax is 16% from 80% of the government valued potential annual rental income (minus rates, which the occupier would normally pay, unless they default) – corporations can elect to pay profits tax instead, which is higher (17.5%), but far more deductable, and the vast majority of corporations indeed do so, successfully negating large parts of this tax.

* Stamp duty is the major purchase-related tax component, and ranges from 0.75% to a 3.75% cap (typical non-luxury units are normally around the 2-3% mark).

* There’s no other income-related tax (yay!) – personal income tax is known as “Salaries tax” in HK, and doesn’t apply to non-employment income.

* There’s also no capital gains tax, which is a HUGE plus, considering the fact that if you DO buy in HK, it will be primarily for capital gain (or residency purposes – one can get residency for purchases over 833 USD approximately).

There are several other unique characteristics of the market which we’ll discuss next week, not the least of which is the fact that all properties in HK are leased from the government for 50-999 years, as opposed to freehold ownership. Other little tidbits concerning the relationship with China, purchasing tips and tricks etc will also be disclosed.

Stay tuned, and as always, please feel free to comment, ask, contest or just share your thoughts – looking forward to the discussion. :)

1 (The majority of data presented above compiled from the “AngloINFO Hong-Kong”, “The New-York Times”, “HK Property Man”, and “Asia Expat”, as well as from leading HK and Asian property forums, and personal interviews with local residents and realty professionals

2 (Image 1:  Hong Kong’s world-famous Nightly Light Show / by “No Lands Too Foreign“, Image 2: HK builds more land “on water”/ by Andrew Turner)

Subscribe to our mailing list

* indicates required Email Address * First Name Last Name

About Author

Ziv Magen (G+) is an Australian, and has been living alternately in Japan and Australia for the past decade. "Born and bred" an IT project manager, he has made the transition to full-time real-estate investing several years ago, and subsequently opened a buyers' and proxy agency - assisting others in remotely capitalising on Asia's booming property market.

2 Comments

  1. Ziv- I’m really enjoying your articles. It’s great to learn about the Asian markets- even if I’m not ready to invest there- yet. Ha! Being aware of what’s possible in other markets can inform the domestic investor about what may be possible here- or at least give us things to be envious of and/or grateful for. Please keep them coming. Thanks

  2. Ziv Magen

    Thanks, Kama, that’s great to hear.
    So glad you’re finding some value there- and you’re absolutely spot-on with your observation, I also find great interest in reading about countries I don’t invest in- yet! ;)
    In fact, one of the things that’s given us the best leverage in our business is the knowledge gathered through reading about the us market here and in other sources- it allows for far greater perspective, a basis or comparison and a deeper understanding of trends, phases and states of economical turmoil or growth.

Leave A Reply

css.php