As promised, here’s a drilldown of some unique characteristics of the Hong-Kong property market, including tips, tricks, inside information etc – starting with the most significant and drilling down to the misc odds & ends –
All land in Hong Kong is leased from the Government, (as opposed to being freehold, which is the straight-forward ownership we’re all familiar with). While this concept may be alien and frightening to the typical “Western” investor, it’s actually common practice in some countries – we’ve only briefly touched upon the subject in our Singapore coverage, so with your permission, I’d like to delve into it a bit further now, just to try and get you a bit more comfortable with the idea.
The two main issues one should take into account with government leases are
a) Stability of government – you don’t want the government to suddenly have a change of heart and decide to confiscate all leased properties from foreigners, for instance, or even worse – to single out one particular foreigner in some sort of corrupt cooperation with local professionals or power figures – in which case you suddenly find yourself property-less, visa-less (so you’re refused entry to legally stake your claim), or otherwise barred from recovering your expense. In severe cases, as has been known to happen in Thailand in the past, for instance, this is accompanied by more “old-school” methods such as threats, physical damages to person or property, bogus arrests, etc, until the exasperated foreigner gives up and goes home.
Fortunately, this is absolutely NOT the case in Hong–Kong (or Singapore, for that matter) – these governments are highly regulated, internationally-inclined regimes, are signatory to all or most international regulatory agreements and conventions, and do not engage in such practices (and if you really think about it, there’s nothing stopping a corrupt regime from engaging in the exact same practice with free-held properties, as happens on a regular basis in China, for instance).
b) Profitability – while all government leases are generally easily renewable, and the “rent” a purely nominal figure in most cases – one should bear in mind that particular laws, bylaws and regulations can and do change, even under the most organized and regulated of regimes – and if you think for even one second this isn’t the case, try following the trends of capital gains taxes around the world – when the government wants extra cash for whatever purpose, or simply to apply pressure on the housing market to (when trying to avoid a price bubble forming, for instance) capital gains tax is raised – sometimes with ample notice, sometimes without.
So one should take into account, even in fully-regulated locations like HK or Singapore, that any lease currently held may either become unrenewable or unprofitable when its current term runs out. As a result, one should evaluate all profitability figures on the basis of the current lease alone. Naturally, as will be evident in the prices of advertised properties offered for sale, the term remaining on the lease is a major price-setting factor, and profitability should be measured under the assumption that, once this lease runs out, so does the lifespan of the investment – even if it is renewable.
In Hong-Kong – older leases are generally very simple and contain almost no restrictions, with newer ones containing more detailed restrictions, particularly regarding development conditions, including environmental control. A Joint Declaration made by the Chinese and British Governments in 1984 provides for continuity of the existing legal system until 30 June 2047.
All old leases may be renewed (but don’t forget “b”, above). The majority of new leases are for terms of 50 years. Most leases in the New Territories, which were due to expire in 1997, have been extended automatically to 30 June 2047 as well, without any need for additional payments to Government. Rent payable under a Government lease, as mentioned, is generally a nominal figure. For some leases granted after 1 July 1997 and for a number of leases granted prior to 1 July 1997, however, “rent” will be 3% of rateable value from time to time. This should be checked in detail prior to purchase, to ascertain correct profitability.
Other odds and ends
Unapproved alterations, (or illegal and often un-safe renovations, to be a tad less polite), such as the closing in of balconies, the constructing of internal fixtures such as staircases, additional walls, and even the building of complete rooftop additions, are rife in HK. The government has been trying to crack down on this, and a lawyer or broker can attempt to track whether such alterations have been identified by the government, in which case there’ll be a standing order to restore buildings to their original conditions – but if no such order is found, it may just mean that inspectors have not gotten to the building yet. So if something’s amiss in the original floor-plan, or if there are any visible signs of tampering, you should probably factor in a bit extra for possible restoration costs at some point in the future.
Oh, and properties on fourth floors, or any floor with a four in it, such as 14, 24 etc, as well as apartments with the number “four” on its doors, are normally slightly cheaper – this is because the Cantonese word for four, “sei,” sounds like the word for “death”. Similarly, a property overlooking a cemetery may be cheaper, although it is considered to have good feng shui for people with a lot of yang, or masculine, characteristics. What this means in practice is, that if you can confirm that you’ll be able to rent your property strictly to non-Chinese expats (which depends on the area, as the non-Chinese tend to gather in particular suburbs in many cases), you stand to make some nice extra money on it, as you’ll be able to buy it cheaper, then rent it out at the same rates a “non-death-oriented” property would yield.
As briefly mentioned in the previous article, Hong-Kong is completely and utterly separated from its mainland China “mothership” in everything but language (Cantonese is actually a shared language for both), and certainly in all aspects relating to culture, corruption, uncertainty etc – an increasingly large number of Hong-Kong’s native residents actually actively resent mainland Chinese, their government and philosophy, social practices and behaviour, and the subject is a highly volatile issue in the small city-state, as those opposing the integration between the two are quite vocal and public about their feelings.
Hong-Kong is a highly regulated, safe business environment, as far as the foreign investor is concerned. While property purchases are via government lease, this has no immediate effect on deals, aside from adding another factor to profitability calculations, and these are usually already reflected in the price. It’s also one of the world’s highest CG-yielding environments so far – although at the very moment it’s probably advisable to factor in a possible reduction in capital for the next 1-3 years. Further unique characteristics such as the business oriented tax system, the availability of local funding, and various odds and ends of the market may also enable the foreign investor to cash in on some nice add-ons to an otherwise purely CG-oriented portfolio.
Cash-flow is extremely low, with current prices most likely too high to be maintained over a long period of time, and if not curbed, may lead to a temporary or longer-term crash, although this is unlikely, considering the government’s highly economically-aware management. The market, in similar fashion to Singapore, is very small (although not quite as miniscule) and, as a result, successful “deal-mining” is quite rare. Government leases, while not severely limiting, do add a further complexity to purchases.
I hope that’s enough info for you – next week we’re finally getting to Japan, my personal favourite and a true delight to explore. Hope you’re still having fun – please feel free to comment, query or discuss! 🙂
1 (The majority of data presented above compiled from “Time” world edition, “The New-York Times”, “Batgung.com”, and “Deacos” Hong-Kong, as well as from leading HK and Asian property forums, and personal interviews with local residents and realty professionals