Easing Spicy Taxes and the Night Vibes Hong Kong Campaign Boost Real Estate Market

Sun Hung Kai has just had its biggest weekend home sale in almost 18 months. Yoho West in Tin Shui Wai sold around 97% of units on Saturday and Sunday. The development, a joint venture with the MTR Corporation, offered 350 units at a 20% discount.

This result reflects China and Hong Kong's economic recovery. It also shows buyers think interest rates may peak and fall next year. In addition, rents continue to rise, buoying buyer confidence. But Yoho West's performance is not solely a result of the very attractive prices.

On 25 October, Chief Executive John Lee Ka-chiu revealed some changes to stimulate the property market and alleviate the financial burdens on Hong Kong Permanent Residents (HKPRs) and non-HKPRs.

The key changes are as follows:

1)?? The period for which a buyer must hold a property before incurring Special Stamp Duty (SSD) is reduced from three to two years. Property owners who sell their properties two years after acquisition will no longer be required to pay 10% SSD based on the property price.

2)?? The Buyer's Stamp Duty (BSD) and New Residential Stamp Duty (NRSD) rates are cut by half, from 15% to 7.5%, to alleviate the financial burden on Hong Kong Permanent Residents (HKPRs) who already own residential properties and to reduce costs for non-HKPRs acquiring residential properties.

3)?? A mechanism to induce incoming professionals to buy homes is valid from 25 October. It builds upon the stamp duty refund arrangement introduced last year. Under the suspension arrangement, incoming professionals must pay the BSD and NRSD when they buy a property, but the payment is suspended until they become HKPRs, when it falls away. If they do not become HKPRs, the relevant stamp duty amount must be paid.

According to the latest Rating and Valuation Department information as of 29 November, private residential price indices have declined for six consecutive months. In October, the price index reached 321.4 points, showing a 2.2% month-on-month decrease compared to September's 328.5 points. Over the past six months, the index has fallen by 9.36%, reducing the annual increase to 3.97%.

The increased interest rates continue to burden new buyers, leading to a preference for leasing rather than purchasing. Additionally, the influx of professionals admitted under the talent scheme has created a sudden demand for residential leasing. In October, the rent index reached 186.3 points, a 0.3% MoM increase and a three-year high compared to the 185.5 points recorded in January 2020. Over the last nine months, the rent index has increased by 7.3%.

The rental index rose across all categories, with Class E units showing the highest increase at 141.4 points, representing a 1.3% MoM growth. Classes A and D followed closely at 207.8 and 152.5 points, respectively, for a 0.4% and 0.5% MoM increase. The Class A index has remained above the 200-point level for five consecutive months, reaching 207.8 points in October. The Class B index reached 184.3 points, the highest since November 2021. Furthermore, Class C units reported 157.4 points in October, indicating a 0.2% month-on-month increase.

Compared to the rent indices in December 2020, Class A and B units have increased by 6.78% and 6.47%, respectively. These increases may be attributed to the demand from new couples and families seeking 2 to 3-bedroom units, as interest rates are not expected to ease before mid-2024. Therefore, the indices for these two classes are projected to continue rising, driven by the Top Talent Pass Scheme, imported labour, and buyers entering the market as occupiers while waiting for interest rates to decrease.

[1] A: Less than 431 sq. ft., B: 431 to 752 sq.ft., C: 753 to 1,076 sq. ft, D: 1,076 to 1,721 sq. ft. E: 1,722 sq. ft. or more

According to Midland Research, 2,767 private residential transactions were recorded in November, a 22.3% increase compared to October’s 2,263. Among these sales, 565 were primary transactions, and 2,202 were secondary. Following the introduction of measures to reduce the SSD, DSD, and BSD, primary and secondary sales increased significantly by 63% and 14.9%, respectively.

Overall, Hong Kong’s residential rental market continues to demonstrate robust performance. New government policies have attracted mainland talent to the city, driving growth in the residential rental market.

However, given the uncertain economic outlook and uncertainty surrounding future interest rate adjustments, we believe the stimulus measures are unlikely to reverse the decline in property prices. The residential market will take time to adapt to the new status quo.

Hong Kong has already witnessed an influx of 70,000 talented professionals in the first 10 months of this year, surpassing the government's original target. Therefore, in the medium to long term, the new arrangement can attract professionals who aspire to become Hong Kong residents and invest in local properties.

Industrial and commercial store sales have also improved, with 261 transactions in November, 15.5% up MoM from October’s 226. Industrial, office, and retail transactions increased during this period, with industrial and retail rising by approximately 6.5% and 27.9%, respectively, compared to the previous month. The number of office transactions also increased to 51, up by around 5.9% MoM. However, it is worth noting that despite the improved market sentiment, investors have become more cautious as the possibility of an interest rate hike looms.

In conclusion, the adjustments made to the demand-side management measures for residential properties, coupled with the introduction of the "Night Vibes Hong Kong" initiative, have the potential to stimulate the Hong Kong real estate market. While property prices have declined, the rental market remains strong. The government's efforts to attract non-local talent and the sustained demand from various buyer segments may contribute to the long-term growth and stability of the real estate sector.