THE NEW VACANCY TAX: IMPLICATIONS FOR HONG KONG’S REAL ESTATE INVESTORS

Active measures to cool off the housing market

It has been widely reasoned that the demonstrations over the past six months in Hong Kong have been driven, in part, by frustrations of young locals locked out of the residential property market due to prices that have risen to incredible levels. The government has attempted to ameliorate this situation through various measures however there's no easy fix to such a large, complex problem. One of the efforts underway is the vacancy tax which focuses on forcing developers to release completed units to the market sooner and not withhold stock from the market to support higher prices. It'll impose a vacancy tax on property developers that are found to be hoarding new flats. The bill, announced in June 2018, is being vetted by lawmakers and will be applied retroactively if it's passed.

A populist measure

This new vacancy tax statute was included in the Chief Executive's policy address last year and is widely considered a populist nod to hopeful homebuyers left out of the local property market. Ultimately an attempt to help create more affordable housing, the law will go into effect three months after passage in Legco but the implementation date is still pending. A broad spectrum of the public generally welcomed the measure while the pro-business camp generally opposed. Now, despite the widespread antigovernment demonstrations that have rocked the Territory, opposition politicians who initially favoured the proposal are said to be getting cold feet in their enthusiasm to embrace it.

Opposition to the bill

The opposition parties that said they may filibuster the bill are reluctant to vote against it, since it is largely considered as a step towards improving livelihoods across the board and doing so would be unpopular. Some legislators have, however, stated that they'll throw roadblocks in the way of passage, citing inadequacies with the measures. Critics in the Civic Party charge that Carrie Lam has been procrastinating in implementing the bill as a diversionary tactic to dissipate attention. The Civic Party has also called for progressively higher rates for developers if they withhold vacant units for longer periods.

How does the government propose to levy the tax?

The bill will be specifically aimed at all newly completed homes that have been left empty, unsold or not rented out for more than six months in a calendar year. A year after a developer receives an occupation permit, a flat is deemed finished. The proposed vacancy tax would be calculated as being equivalent to rental income over two years as estimated by government personnel and based on market rates. Developers would also be responsible for submitting to relevant government authorities yearly updates on the number of vacant new homes they have in their portfolios. If the law goes into effect, returns from the past 12 months will also need to be filed.

Other related issues with the vacancy tax bill

The government has also clarified that the vacancy tax would still be charged in the event a developer decided to transfer an unsold residence to an associated firm, including a subsidiary, holding company, an immediate family member or a company controlled by a member. The secondary market will not be affected by the tax, so private homeowners holding on to empty flats will not be affected. Pro-establishment parties overall widely showed support for the bill.

Are there related opportunities for the real estate investor?

There may be an opportunity to buy new units at lower prices in the short term. If the bill is passed, one can safely assume developers will be more eager to sell new units more quickly and adjust prices accordingly. For homebuyers interested in existing properties, this may put a temporary damper on prices given the increase in supply coming from developers. However, they have already been adjusting their pricing strategy in anticipation of the bill so the impact has already been priced into market values somewhat. Also, the impact would be mild at best as newly completed units typically account for less than 2% of total housing each year, and only a fraction of this would be sold at discounted prices to avoid the vacancy tax. It's also very likely that developers will adjust their plans and simply stagger new builds into smaller releases, allowing them to sell within the prescribed six-month limit. For owners, the market is driven by much larger forces that impact confidence than the vacancy tax bill, namely, the demonstrations and overall economic conditions, locally and globally. Ultimately, the overall supply-demand balance is still likely to keep property values very much on the high side of the global scale.