HK vacancy tax may have only marginal impact

Housing demand in Hong Kong has surged ahead of a chronic under-supply of homes, helping propel a more than 50 per cent increase in prices over the past five years.
Housing demand in Hong Kong has surged ahead of a chronic under-supply of homes, helping propel a more than 50 per cent increase in prices over the past five years.PHOTO: LIANHE ZAOBAO

Developers unfazed by plan to tax unsold new apartments

HONG KONG • A plan by Hong Kong to tax unsold new apartments may have little effect on the city's red-hot housing market.

The levy was announced last Friday by Chief Executive Carrie Lam as part of a broader government effort aimed at boosting supply in the world's least affordable property market.

But analysts from Goldman Sachs, Morgan Stanley and JPMorgan Chase say the latest move won't dent soaring prices.

Taming soaring home prices has been one of the biggest challenges for the Chinese city's lawmakers, who have unveiled a series of measures in recent years to cool the market.

But those measures have fallen short as demand has surged ahead of a chronic under-supply of homes, helping propel a more than 50 per cent increase in prices over the past five years.

With the latest proposed rules, apartments left unsold for more than six months will be taxed at twice the annual rental income, or about 5 per cent of the unit's value. This is a level that analysts say developers can easily absorb.

"The absolute level of tax looks relatively manageable," Goldman Sachs analysts said in a note on Monday, comparing the relatively small cost against annual price volatility.

Because most vacant units are high-value properties, they tend to have lower rental yields, so the vacancy tax as a percentage of the property's value will also be lower, according to head of property and conglomerates research Cusson Leung at JPMorgan Chase in Hong Kong.

The new tax has to be approved by lawmakers, giving developers six to nine months to sell empty apartments.

In addition, of the 9,000 vacant units in the primary market as of March, about two-thirds were completed since last year. Developers may not need to sell them as quickly as the government expects, Goldman Sachs said.

Developers with more inventory could be under pressure in the near term, but selling units will boost cash flow and strengthen balance sheets in the medium term, according to Morgan Stanley.

In Hong Kong, developers usually sell apartments as soon as possible, because their central concern is to "recoup funding and move on to buy more land", said JPMorgan's Mr Leung.

Unsold inventory is composed of either top-end apartments that take time to sell, or units in an area where land supply is limited.

"The vacancy tax may be of marginal impact. In most occasions, there would be no need to apply such a rate," Mr Leung said.

Developers are not worried yet.

"The introduction of the vacancy tax won't affect our sales strategies," deputy managing director Victor Lui of Sun Hung Kai Properties said in an e-mail.

Sun Hung Kai had the largest number of unsold apartments in the city, holding about 2,700 of the 9,000 empty units, according to Morgan Stanley, citing Centaline Property Agency data.

Most of those have since been sold, and the company now holds fewer than 1,000 empty units, Mr Lui said.

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A version of this article appeared in the print edition of The Straits Times on July 06, 2018, with the headline 'HK vacancy tax may have only marginal impact'. Print Edition | Subscribe