Hong Kong’s moribund commercial property market is getting a much needed lifeline. After widespread chatter about Chief Executive Carrie Lam and her council considering elimination of the seven-year-old supplementary stamp duty on commercial property, the city’s top leader made the rumours a reality in her 2020 Policy Address on Wednesday.
Introduced in 2013, the double stamp duty (DSD) — officially the Ad Valorem Duty for Non-Residential Property — was an additional levy on commercial assets, scaled to as high as 8.5 percent on sales of property valued at over HK$21 million ($2.7 million).
“Removal of the double stamp duty will help to improve the transactional volume for commercial properties as we move into 2021, which will also be boosted by pent-up investor demand,” said Hannah Jeong, head of valuation and advisory services at Colliers International. But the agency veteran does not expect removal of the DSD to be a magic bullet.
Thawing Out a Frozen Market
In 2012, before the double stamp duty was enacted, Hong Kong recorded over 18,000 commercial property transactions for the year. Since the cooling measure was put in place seven years ago, trades of commercial assets have yet to reach 10,000 transactions in a single year.
In 2020, the market in Asia’s wealthiest city grew colder still, with commercial property transaction volumes tumbling 62 percent year-on-year to $5.3 billion from January through September compared with the same period last year, according to Real Capital Analytics.
“The impact won’t be too significant; it will fail to boost asset prices, as the rental market remains weak [and will] drop further in 2021,” Jeong added.
Under the new policies introduced by Lam on Wednesday, the double stamp duty on residential properties will remain in place while the tariffs on sales of commercial and industrial assets will fall by half, back to their pre-2013 rates.
Market Rebound Anticipated Tax Cut
The first signs of easing regulation in the stagnating commercial sector came in August, when the Hong Kong Monetary Authority raised the permitted loan to value (LTV) ratio on non-residential property to 50 percent from 40 percent. Lam went further by killing the DSD and allowing “relevant property owners to benefit immediately from the proposal”.
The improved financing picture helped spark the sector to life even before the stamp duty changes became official, if marginally. “Though it failed to drive major transactions, the relaxation did encourage investment sentiment among mid-to-small-cap investors,” said John Siu, Cushman & Wakefield’s managing director for Hong Kong.
With many in the market apparently anticipating the policy change, 318 commercial and industrial properties worth a total of HK$13.74 billion changed hands during the first 22 days of November, including Swire’s HK$9.85 billion sale of the CityPlaza One office tower to Gaw Capital Partners and Schroder Pamfleet. Those totals were up from 208 transactions worth HK$2.62 billion during the same period in 2019, according to data from Centaline Commercial cited by the South China Morning Post.
Among the deals happening in recent weeks, “King of Cassettes” David Chan offloaded a pair of office spaces in the Center in Sheung Wan for HK$126 million, and Sun Hung Kai Properties sold a retail podium in Ma Tau Kok for HK$300 million.
In the days before the policy address, the Hong Kong Christian Church purchased a 4,542 square foot (422 square metre) unit in a Wan Chai commercial building for just shy of HK$50 million, and Lofter Group and Alphalex Capital agreed to acquire 1-7 Ki Lung Street in Prince Edward from Tang Shing-bor for about HK$347 million, according to a local media report.
The Executive Council approved the relevant amendments of the stamp duty ordinance on the morning of the policy address, Lam said in her annual address. She underlined that the government would watch the commercial sector closely and reintroduce duties if needed, before stating that she had handed down a Public Revenue Protection Order so as to “give effect to the abolition of the DSD on non-residential property transactions” starting Thursday.
Speculation Unlikely to Return
The double stamp duty was also an attempt to combat speculative practices that arose when freshly implemented successive rounds of stamp duties introduced to cool down the residential sector in 2010, 2012 and again in 2016 sent money into commercial and industrial deals.
Between 2008 and 2013, office and retail property prices spiked 97 percent. Commercial transactions plunged more than 40 percent after the double stamp duty was levied, according to Land Registry data. There’s unlikely to be a repeat of that kind of speculation any time soon, as COVID-19 will keep most investors on the sidelines despite reduced transaction costs, Siu said.
“Investors are still concerned about the ability to secure tenants, which puts risk around their potential yield,” agreed Jeong. “The market is seeing high vacancy levels for office occupiers and retail tenants, with limited demand surely upping this uncertainty.”
Lowering transaction costs by abolishing the DSD is expected to benefit small and medium-sized enterprises, which comprise over 90 percent of the city’s businesses, according to Hong Kong’s Trade and Industry Department. Also receiving an advantage are properties valued at less than HK$100 million, said JLL Hong Kong chairman Joseph Tsang.
“Since almost all owners of commercial properties worth over HK$100 million hold these on a company basis, the government’s abolishing of the double stamp duty would not boost the transaction of major properties, since these owners will continue to sell via company share transfers,” Tsang said.