Concrete Analysis | The many flaws of Hong Kong’s vacancy tax may lead to unintended consequences for the real estate market

The proposed vacancy tax requires units to be provided to employees as staff accommodation, which means they are liable for taxes if they are used as holiday homes even if they are fully occupied throughout the year

Many developers, to facilitate better management of their businesses, usually set up special corporate vehicles for property holdings. These corporate vehicles may not employ any staff

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Aerial drone view of Cha Kwo Ling Village in the Kwun Tong district on 17 October 2019. Cha Kwo Ling village has been named as one of the villages in the 2019 Chief Executive's Policy Address, that is suitable for high-density housing development. Photo: May Tse

Published: 1:21pm, 5 Nov 2019Updated: 7:14pm, 5 Nov 2019

In the September 11 Legislative Council Brief on the Rating (Amendment) Bill 2019 (the “Bill”), the Transport and Housing Bureau stated that the number of unsold, completed first-hand residential units of Hong Kong have increased to 9,000 units at the end of March 2018.

The government considers the situation undesirable in the face of a housing shortage, and resolved that more effective measures must be taken to encourage developers to expedite the supply of such units. It is one of the Hong Kong Chief Executive’s six housing initiatives announced on 29 June 2018.

The government proposed to amend the Rating Ordinance to introduce special rates on vacant first-hand residential units. With a few excluded premises, the developers of residential units with the occupation permit issued for 12 months or more will be required to furnish annual returns to the government on their status.

The bill passed the first reading on 23 October 2019. The government expects the bill to deter developers’ flat-hoarding practices. Whilst this initiative will accelerate the supply of first-hand units to the public which should be supported, the bill, when scrutinised closely, will result in unintended and unfair consequences to developers and owners alike.

Lilian Chiang, the senior partner at law firm Deacons in Hong Kong. Photo: Jonathan Wong

Under the bill, first-hand units that remain unsold and have not been rented out for more than six months during the past 12 months will be subject to special rates. Special rates will be collected annually at two times the rateable value of the units concerned, which roughly equals to 5 per cent of the property value.

In reality, developers may retain certain residential units for legitimate purposes. Some developers have built, or reserved, units as housing for their staff. The bill provides an exemption for units provided by developer to employees as staff quarters for not less than 183 days during the reporting year.