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New vacancy tax encourages developers to build small flats that will sell easily
It's no secret that Hong Kong has some of the smallest homes in the world, and as developers digest the city's new vacancy tax, average flat sizes could be set to shrink even further.
The new measure incentivises developers to build properties that will be on the market for as little time as possible. That means "small flats" says
Denis Ma, Head of JLL's
Hong Kong research team. "The sale time on larger, luxury apartments has always been slower, and with the vacancy tax looming, developers won't want units standing empty for too long."
Hong Kong's new vacancy tax gives developers 12 months after a building's occupation permit is issued to sell or lease all of its units. If they don't, they are liable to pay a levy equivalent to 200 percent of the unsold homes' rateable value, or twice the annual rent the property could command.
The average apartment size in Hong Kong fell 39 percent between 2013 and 2017 to around 628 sq. ft., although some flats in the city take up just a fraction of that space. In one development in Tuen Mun in Hong Kong's north-west, the smallest units measure just 128 sq. ft., and flats under 100 sq. ft. are planned for a new building in Discovery Bay, a residential district close to the city's international airport.
While those conditions may seem cramped, the tiny floorplans are doing little to dampen demand, says
Henry Mok from JLL's Hong Kong
Capital Markets team. "The smaller the flat, the easier it is to sell, because restrictions on mortgage lending have distorted the market."
"Affordability ratios are off the charts," agrees Ma. "Developers are building units to match the amount of money the average buyer has to spend. They are building exactly what they think the market can absorb."
Reason for regulation?
Across Asia, governments are regulating the size of homes amid concerns about residents' physical and mental well-being. Bangkok has imposed a minimum size requirement, while Singapore limits the number of so-called 'nano-flats' that can be built.
But in Hong Kong, the opposite is true.
"The government policy we've seen so far does not encourage developers to build larger apartments," says Ma.
Concerned that the market would be flooded with large, luxury properties, a 2010 government pilot scheme introduced conditions of sale that set a minimum number of apartments that had to be built on any one site. That move was designed to encourage developers to sell smaller, more affordable homes.
"Now the market has flipped 180 degrees," says Ma.
With city lawmakers recently pledging to provide 20,000 residential units per year, for the next 10 years, it doesn't look like relief will come to the market any time soon.
"In many ways, it would benefit the government to have developers put a higher number of small flats onto a site than just a few luxury units, because that helps them hit their supply targets faster," says Ma. "The liveability of apartments isn't at the top of their agenda."
For more information, visit our Investment Sales and Acquisitions webpage, or contact Denis Ma.
Head of Research, Hong Kong
+852 2846 5135
Regional Director, Hong Kong Capital Markets
+852 2846 5756
Senior Manager, Marketing & Communications
+852 2846 5008