Why Hong Kong's homes are getting ever smaller

Hong Kong’s infamously small apartments are set to shrink further as developers digest the city’s new vacancy tax.

August 16, 2018

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.

Shrinking space

The average apartment size in Hong Kong fell 39 percent between 2013 and 2017 to around 628 square feet, although some come in well under that. In one development in Tuen Mun in Hong Kong’s north-west, the smallest units measure just 128 square foot, while a building featuring apartments under 100 square foot is planned in Discovery Bay, a residential district close to the city’s international airport.

But 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, the government announced a pilot scheme in 2010 that included a clause that set a minimum number of apartments that had to be built on a site sold by the government. 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 18,000 private 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 top of their agenda.”