Vacant residential tax to dampen developers' land bidding

The levy is expected to be focused on newly built units.

Developers are expected to tone down their aggressive land bidding in response to heightened speculation that the government will impose a tax on vacant first-hand private residential units by the end of this month, according to real estate consultant JLL.

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Around a fifth (21%) of the 42,949 vacant residential units built in Hong Kong last year were new builds, representing an 8% increase. Despite the expansion, the figure is still below the 30% peak recorded in 2006 when the number of vacant new builds hit 19,000 units.

“Conceptually, a vacancy tax will pressure developers to offload inventory within a shorter period of time. They may need to reconsider the launch strategy of their new projects to maximise revenue whilst minimising vacancy costs,” said Henry Mok, regional director of capital market at JLL.

“In the long-run, we may see an adjustment on land prices, as developers look to safeguard their bottom line in anticipation of higher holding costs,” he said. However, Mok adds that the impact is still contingent on the magnitude of the tax.

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Assuming that 5% vacancy tax rate is levied similar to government rates being charged on leased properties, the rate may not be adequately punitive as the tax would translate to a measly 0.1% haircut to current market yields, added Ingrid Cheh, associate director of research at JLL.

Secretary for Transport and Housing Frank Chan earlier expressed hesitation in levying the tax in a Legislative Council meeting, claiming that there are 'no notable signs of idling private residential units' as vacancy has been falling from 4.3% in 2012 to 3.7% in 2017.

“In fact, it is inevitable for properties to be left vacant for a period of time when landlords seek buyers or tenants, engage in price negotiation, or refurbish their flats,” Chan added. “Levying a vacancy tax on residential units owned by non-local residents or companies at least 25 per cent of the beneficial interests of which are held by such persons may therefore not be an effective way to increase housing supply.”

The government is set to make an announcement on the vacancy by the end of June, Finance Secretary Paul Chan said in a statement to the media.