Impact of Budget 2022-23 on property owners, tenants and purchasers in Hong Kong

Article 08 March 2022 Experience: Real estate

Hong Kong’s economy has experienced its fair share of shifts in recent years, as the city continues to be clouded by the pandemic situation. While the city withstands the hit of the 5th wave of Covid, Hong Kong’s Financial Secretary, Mr. Paul Chan, announced Budget 2022-23 on 23 February 2022. Several new measures were introduced in a bid to stabilise Hong Kong’s economy. In this article, we aim to highlight the major measures related to real-estate, potential impacts as well as market feedback that will affect property owners, tenants or intended purchasers.

1. Amendments to Mortgage Insurance Programme (‘MIP’)

Hong Kong’s government has relaxed the cap on the value eligible for a mortgage loan. For residential home buyers, the maximum cover of 80 percent loan-to-value (‘LTV’) ratio will be raised from HK$10 million to HK$12 million. For first-time home buyers, the maximum cover of 90 percent LTV will be raised from the existing HK$8 million to HK$10 million. The amendment aims to provide assistance to first-time home buyers and families seeking self-occupied ‘flat-for-flat’ under the current market situation.

The increase in the cap on the eligible property value under the MIP scheme translates to a reduction in down payment for purchase of residential properties. The impact may be most significantly reflected in transactions of larger flats of more than HK$10 million in value. Previously, buyers were only eligible to borrow up to 80% of the property value for flats not exceeding HK$10 million, and up to 50% for larger flats valued at over HK$10 million. The narrowing gap in the LTV ratio can therefore stimulate the demand for larger flats and provide incentive for home owners to upgrade their flats to larger ones. In anticipation of the increase in demand, home owners looking to sell larger flats tend to be less negotiable on the sale price as they recognise that their flats are more attractive in the market under the adjusted scheme. On the other hand, the demand for ‘nano’ flats, which had once been a developmental focus, will shrink, as the down payment for larger flats will become more affordable for home buyers under the new MIP scheme.

When considering a housing purchase, buyers will need to balance the increase in LTV ratio against the more stringent income requirement on MIP loan applicants that banks will impose in order to safeguard against the risk of offering the loan. Existing property owners will need to pay more attention to the details of the interest rate charged under the MIP scheme, especially when considering refinancing from the mortgage offered by the developer’s financier, which normally has a higher interest rate.

Having said that, the market impacts will take a longer time to take effect, given the rapid rebound of Covid and the low market atmosphere since the start of 2022.

2. Rental enforcement moratorium

A new law may be introduced to prohibit landlords from terminating the tenancy or taking enforcement action against their small and medium-sized business enterprise (‘SME’) tenants of specified sectors, who are now subject to compulsory closure, for failing to pay rent. The relief will be valid for 3 months, with the Government initially proposing that the relief may be extended for another 3 months.

The new measure does not provide a rent-free period but is rather a deferment of rental payment. Whilst details of the new legislation have not been announced, the Government intended this moratorium to provide relief to small businesses under the pandemic and to avoid business closure. This would, however, bring significant impact to landlords, such as a higher financial burden in terms of mortgage repayment and cash flow, as well as a negative impact on their financial and business performance.

Subsequently, the Government has also clarified that assistance will be provided to struggling landlords by way of offering 3 months’ worth of advanced rental on the tenant’s behalf up to a ceiling of HK$100,000, as well as interest-free loans to commercial property owners affected by the policy. Banks are encouraged by the Government to exercise flexibility if the repayment ability of the landlords is affected.

At the extraordinary session of the legislative council committee on industry and commerce on 7 March, Mr. Paul Chan stressed that after listening to the views of the relevant stakeholders and the public, and taking into account the short-term financial pressure that the legislative proposal may bring to some landlords, he further proposed the following optimization measures to rationalize the operation of the proposal, including:

(1) a ‘protection period’ for the suspension of the collection of rent arrears for three months, and the option to extend it for another three months after expiration, to ensure that this proposal is a short-term special arrangement;

(2) the rates of properties affected by the legislative proposal may be deferred;

(3) legislation will also specify that lenders are required to suspend the recovery of loans relating to the commercial premises from the landlord during the ‘protection period’;

(4) for any person holding a single shop in his or her personal name who depends on the rent to make a living, the Government will provide the landlord with an interest-free advance arrangement of up to three months’ rent, through the 100% guaranteed personal preferential loan scheme, subject to a ceiling of $100,000; and

(5) providing more space for landlords and tenants to discuss arrangements on the restructuring of rents. This moratorium on the recovery of rent arrears will not apply to merchants who enter into such restructuring agreements during the ‘protection period’. Similarly, if the lender and the landlord enter into a similar agreement on the loan during the ‘protection period’, the measure of suspension of the recovery of the loan will not apply.

Even though the proposed arrangement will last for a short period of three months, it will help SMEs, which are designated commercial tenants, to sustain their business and for their employees to keep their jobs.

As the economic downturn has been continuing for a while, it is possible that landlords who have already suspended legal action against the defaulting tenants may speed up the recovery action before the new law is formally announced (probably by the way of publishing on gazette with immediate effect). However, given the ever changing economic situation, it is equally important for landlords to ensure occupancy of their premises and avoid the difficulty of looking for new replacement tenants. The new proposal from the Government provides a better and sensible solution to allow landlords and tenants to consider restructuring the rental payment mechanism and revise their tenancy agreements to include more flexible measures such as applying the unused agreed rent-free period during ‘the protection period’; implementing or modifying a further rent review mechanism; giving an extension of notice before enforcement; an extension of lease term with a deferral in rental payment; and, offering marketing and promotion incentives to tenants, to name a few, so that both landlords and tenants can sustain through the current difficulties.

3. Revision of rating system and rates concessions

The Hong Kong Government plans to revise the current rates concession mechanism such that only eligible owners who are natural persons can apply for rates concession for one domestic property under their name. On the other hand, the Government will also introduce a progressive rating system for domestic properties. For domestic properties with a rateable value of above HK$550,000, the first HK$550,000 will be charged at the present level of 5%, while the next HK$250,000 will be charged at 8%. If the property’s rateable value exceeds HK$800,000, the rateable level jumps to 12%.

Owners and buyers of high-value homes as well as owners of multiple properties are the main groups affected due to the significant increase on property expenses. Landlords who are not entitled to enjoy any rates concessions and have to bear the increase in rates may shift such additional costs to the tenants.

4. Tax Deduction for eligible domestic rental expenses

From the year of assessment 2022/23, taxpayers who are liable to pay salaries tax and do not own any residential property are eligible for deduction for the rent paid by him or his spouse as a tenant, subject to a ceiling of HK$100,000 per year.

Although the tax reduction measure will only offer small relief to tenants with a cap on the allowable tax deduction, this may attract purchasers eyeing the residential property market to shift to the leasing market and lease a property instead of buying, especially during the real estate investment market’s downturn. Tenants should however be mindful that landlords may take advantage of the new measure and negotiate for an increase in rental with tenants who can enjoy the tax deduction.

There are still plenty of uncertainties as to how the aforesaid measures will affect the real estate sector in times when the economic downturn and pandemic remain a huge challenge to owners, landlords and tenants of both domestic and commercial properties. Our real estate team will continue to scrutinise any updates from the Government and share further details on any new policies and legislations that will be announced in due course. To further understand the impact on your real estate, do not hesitate to reach out for strategic advice from our experienced team of real estate professionals.

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