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the Hong Kong market
 
Understanding sales
 
 
The market back to top

The Hong Kong sales market is of course subject to the same rules of supply and demand that influences house prices worldwide, but there are a number of key local factors to be aware of that set its behaviour apart from others.

Price fluctuations can be significant and rapid.  The recent turmoil in global finance had an immediate and profound effect on pricing; however it is worth noting that no industry analysts or economists correctly predicted the strength of the Hong Kong property market’s rally in 2009.  Property is seen by the local population as an important asset class and it is often traded as a commodity, the price indices following the vagaries of the Hang Seng Index.

A factor that sets Hong Kong apart from other cities is that often properties are owned outright, or levels of borrowing are unusually low allowing owners to hold through market downturns.  So during the 2008/9 global financial crisis the amount of distressed stock coming to market was limited.  Hong Kong differs from many markets in that the government imposes quite strict regulations on the banks and their lending policies, leading to maximum loan to valuation ratios of 60 to 70% or less.

It should be noted that although luxury property represents approximately 7% of the total housing stock in Hong Kong, the accepted local definition of luxury is a property of 1,000 square feet or more.

Square footage back to top

In Hong Kong the square footage of a property is a frequently quoted, however we tend to take the emphasis off its importance as it can be misleading and confusing.  Here are the terms that you will hear being used.

Gross floor area – this figure combines the internal area (typically measured to the outside of external walls) with an apportioned share of the common areas of the building.  This includes the lobbies, hallways, clubhouse, gym, stairwells, management offices and any other shared spaces.  Therefore the larger the building, the more facilities it contains, and generally the newer it is the more it inflates the gross floor area figure. So as you can see it does not directly relate to your
living space.

RVD area or saleable area – this figure is the internal area (typically measured to the outside of external walls) of the property.  Spaces such as terraces, gardens, useable roofs, are not included.  Therefore this figure is a truer reflection of the space that you get to live in.

Efficiency – this figure is produced by dividing the RVD/saleable area by the gross floor area.  Therefore it gives a quick indication on how useable the space is in relation to the amount of money being asked for it.  Typically older buildings have a higher efficiency however they feature fewer shared facilities. Newer Buildings have lower efficiency but have more facilities.


Your buying checklist back to top

Once you have identified the property that you wish to offer for you need to go through the following checklist to ensure that the process proceeds as smoothly as possible.

  • Make sure your finances are in place.
  • Engage a Hong Kong lawyer.
  • Get a valuation done; your bank will undertake this.
  • Conduct a land search; your agent or lawyer will do this for you.
  • Check on your stamp duty liabilities.

The land search will establish whether there are any encumbrances such as building or slope orders registered against the property.  And it is important to check with the vendor or agent whether there are any illegal structures contained within the property.  But don’t be too alarmed if you discover that your future dream home has some “unofficial” features…  The combination of a shortage of space and the tight restrictions imposed by the planning department often leads owners to undertake unapproved building works, most often to create additional square footage by enclosing previously outdoor space.  We would suggest that you look at this situation on a case-by-case basis and discuss it with your agent or lawyer, but be aware that the authorities can force you to
re-instate the space in question at any time in the future.


What next? back to top

Step 1 – The PROVISIONAL Sale & Purchase Agreement
On agreement of the price and general terms and conditions you will sign a Provisional Sale & Purchase Agreement.  This obligates you to buy the property.  If you subsequently fail to complete you will lose your initial deposit, have to pay a penalty of Agent’s fees due from both parties and you may be liable for breach of contract. On signing the Provisional Agreement you will typically pay a 5% initial deposit to either the vendor or the vendor’s solicitor.

Step 2 – The FORMAL Sale and Purchase Agreement
A Formal Sale & Purchase Agreement is usually signed within 14 days of signing the Provisional Agreement.  This is a more detailed and legally binding agreement and is co-ordinated by the solicitors appointed by both parties.  On its signing a further payment of between 5–10% is made.

Step 3 – Completion/Assignment
The completion/assignment normally happens within two months of the signing of the
Provisional S & P.  At this time the balance of the funds are transferred to the vendor’s solicitor.

Prior to completion you are entitled to a final inspection of the property to ensure that it is in the condition agreed on by the parties.  The balance of the purchase price and related costs are settled through your solicitor, including your share of the management fee, rates and government rent (as shown in an apportionment account prepared by the vendor’s solicitors).   If there is a mortgage involved your solicitor will draw down the loan on the completion date and will pay the balance of the purchase price in return for keys to the property.  At this point you are responsible for the payment of the stamp duty in accordance with the schedule outlined below.  There’s a link to the government's stamp duty calculator here.

What name to buy the property in? back to top

Consult with your accountant or financial advisor at the beginning of the process to establish the most suitable structure for ownership. You may find that there are tax advantages in using a limited company to purchase and hold the property; however this has to be weighed up against the additional costs involved. But be clear in whose name you will be buying the property before you sign the Provisional S&P as changing the buyer’s identity midway through will be treated as a different transaction and subject to stamp duty.


Title investigation back to top

Your solicitor should review the title deeds and ensure that the vendor has good title to the property and the full right to sell it free from encumbrances. The vendor’s title deeds include the land grant and the document transfers of the property title from one owner to the next with the last being that of the vendor.


Financing back to top

The Hong Kong government periodically steps in to attempt to control the temperature of the local property market; therefore the rules on mortgage financing are subject to reasonably frequent changes. So we strongly advise our clients to check on the most up to date legislation.

The Hong Kong Monetary Authority controls the local banks and sets the parameters on the ratios of loan to valuation mortgage lending. And they also govern the operations of the Hong Kong Mortgage Corporation who provide the banks with insurance on mortgages, extending individuals borrowing limits up to 95%. Your bank will be able to advise you on the current lending requirements.

There are more than 30 banks in Hong Kong that provide mortgages and your financial advisor should be able to advise you on which one suits you best, but if you are looking to calculate rates quickly you can use the websites of the following banks.

HSBC

Bank of China

Hang Seng

Standard Chartered


Capital gains back to top

There are no capital gains paid on property held for over one year in Hong Kong.  As ever speak to your accountant or financial advisor for further advice.


Agent’s fees back to top

Agency fees are a standard 1% of the purchase price payable by both the vendor and the
purchaser alike.


Additional costs back to top

Be sure to take into account the other costs that you may incur in the buying process; legal fees and other consultants such as valuers, structural engineers, designers, etc.


 
 
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