Valuer Insights
Progressive Rating System to Impact mid-to-Luxury Residential Properties in Hong Kong
By Valuation and Advisory Services
February 13, 2025
Contact
Shana L. Lam
Executive Director, Valuation & Advisory Services, Hong Kong
The progressive rating system for domestic tenements in Hong Kong is set to take effect on 1st January 2025, following the gazettal of the Rating (Amendment) Ordinance 2024. This system was first introduced in the 2022-23 Budget and aims to uphold the principle of "affordable users pay" by imposing higher rates on residential properties with a rateable value (RV) exceeding HK$550,000.
Rateable value refers to an estimate of the annual rental value of a property at a designated valuation reference date based on the assumptions stipulated in the Rating Ordinance. For RV exceeding HK$550,000, owners or occupiers of residential properties with monthly rental of approx. HK$45,800 or above have to keep an eye at the introduction of the progressive rating system.
What You Need to Know about the Progressive Rating System
The new structure proposed by the Rating and Valuation Department (RVD) is expected to yield an additional revenue of approximately HK$840 million p.a., which constitutes about 2% of the total revenue from rates for the rate year 2024/25, to Hong Kong Special Administrative Region (HKSAR) Government.
What’s the impact?
To illustrate the impact of the new progressive rating system on property taxes, let's consider an ultra-luxury residential unit with RV of approximately HK$8.64 million p.a.. The new annual rates liability for this property would have been increased to HK$988,300, up by 129% from the previous level.
Surely, for any tenement having a greater portion of RV above the HK$800,000 p.a. threshold would mean a more notable increase in rates payable as a substantial sum of RV is taxed at 12%.
Impact on Residential Tenants and Landlords / Developers
One may question whether the substantial increase in rates burden will ultimately lead to higher rental levels, as landlords might pass these costs onto tenants, particularly since residential tenancies are generally inclusive of rates.
We believe that landlord could only raise rent when there is significant demand, which provides him with considerable bargaining power. With the introduction of progressive rates, luxury residential properties will be impacted the most, in which the market operates differently compared to the broader residential market.
Following the pandemic, we’ve witnessed a decline in the number of high-net-worth expatriates, resulting in reduced rental budgets amid challenging economic conditions in Hong Kong. Consequently, the leasing demand for luxury properties remains weak compared to smaller units, which have seen a stronger demand driven by individuals and families of the Top Talent Pass Scheme and non-local students.
The RVD publishes data on private residential property market yields and categorizes residential properties into classes based on size. Over the past three years, there has been a notable yield expansion in smaller properties within Classes A and B (with saleable area of less than 40m2, 40-69.9m2 respectively), aligning with the strong demand for small-to-medium sized residential units sought after by individuals and families that we discussed above. In contrast, luxury properties (Classes D and E, respectively with saleable area of 100-159.9m2 and 160m2 or above) have exhibited slower yield growth, indicating a stable rental demand for these higher-end units. Furthermore, the yield spread between Class A and Class E properties has also doubled from 0.6% to 1.2% between 2022 and 2024.
Source: RVD
* Provisional figures
In light of the relatively stable mild demand for luxury properties, landlords may find it challenging to pass on these costs to tenants without risking prolonged vacancies or reduced demand for their properties. Therefore, in a market characterized by weaker demand where rental raise stemming from the progressive rates is considered unlikely, the net returns from leasing are expected to be further compressed.
Implementation Timeline
The progressive rating system will start being applied from the January to March 2025 quarter, and affected ratepayers will see these changes reflected in their quarterly demands issued in early January 2025.
Property developers/owners who are affected by this progressive rating system for domestic tenements and believe their RVs have been over-assessed are encouraged to file a protective objection during April and May for a proposal to alter the RVs of the tenements to more reasonable levels. In case of a successful objection, the overpaid amount will normally be used to offset the next and/or future quarter's rates and government rent payment.
If you wish to have a refund of your over-paid rates by cheque rather than an offsetting arrangement, you may apply by providing the account number of the property and supporting document to RVD.
Rateable value refers to an estimate of the annual rental value of a property at a designated valuation reference date based on the assumptions stipulated in the Rating Ordinance. For RV exceeding HK$550,000, owners or occupiers of residential properties with monthly rental of approx. HK$45,800 or above have to keep an eye at the introduction of the progressive rating system.
What You Need to Know about the Progressive Rating System
- For Domestic Tenements with RV ≤ HK$550,000
Rates will continue to be charged at 5% of the RV.
- For Domestic Tenements with RV > HK$550,000
Rates will be structured as follows:
First HK$550,000: 5%
Next HK$250,000: 8%
Remainder (RV > HK$800,000): 12%
The new structure proposed by the Rating and Valuation Department (RVD) is expected to yield an additional revenue of approximately HK$840 million p.a., which constitutes about 2% of the total revenue from rates for the rate year 2024/25, to Hong Kong Special Administrative Region (HKSAR) Government.
What’s the impact?
To illustrate the impact of the new progressive rating system on property taxes, let's consider an ultra-luxury residential unit with RV of approximately HK$8.64 million p.a.. The new annual rates liability for this property would have been increased to HK$988,300, up by 129% from the previous level.
Surely, for any tenement having a greater portion of RV above the HK$800,000 p.a. threshold would mean a more notable increase in rates payable as a substantial sum of RV is taxed at 12%.
Impact on Residential Tenants and Landlords / Developers
One may question whether the substantial increase in rates burden will ultimately lead to higher rental levels, as landlords might pass these costs onto tenants, particularly since residential tenancies are generally inclusive of rates.
We believe that landlord could only raise rent when there is significant demand, which provides him with considerable bargaining power. With the introduction of progressive rates, luxury residential properties will be impacted the most, in which the market operates differently compared to the broader residential market.
Following the pandemic, we’ve witnessed a decline in the number of high-net-worth expatriates, resulting in reduced rental budgets amid challenging economic conditions in Hong Kong. Consequently, the leasing demand for luxury properties remains weak compared to smaller units, which have seen a stronger demand driven by individuals and families of the Top Talent Pass Scheme and non-local students.
The RVD publishes data on private residential property market yields and categorizes residential properties into classes based on size. Over the past three years, there has been a notable yield expansion in smaller properties within Classes A and B (with saleable area of less than 40m2, 40-69.9m2 respectively), aligning with the strong demand for small-to-medium sized residential units sought after by individuals and families that we discussed above. In contrast, luxury properties (Classes D and E, respectively with saleable area of 100-159.9m2 and 160m2 or above) have exhibited slower yield growth, indicating a stable rental demand for these higher-end units. Furthermore, the yield spread between Class A and Class E properties has also doubled from 0.6% to 1.2% between 2022 and 2024.
Source: RVD
* Provisional figures
In light of the relatively stable mild demand for luxury properties, landlords may find it challenging to pass on these costs to tenants without risking prolonged vacancies or reduced demand for their properties. Therefore, in a market characterized by weaker demand where rental raise stemming from the progressive rates is considered unlikely, the net returns from leasing are expected to be further compressed.
Implementation Timeline
The progressive rating system will start being applied from the January to March 2025 quarter, and affected ratepayers will see these changes reflected in their quarterly demands issued in early January 2025.
Property developers/owners who are affected by this progressive rating system for domestic tenements and believe their RVs have been over-assessed are encouraged to file a protective objection during April and May for a proposal to alter the RVs of the tenements to more reasonable levels. In case of a successful objection, the overpaid amount will normally be used to offset the next and/or future quarter's rates and government rent payment.
If you wish to have a refund of your over-paid rates by cheque rather than an offsetting arrangement, you may apply by providing the account number of the property and supporting document to RVD.