Investors viewed unfairly as speculators
Government's cooling measures in commercial sector failed to make a key distinction
Why did the Hong Kong government assume that all investors in the city's commercial properties were speculators, when the sector overheated early this year?
This question has clearly confused many foreign investors, prompting several chambers of commerce representing hundreds of firms to voice their unhappiness about the government's sweeping anti-speculation measure in February.
Their message was simple but loud and clear, as reported by the South China Morning Post on Friday: their member firms are long-term investors, not speculators. This is precisely the reason they bought the office premises they had been using in Hong Kong - because they did not want to be subjected to the roller-coaster ride in the city's property market.
That the government failed to recognise this long-standing phenomenon has understandably upset and bothered these foreign investors, prompting them to ask their respective trade chambers to speak up on their behalf.
After a 15 per cent buyer's stamp duty for non-permanent residents and corporate buyers was imposed in the residential market in October last year, speculators quickly shifted to the commercial property sector, pushing up prices of car parking spaces, offices, hotel rooms and industrial units.
The government's February 22 announcement of a doubling of stamp duty on residential and commercial property sales exceeding HK$2 million in value was designed to curb speculation. In the top bracket - on sales worth more than HK$20 million - stamp duty rose to 8.5 per cent of the property's value, from 4.25 per cent.
But companies that bought or plan to buy office space for their own use say they have been unfairly punished by the measure, which will dampen business expansion in the city.
Although first-time home buyers will not be affected by the doubling of stamp duty, no such waiver exists for purchasers of commercial property.
If the Legislative Council passes the Stamp Duty (Amendment) Bill 2013, the proposed doubling of stamp duty will come into force. This means the extra stamp duty will apply to all commercial property transactions concluded on or after February 23.
Canadian insurer Manulife (International) was caught by the doubling of the stamp duty when on March 15 it bought the West Tower at One Bay East in Kwun Tong - due for completion in late 2015 - for its own use. The firm paid HK$4.5 billion for the 512,000 square foot office block, or HK$8,789 per square foot. Manulife faces a stamp duty of HK$382.5 million instead of HK$191.25 million.
But the firm is going ahead with the deal, probably for the purpose of capping its rental expenses. If it were to rent the 512,000 sq ft of office space at West Tower instead of buying the building, it would cost an additional HK$123 million per year, based on the prevailing monthly rent of about HK$20 per square foot in Kwun Tong.
The insurer is now leasing 500,000 sq ft at Manulife Financial Tower in Kwun Tong and several hundred thousand square feet of office space in Causeway Bay and Jordan.
It said it would continue to keep substantially all these premises, bringing its rented office space to more than 1.3 million sq ft, which could easily cost HK$260 million a year.
For a global corporation with plans to expand over the next two decades, this translates into HK$5.2 billion in rental expenses for the next 20 years if the rent stays at HK$20 per square foot.
The decision to pay HK$4.5 billion for the additional space in the new headquarters is believed to have been taken to cap its rental expenses, to avoid profit margins being squeezed significantly in case rents rise rapidly.
Manulife will also enjoy the capital appreciation if the office market improves over the next decade or two. A 5 per cent increase in the price of office space will allow it to enjoy a capital gain of HK$225 million on paper.
But ultimately, it boils down to a question of fairness, as the doubling of stamp duty showed the government failed to make any distinction between legitimate long-term investors and speculators when they buy commercial property.