Hong Kong stamp duty
To rein in the city's runaway housing prices, Hong Kong's Financial Secretary John Tsang Chun-wah announced an additional 15 per cent stamp duty on non-permanent-resident and corporate buyers starting from October 27, 2012. The move prompted speculation over the effectiveness of taxation on the real estate market and criticisms that Hong Kong was turning away from its roots as a free market economy in favour of a more protectionist market environment.
Double stamp duty on non-residential premises will hit businesses hard
Timothy Peirson-Smith says the government's property cooling measures will make many businesses think hard about investing in the city
With limited supply and rife speculation, the cost of property in Hong Kong is notoriously high, which seriously challenges the city's economic development and the public's standard of living. To address this, Chief Executive Leung Chun-ying's administration made early efforts to further curb residential property prices by introducing a buyer's stamp duty following the introduction of a special stamp duty by the previous administration.
The two measures have cooled the residential market, but have undesirably fuelled similar speculation in the commercial and industrial sectors. To further "regulate" the market, the government announced a doubling of basic ad valorem stamp duty in February, targeting non-residential and residential premises.
This new measure may appear to be an elixir to the overheated market - transactions in both sectors have dropped considerably since the new measure was announced, although prices remain largely unchanged. Yet, worryingly, the inclusion of non-residential property in the scheme will discourage businesses wishing to acquire property to house their operations or make long-term investments.
In erroneously labelling all such businesses - be they small, medium or large, local or international - as property speculators, the legislation overdose risks damaging Hong Kong's competitiveness and business reputation at a crucial period.
One can foresee five scenarios where businesses will be adversely affected: small businesses wanting to acquire commercial premises for their future development in Hong Kong; medium and large local businesses seeking to expand by acquiring commercial premises for their own use; international businesses in Hong Kong looking to consolidate and expand existing businesses by acquiring commercial premises; multinational corporations that want to enter Hong Kong and consider acquiring commercial premises, which comprises a foreign direct investment; and, genuine property developers and investors seeking to upgrade existing buildings, adding diversity to the rental stock.
In all these scenarios, businesses are making constructive non-speculative investment in the city, but will surely be intimidated by the transaction costs involved in the double stamp duty. This will be felt most by small and medium-sized enterprises which do not hold big financial "war chests" to pay such large new duties. Likewise, it is government policy to encourage foreign direct investment but this measure hardly furthers that aim.
These unintended consequences to businesses can be avoided without derailing the real benefit of dampening speculative office property "flipping''. A provision could be included in the legislation to exempt property owners who hold non-residential properties for more than a certain number of years, say three. By exempting such "buy-and-hold" users, real investors will not be affected.
For the sake of Hong Kong's economy, businesses should be allowed to expand and develop in an unfettered manner. Real investment should be encouraged, not dampened by overly reactive laws.
Timothy J. Peirson-Smith is managing director of Executive Counsel Limited, a business consultancy based in Hong Kong. He is also chairman of the Business Policy Unit of the British Chamber of Commerce, Hong Kong