Viewpoint 2006
What a joy it was to be able to arrive in Hong Kong, the famous island city which became independent of England in l997. To be in this historic city was thrilling. I was happy to have the time to investigate the real estate market while learning my way around the city with a friend who has been there many times. New friends referred to us who are long term residents, also provided a great deal of insight.
The famous ocean harbor is full of activity, day and night: freighters sail boats, ferries, eccentric yawls, and sleek motor boats crossing the water day and night. What a colorful sight!
The high rise buildings are surrounded by greenery, which makes them less harsh and when there are so many of them side by side. There are parks and fountains throughout the down town area. New glass and chrome shopping centers are full of expensive shops, unique restaurants. Everything is clean and signage is well designed to help you maneuver this new terrain. My friends mused about the charm of days gone by with much of the city commerce conducted in colorful stalls down small streets. Temple Street and the Pegler Building were called to mind. The China Club, a private club with what is reported to be the best Chinese restaurant in the entire city, was charming with its classical Chinese décor, wooden floors with a patina from many waxings, and fresh flowers everywhere.
Double and triple decker buses, red taxis or private limousines, subways with computer screens on their back and fast noiseless engines, take you from the heart of town to the airport, huge convention center, or to the Middle Territories on the mainland.
Hong Kong is said to be between 7 and 8 million people. Across Victoria Harbor, the mainland of Kowloon and the New Territories looks very similar to the island. Gardens, parks, high rises abound.
Almost one half of Hong Kong’s residents live in government housing. The rest of the city is up for is for sale. There are record prices, however for what remains. More on this later.
All property in Hong Kong is owned by the Government, except the famous St. John’s Cathedral, which is a freehold. The government sells its land for development on a leasehold basis. Hong Kong became part of China in 1997 and has been a British colony for 150 years. It is now a special zone permitted to be run more independently of China, and has therefore continued to attract international investment. Many see investment in Hong Kong as a pathway into China for investment. In 2027, the special zone will cease to exist, and mainland China can decide how autonomous to allow Hong Kong to continue to be at this point.
Major vendors to some of the largest manufactures have moved to China in order to be able to continue to be the best most competitive suppliers for the manufactures products.
Back to leasehold, however, which forms the basis for the term of ownership of the real estate. In the early years, Hong Kong leases were granted for 999 years, and those that exist today are now highly prized. Gradually the 99 year leasehold were negotiated, renewable for a further 99 years, as well as 75 hear terms renewable for another 75 years.
But now the newer government leases are 50 years. This shorter term was part of the arrangement relating to Kong Kong’s handover to China in 1997. There is no stated policy or ruling about an extension for a second 50 years, although many people presume that extensions will be offered, subject to payment of Government rent.
Somewhere last week I read that 48% of Americans believe that China will be the leader of the world economically in the next 20 years. That is about the time that Hong Kong can be pulled into the fold of mainland China. Perhaps both will be leaders of the world in investment and trade, with Hong Kong keeping its individuality.
Then "ownership" of a property for a term of years must be registered within 30 days of acquisition. Often the purchase is of undivided shares in a completed building, and is known as strata title.
The current system of deed registration does not provide evidence of the seller’s title or confer the title to the buyer, according to Margaret Brooke, the chief executive of a Hong Kong based company in real estate consultancy.
When a property is sold or mortgaged, an attorney must review all the title deeds and documents to establish validity of title. This research can cause delays, as well as legal challenges, particularly with older properties.
The Government is working on a new registration system which will confer title but this has not been completed yet and may not include all properties for a period of time.
One possible solution to title issues is the introduction of title insurance to protect owners by providing indemnity for losses suffered as a result of defects of titles of properties. The insurance includes legal fees to defend the title and financial loss resulting from title defects. The coverage can be extended to funding institutions for mortgages, as well.
Title insurance can be especially helpful to older properties. New developments in primary developments have the new registration system which will confer security of title. This gives these buyers more peace of mind. There are many new projects offered for sale through standard advertising. There is no shortage of properties to look at if you are seriously considering buying here.
So, one of the first things to do when you are going to look at buying property here is investigate the pros and cons of buying older properties versus new ones. Hiring a competent attorney is a prerequisite, also.
The property purchasing process is based on common law similar to that in England. Currently, the autonomous Special Administration Regions of Hong Kong and Macao operate so that there has been little overall effect on their active real estate markets since China took over the two cities.
A buyer searching for a property will want to spend the time to shop around the find the best value in a market which has quirks. Properties with certain numbers as their address or on certain floors, such as the fourth floor, are slightly cheaper because of other considerations. The Cantonese word for four is “sei” which sounds like the word for “death”. “8” is a good number so this floor and certain address combinations can be higher prices for their dwellings.
Many owners have made unapproved alterations such as internal staircases or closed- in balconies. The Government is cracking down and ordering the buildings to be restored to their original conditions. An attorney or real estate broker can track an order, but if they inspectors haven’t gotten to that building yet, the order could still show up later.
So, here is the best reason perhaps to buy with a mortgage. If the bank funds the loan, they have made sure that the property has good title. “Big brother”, the mortgage company and their underwriters, oversee the due diligence necessary to be sure there is documentation of a recorded title. Recommendations are given to those who can well afford to pay cash, to go for a mortgage for the protection offered by the lender of a clear recorded titled property.
Typically a buyer puts down 5 per cent of the purchase price when a preliminary sales and purchase agreement is signed. Another 5 per cent is due about two weeks later when a formal agreement is signed. The balance is due at closing, usually 6-8 weeks later.
The broker’s fee is generally a half to one percent of the price, and both the buyer and seller each pay this amount. The attorney fees vary, but it is usually about 6,000 Hong Kong dollars for their work. A stamp duty is 0.75 to 3.75 per cent of the purchase price. When the formal agreement is signed, the buyer is responsible for the property in case of damage or acts of nature. The buyer should get insurance at this point on the property at this point.
A mortgage for local residents is usually up to 70% of the sales price. Mortgage insurance will allow as much as 95 per cent on certain purchases, with less favorable rates and some restrictions.
An example of a mortgage would be 20 years, 7.25% interest with 20% down on a purchase price of 2,980.000 Hong Kong dollars. The current ratio s $1 US dollar to 7.8 Hong Kong dollars.
Foreign buyers, from America, Korea and Japan, have been able to arrange for mortgages through branches of banks associated with Hong Kong.
In some cases, buying a property can produce a residency permit. In Hong Kong, currently the amount you are required to invest is 6.5 million Hong Kong dollars. This amount is about $833,333 USD. These required Hong Kong dollars can be invested in a combination of properties or financial instruments like stocks or bonds.
There are groups of people who are exempt from being able to acquire residency or citizenship. Mainland Chinese, unless they are residents in another country, Afghans, Albanians, Cubans and North Koreans are not allowed to acquire this residency status. In Macao, the other Administration Zone, an investor must have a university education or run a company in order to become a citizen.
These investment amounts of 6.5 million Hong Kong dollars must be the net amount invested, not a mortgage. The government influences the bankers lending money to not overvalue a property. In fact, the value currently must be no more than two thirds of the market value. A conservative appraisal for the lender is a way to stop overheating a market and investors running up the prices.
Harriet Cochran Murray
This article is based upon legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller conduct his own due diligence and review.
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