Progressive rating system to impact mid-to-luxury residential properties in Hong Kong

The law of supply and demand always applies when it comes to price setting.

The progressive rating system for domestic tenements in Hong Kong took effect on 1 January 2025. This system primarily imposes higher rates on residential properties with a rateable value (RV) exceeding $550,000.

Rateable value refers to an estimate of the annual rental value of a property at a designated valuation reference date. For RVs exceeding $550,000, owners or occupiers of residential properties with monthly rentals of approximately $45,800 or above must keep an eye on the introduction of the progressive rating system.

Direct impact on property taxes
To illustrate the impact of the new progressive rating system on property taxes, let's consider an ultra-luxury residential unit with an RV of approximately $8.64m p.a.. The new annual rates liability for this property would have been increased to $988,300, which is a significant increase of 129% from the previous level.

Surely, for any tenement having a greater portion of RV above the $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.

The law of supply and demand always applies when it comes to price setting. Landlords could only raise rent when there is significant demand, which provides them 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.

Stable mild market demand for luxury properties 
Following the pandemic, we’ve witnessed a decline in the number of high-net-worth expatriates, resulting in reduced rental budgets amidst 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 Rating and Valuation Department publishes data on private residential property market yields and categorises 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 areas of less than 40m2 and 40 to 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 to 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 doubled from 0.6% to 1.2% between 2022 and 2024.

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 characterised by weaker demand where rental raises stemming from the progressive rates are considered unlikely, the net returns from leasing are expected to be further compressed.

Progressive rating system applies to domestic tenements

The progressive rating system aims to uphold the "affordable users pay" principle and was first introduced in the 2022-2023 Budget.

For domestic tenements with a rateable value (RV) of $550,000 or less, rates will continue to be charged at 5% of the RV. For domestic tenements with an RV exceeding $550,000, the rates will be structured as follows: the first $550,000 will be charged at 5%, the next $250,000 will be charged at 8%, and any remaining amount (RV over$800,000) will be charged at 12%.

The new structure proposed by the Rating and Valuation Department (RVD) is expected to yield an additional revenue of approximately $840m p.a., which constitutes about 2% of the total revenue from rates for the rate year 2024/25 to the Hong Kong Special Administrative Region (HKSAR) Government. 

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 affected by this progressive rating system for domestic tenements and who 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 offset by the next and/or future quarter's rates and government rent payment.

If you wish to have a refund of your overpaid rates by cheque rather than an offsetting arrangement, you may apply by providing the account number of the property and supporting document to RVD.