Buying Off-Plan Property in Hong Kong

Hong Kong is frequently named as the most expensive property market in the world

In Episode 5 of Expat Property Story, Vicki Wushe argued very convincingly and wisely of the dangers of buying off-plan new build developments in the UK.

But the housing market in Hong Kong is very different and while it’s still a potentially dangerous strategy, I have to say that we did ok out of it, even if it was a bit of a rollercoaster ride. 

We touched upon this experience in Season One when we chronologically covered our Expat Property Story, but didn’t really explore in much detail, mainly because the story took place before I started keeping a journal to record our experiences. 

If you’ve been with us since the start, you will know that we first thought about buying property in Hong Kong in 2013 but our ‘Independent’ Financial Adviser put us off. Shame on him!

We felt that paying rent was like pouring money down the drain.

Meanwhile the value of the flat we had been renting since 2008 had doubled in value from the equivalent of £360,000 to around £700,000 in just five years.

But at the time we felt it would have been too risky as we’d have been over stretched financially and would not have been able to make our mortgage payments had one of us lost our jobs.

Our stocks and shares stalled so we started to look at property.

Meanwhile, property prices continued to rise, and our stocks and shares continued to stall, so we started to explore the idea of buying a smaller property as an investment.

We looked at a second-hand property on Hong Kong Kong Island, but it was pretty shabby, so we left it at that.

That may be one of the reasons why people tend to prefer new build developments here rather than focusing on the secondary market.

Newly built properties also offer a range of attractive amenities to potential buyers such as clubhouses with indoor and outdoor swimming pools, private pool party venues, tenpin bowling alleys, tennis courts, squash courts, gyms, saunas, steam rooms, wellness centres and beauty clinics, study rooms, reading rooms and even music rehearsal and recording studios.

A couple of years went by, and property prices continued to climb so in July 2015, we looked again. This time we looked at a new development that was being built close to where we were living, and we started looking at buying a place to live in ourselves as opposed to for investment.

The higher the floor, the higher the price

Prices in Hong Kong are determined by floor and view. The price goes up with each floor and you pay more for a property with a sea view than you do for one facing the mountain.

We wanted a three-bed, so all we could afford was an apartment on the lowest floor with a glimpse of the mountain between two blocks of the neighbouring estate on the other side of the road!

After much toing and froing, we came to the same conclusion we’d reached the first time we’d thought of buying, namely that we’d have been over stretched financially and would not have been able to make our mortgage payments had one of us lost our jobs.

This turned out to be a good decision as, sure enough, within six months one of us lost our jobs!

So, that was that…

Or was it?

Property prices were still going up, while our pension plan continued to stall, so we started to think about buying to let rather than buying to live.

Another development was being built in our neck of the woods.

By now, we had cut down our living expenses and sorted out our finances and were ready to invest. We would cash in some of the stocks and shares from the pension plan and buy a one-bedroom flat in this new development.

When the Hong Kong Property Market is HOT, developers use a lottery system to drive up prices

In Hong Kong, when demand is high, developers sell units in phases using a lottery system.

The lottery system involves prospective buyers registering their interest in a property.

The developer will then randomly pick names from the pool of registered buyers who then advance to a live Lucky Draw in a hotel or an exhibition centre.

By limiting the number of units available at any one time, the developers create not just exclusivity, but also a sense of urgency, competition and a Fear Of Missing Out.

All of this helps them to drive up their prices and garner more interest in their projects.

This was the lie of the land, then, when we registered our interest to buy a one bed apartment back in 2015. We missed out on the first two ballots and began to lose hope, but the third time around we received a call from our agent saying that our name was on the list and we were off to the lottery.

When we got to the venue where the ballot was being held, they had made the room as small as possible using portable room dividers, and everyone was crammed in like sardines.

As each lucky ticket was displayed on the screens, an announcer would bellow the winning number down the microphone for those not able to see.

You have to choose your unit quickly

Those like us, whose numbers did not appear would look on with envy at the smiling faces of the lucky winners being led out of the room to pick their units of choice, still under pressure from those next in line who don’t have to wait for those in front to choose.

You have to do your research around the costs of all the potential properties you’re interested in because every unit has its own unique price (and therefore financing cost) and so, you have to be able to act fast and think on your feet before the people behind you snap up what you might have snared had you been quick enough off the mark.

All we could afford was a one bed apartment on a low floor and as expected they were all gone.

We went home disappointed.

A couple of months later, in November of 2015, we got a call from the same agent we’d been dealing with. She told us about another new development in in an area called the Gold Coast in Hong Kong Kong’s New Territories.

A tunnel under the sea was being built nearby which meant the airport would soon be just a 20-minute drive away and this development was in the shadow of the new Harrow International School, which is part of the famous Harrow School on the outskirts of London.

Like last time, we could only really afford a one-bedroom flat on the lowest floor with a view of the road leading in and out of the estate. The clubhouse came with all the usual amenities which people have come to expect in Hong Kong, but, at a price, as the service charge was a hefty £200 a month.

This one was not in such high demand that it warranted a lucky draw, but it still looked like a good deal to us (not that we really knew what a good deal was at the time!)

We bought our apartment for $4 Million HKD

So, we agreed to buy the property for around £400,000. The next step was to arrange a mortgage.

If I remember correctly, we paid 5% immediately to secure the deal followed by another 5% maybe 30 days later, before completing and clearing the balance some six months later in May of 2016, via a combination of a mortgage loan and by cashing in around half of our stocks and shares.

We found a company that provide mortgage comparisons at no charge and, after comparing the different products, and choosing the one that suited us most, the representative came out to meet us and helped us arrange our loan.

Our first payment would be in June 2016. The development was not due to complete until December 2017, so we would have money going out but not coming in for eighteen months.

As is often the case with new build developments, the completion of the development was delayed, which is always a risk, if not a nailed-on certainty when buying off-plan and it was not until March 2018 that we received the keys.

Unfortunately, everyone else received the keys at the same time so it was a renter’s market, and it took us two months to find a tenant who got a good deal due to the over-supply and diminished demand caused by lots of stock entering the market at the same time.

Our property increased in value by 50% in just over two years!

The good news was that by the time the tenants had moved in in May of 2018, the property was worth the equivalent of £600,000 pounds! Remember we’d bought it for £400,000. So, in two and a half years, it had gone up a whopping 50% in value.

These gains made us seriously question whether the pension plans we’d taken out under the guidance of our supposedly independent financial adviser were really the best place for our money to be working. Long-time listeners will know all this of course, but if you’re new here, there is a fuller version in Season One which runs from Episodes 1 – 34. But the gist of it is that we decided to look at ways to get more property.

 I had started to get more clued up on all things financial by this stage and had discovered the Tax Café series of books and one book in particular, which I reviewed in Episode 63 called ‘Tax Planning for Non Residents & Non-Doms’ taught me that if we moved back to the UK and subsequently sold our Hong Kong Property, the UK government would be entitled to Capital Gains Tax on our Hong Kong profits from selling the flat. So, we needed to sell at some point before returning to the UK anyway.

By the time that the tenants were taking up residence in May 2018, if we could have sold, we would have. So why didn’t we?

Unfortunately, in order to cool the market, the government had introduced Stamp Duty penalties for people flipping property for profit. For property owned for six months or less the penalty was 20% of the sale price.

Property owned for between six months and a year would trigger 15%, which reduced to 10% for properties sold between one and three years after purchase. To avoid the 10% penalty, we needed to wait until May 2019.

The Trade War between the USA and China had a negative impact on Hong Kong property prices.

But in January 2018, Donald Trump started a trade war with China which had a negative effect on property prices in Hong Kong.

The value of our flat started to slide through 2018. The tenants told us they wanted to move out after a year which was perfect as this coincided with the end of the three-year period for extra stamp duty.

We put the property on the market in May with three different agents but got no interest. In August we received an offer at the equivalent of £550,000 but we thought we could get more so we rejected it.

And then the protests started. This not only had a drastic effect on Hong Kong but also on the price we could expect to achieve for our flat.

This was what is meant by trying to catch a falling knife. We received another offer at £500,000 which felt too low for us so we said no.

Prices continued to slide. We were offered £490,000. We still said no.

And then a stroke of luck. The government announced a relaxation on eligibility requirements for the government mortgage scheme. The ceiling for 90% mortgages would be doubled from $4 million Hong Kong Dollars to $8 million, making homes more affordable for people.

This gave a mini boost to the market and with the protests still affecting daily life we received a new offer at £500,000.

By now we’d learnt our lesson around holding out for what we wanted rather than what the market dictated, so we reluctantly accepted.

So, while we could have sold for £550,000 a few months previously, we had still made over £100,000 in three years.

With the funds from selling our Hong Kong property, we were able to buy more UK property.

We now had a significant pot of cash to play with to scale our portfolio.

We had started our portfolio by releasing equity from our original flat in London. We had used these funds to buy a three-bed house which was developed into a 5-bed student HMO in Nottingham, which we then mortgaged to release funds to repeat the process this time with a six-bed student HMO also in Nottingham.

With the cash released from our second HMO, the funds from selling our flat in Hong Kong and £100,000 raised through private investment, we were able to buy three more HMOs in 2020 in the middle of Covid lockdown which is a story and worth going back to Season One for if you haven’t already done so.

Would we buy an off-plan property in a new development again. Probably not, but I guess we got away with it!