The Impact of the New Progressive Rating System on Residential Properties

The Rating and Valuation Department announced the most recent rental index at 29 May, with a reported value of 186.9 points for April, representing a marginal monthly increase of 0.92% compared to March’s 185.1 points, a two-month increase of about 1.2%.

Rents eased across all but one category, with Class D units showing the highest increase at 150.2 points, representing a 1.08% MoM increase. Classes B and E followed closely at 185.3 and 139.2 points, respectively, for a 0.98% and 1.02% MoM increase. The Class A index has remained above the 200-point level for seven consecutive months, reaching 207.6 points in April, representing a 0.83% MoM increase. The Class C index represented growth, reaching 158.8 points, close to 159.7 in January 2020.

Progressive Rating System for property rates in the residential market will be implemented starting from the fourth quarter of the 2024/25 fiscal year (i.e., January to March 2025). Luxury residential properties can be subject to a maximum rate of 12% of the annual rental value, reflecting the principle of "those who can afford more should pay more." The government will publish the draft ordinance for the 2024 Rates (Amendment) Bill on 31 May and submit it for legislative council deliberation on 12 June. Leased properties under the Housing Authority, Housing Society, as well as those managed by the Hospital Authority and university dormitories, will be exempt from the new rates.

For domestic tenements with rateable value of $550,000 or below (about 98% of private domestic tenements), the rates percentage charge shall remain at 5%.

For domestic tenements with rateable value over $550,000, rates will be calculated according to the following progressive rates charge scale*

According to the proposed amendments, residential properties with a rental value of up to HK$550,000 will maintain the existing 5% rate.

For residential properties with a rateable value exceeding HK$550,000, progressive rates will be applied based on the rateable value. Non-residential properties, including those used for commercial usage or social services such as hotels, children's homes, daycare centers, elderly homes, youth hostels, and holiday camps, are not covered under the progressive rates system. The proposed changes would only affect residential properties with rental values exceeding HK$550,000, which account for approximately 1.9% of the total number of private residential properties in Hong Kong, equivalent to a monthly rent of about HKD 46,000 or above.

According to the Private Domestic Report compiled by the Rating and Valuation Department (RVD), as of the statistics of 2021, the total stock of residential properties amounted to 1,237,995 units. Consequently, the implementation of the new progressive rating system would affect approximately 23,521 units, accounting for 1.9% of the total residential property stock. Owners of these units will be required to pay rates based on the new calculation methodology.

For domestic tenements (including separately assessed domestic car parking tenements) subject to progressive rates, the ratepayers concerned were informed in April 2024 that the tenement will be subject to payment of progressive rates in the January to March 2025 quarter. The amount of progressive rates payable for that quarter will be shown on the demand concerned. Whether progressive rates should be payable for subsequent years of assessment will depend on the rateable value for the relevant year(s)

The new rate demands reflecting the changes are expected to be issued in December 2024, and the government's annual revenue is projected to increase by approximately HK$820 million.

Due to the current practice of using the overall valuation method for certain residential properties based on their design and occupancy patterns, the rateable value may exceed HK$ 550,000. Therefore, exemptions will be provided for rental properties provided by the Housing Authority, Housing Society, as well as those in Tai Hang West Estate, transitional housing, and simplified public housing. Additionally, dormitories provided by the Hospital Authority, Chinese medicine hospitals, registered non-profit schools, higher education institutions, and religious organizations will also be exempt from the new rates.

According to the latest rental indices performance, there has been notable rental growth in Class D and E properties, which range from 1,076 sq. ft. to 1,722 sq. ft. or more. Furthermore, the prevailing high interest rates have led end-users to opt for leasing rather than purchasing larger flats. According to data from Centaline Agency, a total of 1,493 rental transactions were recorded in the past year, with 99.31% of them involving properties sized between 800 sq. ft. and 2,000 sq. ft. or larger.

While it is true that the implementation of the Progressive Rating System will increase the government's annual revenue, it also brings about certain side effects for property owners. As a result, some owners may choose to raise renewal rents in order to compensate for the additional rates, leading to higher yields on their properties.