With Hong Kong housing prices at record high levels and the government’s cooling measures driving more people towards the rental market, an increasing number of investors and developers are taking a closer look at multifamily housing as an asset class.

Unlike in the US or Japan, where “build-to-rent” developments are a well-established real estate asset class, multifamily housing remains largely underdeveloped here in Hong Kong. Where it does exist, it is usually geared towards the luxury segment of the market or let as serviced apartments. Moreover, these properties are usually held by a handful of local developers or family offices and rarely traded on the market in their entirety. But this is set to change.

According to the 2016 Population By-census, the proportion of domestic households living in rental properties or in free or employer-provided accommodation had increased to 52 per cent, up by four percentage points from 48 per cent in 2011. This is more than the one percentage point increase over the previous five-year period.

The rental market provides options for households that cannot afford the hefty down payments required to purchase a home, and for those unable to find a property that meets their immediate requirements. Rental housing can also alleviate the financial burden on households.

Data from the By-census and JLL shows that the median rent to income ratio stood at 30.7 per cent in 2016, compared with the mortgage debt payment to income ratio of over 40 per cent for an average-sized flat.

In April, the government extended the 15 per cent stamp duty levy on residential transactions to include all first-time buyers purchasing multiple properties under a single sales and purchase agreement. The move was aimed at closing a loophole where investors with no residential holdings under their name could purchase multiple residential properties at a significantly lower stamp duty rate, supposedly reserved for first-time buyers.

For investors who are still eager to have exposure in the local residential property market, there will likely be two key options.

The first is to funnel their capital into the luxury segment of the market. So instead of buying multiple properties, investors may choose to buy only one.

The second is to acquire en-bloc buildings held under single ownership via equity transfer and then lease the building out as multifamily units. Share transfer deals are subject to significantly lower stamp duty rates than the direct sale or transfer of immovable property.

Going down the multifamily route also provides the option of keeping a portion of the building for long-term investment and stratifying remaining units to individual buyers should market conditions or the regulatory environment change.

Still, there are a number of challenges hindering the proliferation of the asset class. These generally revolve around policy changes, yield expectations and the general acceptability of renting versus home ownership, to name a few.

That said, some niche product types of multifamily housing, such as elderly homes or student accommodation, are likely to have stronger impetus for growth in line with the specific demographic needs of Hong Kong’s population.

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