With the Government’s push to attract talents to Hong Kong in the past years, rental accommodation has become a hot topic in the city, whether under the auspices of student accommodation, talent housing, workers dormitories or otherwise. Chief Executive John Lee’s Policy Address, delivered on 16 October, touched on two areas that are relevant to property owners and investors providing or looking to invest into rental accommodation.
Subdivided Units (SDUs)
The Chief Executive unleashed specific measures to tackle the issue of SDUs in his third Policy Address. In summary:
- The regulation of SDUs in residential buildings will be implemented by legislative proposal.
- All substandard SDUs in residential buildings must be converted into "Basic Housing Units" (簡樸房) with a set of parameters including the provision of windows, an individual toilet, and floor area of not less than eight square metres.
- A recognition system will be in place to recognise SDUs that meet the required standards of "Basic Housing Units". The Chief Executive currently suggests a registration period to be either 12 or 18 months.
- There will be criminal liability for owners to rent out substandard SDUs, while tenants will not be held liable.
- A grace period (which the Chief Executive currently proposes to be one or two years) will be given to owners of pre-existing SDUs under rental to convert their SDUs into "Basic Housing Units" upon registration.
The measures are rolled-out after the Chief Executive received the recommendations in August from the Task Force on Tackling the Issue of SDUs led by Deputy Financial Secretary, Michael Wong, and with the Secretary for Housing, Winnie Ho, as deputy. The task force was established by the Chief Executive last year to conduct in-depth study on comprehensive handling of the issue of SDUs and to make relevant recommendations. Further details of the measures will be announced by the task force and submitted for legislative proposal.
Currently, tenancy control on the SDUs is implemented by Part IVA of the Landlord and Tenant (Consolidation) Ordinance (Cap. 7 of the Laws of Hong Kong), which took effect from 22 January 2022. Protections on various aspects of tenancies were provided to tenants of SDUs, including a four-year security of tenure, restriction on the amount of rental deposit, and rental increment.
Apart from tenancy control, there has not been any specific regulation on the physical requirements (e.g., design, size, fire safety, etc.) of the SDUs. As long as the building works converting residential units into SDUs comply with the Buildings Ordinance (Cap. 123 of the Laws of Hong Kong) and its regulations, there is no restriction on the owners of SDUs to decide on the size and the sanitary provisions of the SDUs. Driven by the financial incentive to rent out as much space as possible, many SDUs are built with poor design, with no window and no separate toilet, directly affecting the quality of living and hygiene standard of the tenants.
The legislative proposals aim to phase out substandard SDUs in an orderly manner and to promote the wellbeing of the tenants of the SDUs. Owners of SDUs will, upon registration, be given a grace period to convert any substandard SDUs into "Basic Housing Units". It is expected that the owners will have to instruct registered building professionals to supervise the conversion and submit certification of compliance to the relevant government authority. A recognition system will be established to identify SDUs that comply with the standards of "Basic Housing Units", and enforcement action will be taken against owners who rent out substandard SDUs.
From an investment perspective, we consider that there will inevitably be an impact on investors who operate rental accommodation by way of SDUs. In this regard, relevant investors will need to stay informed of the relevant legislative proposals to be announced, in order to assess the feasibility for converting any substandard SDUs into "Basic Housing Units" and the financial and operational impact.
Hostel Facilities – Conversions and Building New Hostels
Meanwhile, under the themes of building Hong Kong into an international hub for high-calibre talents and promoting the development of an international hub for post-secondary education, the Chief Executive also announced in the Policy Address that the Government will:
- Launch a pilot scheme to streamline the processing of applications in relation to planning, lands and building plans to encourage the market to convert hotels and other commercial buildings into student hostels on a self-financing and privately-funded basis, increasing the supply of student hostels; and
- Make available suitable sites for the private sector to build new hostels, having regard to market demand.
The Development Bureau will provide one-stop advisory and facilitation services for these projects.
Conclusion
The Chief Executive sent a clear message of the Government’s commitment to regulate and phase out substandard SDUs and at the same time to provide policy support to promote the supply of student accommodation facilities.
This presents both challenges and opportunities for real estate investment. Investors will need to adapt their strategies in selecting among different asset types, taking into account the new legislative proposals and compliance requirements once they are introduced. The Government’s express policy support for student accommodation facilities through conversion of hotels and other commercial buildings may attract investment in this area. Interested investors should closely monitor the introduction of the relevant pilot scheme and developments in this regard.
