Hong Kong task force on subdivided flats recommends tying rent increases to market index, capping raises at no more than 15 per cent

Gigi Choy
·6-min read

Tens of thousands of subdivided flats, home to some of Hong Kong’s poorest people, should be subject to rent controls tied to an existing index that reflects the general market, with raises capped at no more than 15 per cent, a government-appointed task force has recommended.

Pegging rent increases for the often-cramped dwellings to the local index would prevent exorbitant spikes and keep prices in line with the general trend in the residential market, the task force said on Wednesday.

Unveiling its proposal, task force chairman Dr William Leung Wing-cheung defended the 15 per cent figure as appropriate, although it was higher than the 10 per cent ceiling for a separate mechanism that regulated rents of public housing.

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“[Subdivided units] are not provided by the government. The owners of SDUs are actually ordinary citizens so they have no obligation to help subsidise housing for the low-income group,” he said.

The plan to bring back tenancy control, a policy scrapped 17 years ago, was first announced by Chief Executive Carrie Lam Cheng Yuet-ngor in January last year in a bid to address Hong Kong’s housing crisis, long viewed by Beijing as one of the city’s most “deep-seated” problems.

The plan to bring back tenancy control was first announced by Hong Kong Chief Executive Carrie Lam. Photo: Reuters
The plan to bring back tenancy control was first announced by Hong Kong Chief Executive Carrie Lam. Photo: Reuters

Lam acknowledged that many low-income families were forced to live in subdivided units due to the long waiting time to obtain public housing, and might need protection from being overcharged.

About 99,000 households are believed to live in the type of flats covered by the changes, according to a government report last December. The shoebox-sized homes are mostly in older buildings privately owned by individuals or companies, and are commonly found to contain health, fire and structural risks.

A standard contract setting out the rights and obligations of landlords and tenants should be mandated, the task force recommended, noting that 15 per cent of renters previously surveyed had no written agreements.

Landlords of subdivided flats could still raise rent by up to 15 per cent under new bill

The tenants would only need to pay the rent, deposit, utility charges and fees for any breach of the agreement, and nothing else.

The lease would have a fixed period of two years, and on expiry the tenant will have the priority over others to renew it for another two years, with the rent subject to control. After four years, the landlord and the tenant would be free to negotiate and enter into a new agreement with no cap on rent increase.

Only tenants can terminate the lease after a 12-month period by giving the landlord one month’s notice.

If there is no individual electricity or water meter installed, the landlord will need to provide a copy of the utility bill and a breakdown of the apportionment among the tenants of the unit.

A landlord will commit an offence and be subject to penalties if he or she asks the tenant to pay for items other than those prescribed in the contract.

Acknowledging that imposing rent control could result in unfavourable consequences for tenants, the task force said government intervention was justified if the rental market for subdivided flats “has been ‘unjust and unfair at the outset”.

“Due to the imperfection of the SDU market, implementing rent control on SDUs does not violate the principle of free market,” its report reads. “Unless the extent of rent control is very large, rent control will not immediately reduce the supply of SDUs because the cost of reverting SDUs to normal units is high.”

Many low-income families were forced to live in subdivided units due to the long waiting time to obtain public housing. Photo: Xiaomei Chen
Many low-income families were forced to live in subdivided units due to the long waiting time to obtain public housing. Photo: Xiaomei Chen

The task force also recommended the scope of tenancy control be “relatively broad to cover as many SDUs as possible”, such as those in industrial and commercial buildings or in temporary structures – which may involve illegal land use and/or unauthorised building works – but deferred to the government to define subdivided units in future legislation.

The task force suggested adopting the Rating and Valuation Department’s (RVD) rental index for residential properties to regulate how much landlords could raise the rent when renewing a lease. The rate of the increase, it said, should not be more than the percentage change of the index, or 15 per cent, whichever was lower.

“This approach would help rein in the rent increase of subdivided units in tandem with the overall movement of the private domestic rental market while enabling landlords to earn a return on their properties which is in line with the general yield expected from the prevailing … market,” the task force’s report said.

Subdivided flat tenants welcome task force call to keep rents under control, but are not sure how the system will work

The RVD index fluctuated wildly in the past. It found that rents rose by 33.5 per cent from 2009 to 2011, only for that rate to fall to around 12 per cent from 2013 to 2015. The index found rents actually dropped by 6.6 per cent from 2018 to last year.

Karen Wu Cheuk-yan, a spokeswoman for the Subdivided Flats Concerning Platform, said the proposed rent control mechanism was “better than nothing”, but added the 15 per cent limit did not offer enough protection for tenants. It should follow inflation instead and be capped at 10 per cent, she said.

“Even if you control the amount, that rent can go up, the landlords can significantly increase the base rent, which would render the new regulations useless,” she said.

Shea Hing-wan, chairman of the Hong Kong Owners Club who sits in the task force, said he had no strong views about the 15 per cent cap, but objected to the two-plus-two year tenure.

An estate agent in Wan Chai. Photo: Felix Wong
An estate agent in Wan Chai. Photo: Felix Wong

“If a landlord does not get along with the tenant, they have to be bound together for four years. This puts the landlord at a big disadvantage,” he said.

Francis Lam Ka-fai, chairman of the Institute of Surveyor’s housing policy panel, meanwhile, likened the task force’s recommendations to a painkiller that helped ease tenants’ economic burden.

“These are temporary measures but are not a solution to the problem. In the long run, the government needs to provide more transitional homes and public flats to tackle the city’s housing crisis,” he said.

He added that it was “logical” to peg rent control to the RVD index: “If landlords can only raise rents by a small amount, they may lose incentive to lease out their property and upset supply.”

The task force said the fundamental way to solve the issue of subdivided flats was to increase the supply of public and transitional housing. But the government should consider further intervention, such as putting in place a registration and licensing system of subdivided units, if the problem persists or worsens.

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