Getting the right accommodation mix will be crucial to the Northern Metropolis’ success

A local government accommodation scheme in Shanghai could boost private interest in Hong Kong’s Northern Metropolis and solve housing issues before they arise.

As China continues to industrialise, it continues to urbanise. China’s National Statistics Bureau notes that by the end of last year, 65.2% of its 1.4118 billion population was urbanised and that by 2035, 75.3% would be living in cities. Population forecasts by Yuwa, a group of academics focusing on national population issues, indicate that by the end of 2035, China’s population will reach 1.13 billion, meaning some 850,890,000 people will live in urban space.

Homes in Tier 1 cities such as Shanghai are too expensive for around 30% of residents, who must settle in rented accommodation. But even rent can be steep. Fresh graduates, or those without tertiary education, earn roughly RMB6,000 a month. 

A single-bedroomed apartment on the city's outskirts could cost almost RMB4,000, and few studios are available.

Last year, Shanghai’s government cracked down on people sharing apartments, increasing the need for more co-living solutions. Generally, co-living accommodation is managed by an operator. Tenants have small private quarters, including a bathroom, while shared amenities, like kitchens and living rooms, are far larger than the average flat. 

As Hong Kong subsidises public rental flats, Shanghai subsidises co-living. Accommodation can cost as little as RMB2,000. This scheme might be worth considering for Hong Kong’s Northern Metropolis to fulfil the city’s goal of attracting the world’s top young talent.

The golden opportunity

Shanghai works with the private sector to encourage developers and operators to be involved in public co-sharing accommodation in several ways, including substantial tax benefits. 

The general property tax for commercial property rental income is 12%, but developers who go into subsidised co-living pay less than 4%. VAT for typical commercial buildings is around 5%, but subsidised accommodation only costs 1.5%.

The government sets aside land, categorised as R4, for this scheme which is sold at a 70% discount from other land sales. Developers who take this option may not alter the accommodation land use for the 70-year duration of the term. Furthermore, R4 land caps rents, rental growth rate and strata-title sales, so that the developers meet the objective of the rental housing scheme. 

Developers or investors can refurbish existing buildings used for other purposes – such as non-performing office, retail and industrial buildings – to create subsidised accommodation, allowing them to boost the performance of weaker assets in their portfolios.

Owners seeking an exit strategy will find these developments can be listed as C-REITs, which increase their liquidity.

Large-scale developers – Vanke, China Resources – and global investors – Warburg Pincus, Ping 'An Insurance, CCB Trust – are making the most of this golden opportunity.

If we build it, they will come

As we know, Hong Kong’s government is doing all it can to attract top talent, especially to the Northern Metropolis, fitting into the city’s developmental blueprint as a technological powerhouse in the Greater Bay Area. One of the most daunting things foreign workers face in Hong Kong is finding reasonable accommodation. If thousands of professionals are to enter the Northern Metropolis, they will need housing. Not all will immediately be able to afford to rent homes, especially if they come from areas less well-off than Hong Kong. 

Experts have warned of a “social time bomb” if migrant workers' housing requirements are not met, especially now that Hong Kong has found the need to import hundreds of thousands of workers from offshore. Repurposing quarantine facilities and building dormitories are among the ideas floated to accommodate blue-collar workers.

In February 2023, the Secretary for Development, Bernadette Linn, announced the government's 2023-24 Land Sale Programme Development Bureau (DEVB) and the Home and the Youth Affairs Bureau (HYAB) had identified the Tung Chung Area 106A site to incorporate youth hostel units. The site falls under a “Residential Group B” use classified. The government will require, via land sale conditions, the developer to construct youth hostel units and facilities. Such units and facilities would not exceed 10 per cent of the total GFA, which will not be counted towards the maximum permissible GFA. The Board is now formulating the project details, which will be announced when the site is put up for sale.
 
Co-living is already a hit in Hong Kong

The concept of co-living took off during the COVID-19 pandemic. Still, even before that, it had begun attracting the interest of young professionals who wanted an affordable place without skimping on facilities. Several co-living operators launched branches in 2018.
As the pandemic affected the city’s tourism, the hotel sector’s performance was hampered. Attracted by the relatively stable income, investors and operators took advantage of it to meet local and foreign future demand. 

Significant players in Hong Kong include Weave Living, Dash Living and Oootopia. Their existing business models involve acquiring hotels, serviced apartments, or old residential buildings with good access to transport and in trendy parts of town. These assets are converted into modern co-living flats with communal areas like kitchens and lounges. Their tenant mix includes young professionals, entrepreneurs, overseas university students and ex-pats.

Even Hong Kong Science and Technology Parks Corporation built a smart-living co-living facility, InnoCell, to accommodate I&T talent and spark collaboration within its community.

Next steps

Occupiers in the Northern Metropolis will drive accommodation demand for co-living, rental or private home ownership. However, one of the overlooked occupier sectors is fresh graduates and young professionals, who may very well be unable to afford to move into any of the current offerings right away.

Millions of people are expected to call the Northern Metropolis home. Not all of them will be star earners; some will be new Hongkongers hoping to make their way in the city. By offering affordable accommodation from the start, the government can house all.

We believe there is a feasible way ahead for Shanghai’s model. Hong Kong can set aside tracts of land for subsidised co-living, as the mainland has done under its R4 category, with rent capped to benefit end users.

Land usage rights to non-residential land should spontaneously be changed to residential use with restrictions that it can only be used for subsidised co-living accommodation.

Provide a standard conversion rate scheme for land-use conversion in this category.

Allow existing local hotels and residential buildings to be converted into subsidised co-living developments.

It’s even easier to list subsidised co-living as a REIT in Hong Kong, and developers and investors should be made aware of this to make their participation more attractive.

It’s time to consider tax incentives on the income generated from privately owned subsidised co-living to encourage the private sector’s involvement.

Furthermore, Hong Kong to start planning beyond the Northern Metropolis. As the city becomes more embedded in the Greater Bay Area, it should diversify its housing options to mitigate its image of unaffordable rents and cramped conditions and appeal to a broader range of talent. Perhaps we can look to Shanghai for the answer.