Centaline’s wily bet on a coveted relaxation of Hong Kong’s property rules lands it in hot water

Centaline Property Agency, one of Hong Kong's largest real estate firms, has found itself in a predicament. The company attempted to stimulate sales by speculating that the government would ease property regulations. If Hong Kong's Chief Executive, John Lee Ka-chiu, abolishes certain rules during his October 25 address, buyers and sellers could potentially terminate their contracts without any penalties. This is according to a memorandum issued by Centaline and its subsidiary, Ricacorp Properties. However, the Estate Agents Authority (EAA), a regulatory body for sales agents, has criticized this unusual strategy as inappropriate. The EAA warned that the memorandum could lead to legal disputes and create confusion in the property market. They also suggested that the arrangement might be a method of tax evasion or avoidance of other legal liabilities. The EAA is currently investigating whether the memorandum violates any of its guidelines. Shih Wing-ching, the founder of Centaline, has dismissed any allegations of tax evasion, asserting that his lawyers have found no issues with the memorandum. He stated that it's not a rigid rule, but a response to the current market conditions. The controversy highlights the struggles of Hong Kong's property industry, which is trying to recover after a decade-long bull run. The industry has suffered a 15% decline from its peak in September 2021. Centaline, Ricacorp, Midland Realty, and Hong Kong Property Services (Agency) have collectively laid off 3,100 sales agents since the beginning of 2023 due to a significant reduction in transactions last year. Real estate agents are eager to secure clients before the policy address. Many potential buyers are currently waiting for the address to gain clarity on the future direction of home prices. The number of newly approved mortgages, a key indicator of housing market demand, fell by 28. 6% last month. The value of these mortgages also decreased by 31. 9% to HK$3. 72 billion (US$475 million) from August. The industry is lobbying the government to abolish the restrictions, colloquially known as 'spicy measures', that were implemented in 2009 following the Global Financial Crisis. The removal of these measures could potentially boost home sales by 5 to 10%, according to an estimate by Victoria Allan, the founder of property agency Habitat. Centaline's hedge will only come into effect if certain conditions are met. If the government maintains the 15% stamp duty, the agent will nullify the provisional sales and purchase agreement and refund the deposit to the buyer, unless otherwise agreed by the buyer and seller within three days after the address. The memorandum could potentially cause confusion between buyers and sellers if it lacks clear specifications. It may not accurately reflect the parties' intentions, and buyers and sellers must fully comprehend its implications to avoid litigation in case of disagreements on the conditions after the policy address. However, the debate may be irrelevant, as few have dared to sign Centaline's memorandum following the EAA's warning. If a property buyer insists on signing such a memorandum, the agent will consult with the solicitors of both parties based on the specifics before signing the contract.