Last month, a reader named Michael sent me a private message, saying that he was interested in a studio unit in a new development in Mong Kok. The price per square foot was 15% cheaper than a one-bedroom in the same area, and the expected monthly rental yield was 3.5%. He asked me if it was worth buying. I replied to him directly: 'If you are buying for investment and rental purposes, I advise you to think twice.'
This is not the first time I have encountered this situation. In the past few years, there has been a craze for 'open-plan units' in the Hong Kong property market. Developers have vigorously promoted the concept of 'easy to get on the property ladder, mortgage payments cheaper than rent, high rental returns,' attracting many first-time homebuyers or small investors. But as someone who has been working in the real estate industry for 15 years, I have to tell you: open-plan units, as an investment tool, carry many hidden risks you might not have considered.
In today's article, I will analyze the true nature of open-plan units from an investment perspective, using data and real-world cases to show you why this type of property is often not an ideal real estate investment choice.
Investment Traps of Open-End Funds: Glamorous on the Surface, Yet Hiding Hidden Dangers
Narrow tenant base, high vacancy risk
Many people think that open-plan units, being 'cheap in price and rent,' are necessarily easy to rent out, but in reality, it is often the opposite. The main target tenants for open-plan units are:
- Single young office workers
- Foreigners with short-term work visas
- Students or recent graduates entering the workforce
This tenant group has several obvious characteristics: high mobility, short lease terms, strong bargaining power. Based on cases I have handled in the past, the average lease period for open-plan units is only 9-12 months, far lower than the 18-24 months for one- or two-bedroom units. More importantly, when the economic environment worsens, this group of tenants is often the first to choose to 'move back home' or 'find someone to share a larger unit'.
:::warning Real data According to the 2023 data from the Rating and Valuation Department, the average vacancy period of open-plan units is 40% longer than that of one-bedroom units, and this gap exceeds 60% during economic downturns. :::
The Myth of Rental Yield
Developers often use '3.5% - 4% rental yield' to attract investors, but this figure is often calculated based on an 'ideal situation':
- Assuming zero vacancies all year: But in reality, you need to account for at least 1-2 months of vacancy period.
- Ignoring the management fee ratio: The management fee for open-plan units often accounts for 15-20% of the rent.
- Not calculating rates and land rent: These fixed expenses will further eat into your actual returns.
- Underestimating maintenance costs: Tenants in small units have high turnover, so wear and tear on the fittings is more frequent.
Let's calculate it with actual numbers:
Gross Yield Calculation:
- Property Price: $4,000,000
- Monthly Rent: $13,000
- Annual Rental Income: $156,000
- Gross Yield: 3.9%
Actual Return Rate Calculation:
- Annual Rental Income: $156,000
- Less: Vacancy Loss (1.5 months): -$19,500
- Less: Management Fees ($2,500/month): -$30,000
- Less: Rates and Government Rent: -$8,000
- Less: Maintenance and Miscellaneous Expenses: -$15,000
- Actual Annual Income: $83,500
- Actual Return Rate: 2.09%
:::highlight Expert Opinion When your actual rental yield drops to around 2%, it is better to buy blue-chip stocks for dividends, and the liquidity of stocks is far higher than that of the property market. This is why I say that the claim that open-ended units are "cheaper to buy than to rent" is often just a beautiful lie. :::
Mortgage LTV Limits, Leverage Effect Discounted
A major advantage of investing in real estate is the ability to use mortgage leverage to amplify returns, but open-plan units are at a disadvantage in this regard:
- Conservative Bank Valuation: Banks often value open units 5-10% lower than the market price
- Mortgage Ratio Limitations: Some banks set a cap on the mortgage ratio for open units (approving at most 50-60%)
- Difficulty in Refinancing: When you want to refinance to cash out, bank approvals will be stricter
This means that you need to prepare a larger down payment, and your financial flexibility in the future will also be limited.
Resale Difficulty: Your 'Asset' Might Turn into a 'Liability'
Weak purchasing power in the second-hand market
Open-plan units might sell well in the primary market, but it's a different story in the secondary market. Why?
- Low demand for personal use: Most Hong Kong people will not choose a studio apartment as a long-term residence.
- Investors hesitate: Experienced investors are aware of the investment risks of studio apartments.
- Low bank valuation: This affects the buyers' mortgage capacity.
I had a client who bought a studio unit in Cheung Sha Wan for $4.2 million in 2019. By 2023, when they wanted to sell it, they had it on the market for 3 months with no interest from buyers, and eventually had to reduce the price to $3.8 million to successfully sell it. The paper loss reached $400,000, not to mention the interest, management fees, and other holding costs over these 4 years.
:::warning Guide to Avoiding Pitfalls If you really want to buy open-plan units for investment, please make sure the unit is located in a prime area (such as the Hong Kong Island district or above Kowloon Station) and that the building is no more than 10 years old. Otherwise, when you sell it in the future, you will find that it is practically impossible to find a buyer. :::
Limited potential for asset appreciation
The core logic of real estate investment is 'buy and wait for appreciation,' but open-plan units often perform disappointingly in this regard:
Average increase in different unit types over the past 5 years (2019-2024):
- Two-bedroom units: +18%
- One-bedroom units: +12%
- Studio units: +5%
Why is the appreciation potential of open-end units lower?
- Large Supply: In recent years, many new developments have launched studio units, resulting in an oversupply.
- Weak Demand: Owner-occupier demand is low, and investment demand is also decreasing.
- Strong Impact of Property Market Cycles: During economic downturns, studio units are often the first type to decrease in price.
:::tip Insider Tip If your investment goal is 'capital appreciation' rather than 'rental income,' I would suggest that you would rather buy a one-bedroom unit in a well-located old building than an open-plan unit in a new development. The potential for redevelopment in old districts often offers more imagination than the 'ready-to-move-in' appeal of new developments. :::
Case Study: The Different Outcomes of Two Investors
Let me share two real cases to help you better understand the risks of open-end unit investments.
Case 1: Michael's Open-End Unit Investment Failure
Background:
- In 2020, bought a new studio unit in Mong Kok for $4.5 million (usable area 280 sq ft)
- Down payment $1.35 million (30%), mortgage $3.15 million
- Monthly payment about $12,000, management fee $2,500
Rental Income:
- First year rent: $14,000/month
- Second year rent: $13,500/month (increased market competition)
- Third year: vacant for 2 months, rent reduced to $12,500/month
Holding Costs (3 Years):
- Mortgage Interest: Approximately $28,000
- Management Fee: $90,000
- Rates and Rent: $24,000
- Maintenance and Miscellaneous Expenses: $35,000
- Total Cost: $177,000
Rental Income (3 Years):
- Year 1: $168,000
- Year 2: $162,000
- Year 3: $125,000 (after vacancy)
- Total Income: $455,000
Actual Return:
- Net Income: $455,000 - $177,000 = $278,000
- 3-Year Return Rate: $278,000 ÷ $450,000 = 6.2%
- Average Annual Return Rate: 2.07%
In 2024, Michael wanted to resell the unit, but the market valuation was only $4.3 million. After deducting the agent's commission, he actually ended up with a loss.
Case 2: Jenny's Successful Investment in a One-Bedroom Unit
Background:
- In 2020, purchased a one-bedroom old flat in Sham Shui Po for $5.5 million (usable area 350 sq. ft.)
- Down payment $1.65 million (30%), mortgage $3.85 million
- Monthly payment about $14,500, management fee $1,800
Rental Income:
- First-year rent: $15,500/month
- Second-year rent: $16,000/month
- Third-year rent: $16,500/month (tenant stable, renewed lease with increased rent)
Holding Costs (3 Years):
- Mortgage Interest: Approximately $34,000
- Management Fee: $64,800
- Rates and Rent: $28,000
- Maintenance Miscellaneous: $20,000
- Total Cost: $146,800
Rental Income (3 Years):
- Year 1: $186,000
- Year 2: $192,000
- Year 3: $198,000
- Total Income: $576,000
Actual Return:
- Net Income: $576,000 - $146,800 = $429,200
- 3-Year Return Rate: $429,200 ÷ $550,000 = 7.8%
- Average Annual Return Rate: 2.6%
More importantly, in 2024, Jenny's unit market valuation has risen to $6.2 million, with a paper gain of $700,000. With rental income included, her total return rate reaches 18.2%.
:::success Key Difference For the same 3-year investment period, a one-bedroom unit not only has a higher rental yield, but also greater potential for asset appreciation. This is why experienced investors choose a 'well-located one-bedroom' rather than a 'new studio apartment'. :::
In what situations can open units be considered?
Although I do not recommend investing in open-end units, it does not mean that all situations require a one-size-fits-all approach. In the following situations, open-end units may be a reasonable choice:
1. You are a first-time homebuyer
If your goal is to "buy a home for self-use" rather than for investment, and:
- Budget is limited (down payment only $1-1.5 million)
- Single or newlywed couple, not planning to have children in the near future
- Workplace is in the city, need to live nearby
So, an open-plan unit can be a 'transitional choice.' But remember, this is to meet housing needs, not for investment appreciation.
2. You plan to hold short-term (resell within 3 years)
If you can enter the market early in a rising property cycle and plan to resell within three years, the 'small-priced flat effect' of open-plan units may bring you a good return. However, this requires accurate judgment of the market cycle and carries higher risk.
3. The unit is located in a prime core area
If an open-plan unit is located in the following areas, its investment value will be relatively higher:
- Core areas of Hong Kong Island (Central, Admiralty, Wan Chai)
- Luxury residential projects above Kowloon Station
- Major railway hubs (such as Tseung Kwan O Station, Whampoa Station)
The tenants in these areas are of higher quality, and it is easier to find buyers when reselling.
:::tip Experts recommend Even for open-plan units in prime locations, I would suggest that in your investment portfolio, such properties should not exceed 30%. Diversification is the key to reducing risk. :::
Summary: Invest rationally and avoid falling into the 'small-priced property trap'
Returning to Michael's question at the beginning of the article, why do I not recommend him to buy that studio unit in Mong Kok? Because:
- Rental yield is overestimated: Actual returns are often only around 2%, which is lower than other investment tools.
- Narrow tenant base: High vacancy risk and unstable leases.
- Resale difficulties: Weak secondary market demand, limited potential for asset appreciation.
- Mortgage restrictions: Leverage effect is reduced, low financial flexibility.
The core of real estate investment is 'buy high-quality assets, hold them long-term, and wait for appreciation.' Although open-ended units have a low entry threshold, they often do not meet the standard of 'high-quality assets.' If you really want to invest in real estate for rental income, I would suggest that you:
- Rather save an extra year of down payment to buy a one-bedroom unit in a good location
- Choose property types with a wider tenant base (e.g., two-bedroom units)
- Avoid chasing newly completed ready-to-move-in units, and consider potential redevelopment opportunities in older districts
Remember, investing in real estate is not gambling, but a long-term asset allocation game. Do not be misled by slogans like 'paying less than rent' or 'easy to get on the property ladder'; make decisions using data and rational analysis.
What are your thoughts on open-end unit investments? Feel free to share your experiences in the comments below!
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