Family offices play an important role in Hong Kong as powerful investing entities, and in a competitive and fast-moving Asia, family offices and the assets they possess will hold even greater importance to the city.
As a longtime leading financial hub in Asia, Hong Kong has a lot going for it, along with the family offices located there.
Access to mature and robust capital markets, a favorable tax and regulatory regime, and resources to serve family offices are all available in the city.
Home to more than 7 million people, Hong Kong has long been romanticized as the "best of both worlds" in an intricate blend of East and West.
And rightfully so.
The former British colony and semi-autonomous region part of China provides access to lucrative opportunities in the region while adopting familiar Western frameworks for investing.
Likewise, Hong Kong attracts China's wealthy who seek access to investment products and opportunities outside the mainland.
Despite the benefits, Hong Kong's status as the dominant finance hub in Asia is being challenged, as wealthy families and their businesses are on the move.
The last few years have been particularly challenging for the city, facing a mix of political and public health crises.
And in the meantime, neighboring locations have done a lot to attract family offices.
Since gaining independence from the United Kingdom in 1997 and handed over to the People’s Republic of China, Hong Kong has maintained a degree of political and economic autonomy under the one-country, two-systems policy that is to last until 2047.
While Hong Kong has mostly maintained autonomy, in recent years some have questions about the policy’s durability.
With the passing of the Hong Kong national security law in 2020, a policy that “prohibits any act of treason, secession, sedition, subversion against the Central People’s Government,” those deemed in violation of the law can be extradited to China’s mainland and stand trial for prosecution.
Concerned about the law’s potential for overreach, many Hongkongers have already left or are planning on leaving, including the wealthy. It was estimated that by the end of 2022, up to 10,000 HNWIs (high-net-worth individuals) and US $65 billion would leave the territory.
Hong Kong has maintained strict measures against COVID-19 up until early this year, more or less in line with measures set by Beijing for the mainland.
In fact, mask mandates were recently lifted at the beginning of March.
Despite success in keeping COVID cases and death rates low relative to harder-hit countries, the stringent approach has taken a toll.
Lockdowns, travel restrictions, lengthy quarantine periods, and the overall challenges conducting business in such climate have hurt the economy, prompting more people to leave.
And with the easing of COVID travel and lockdown restrictions, another wealthy “exodus” has occurred.
Setting aside politics and pandemics, Hong Kong has seen increased competition from its Asian neighbors over the last two decades.
At the time of the 1997 handover, Hong Kong's GDP as a percentage of China's economy was 18.4%. By 2021, that figure dropped down to 2.1%.
And the decline wasn't because Hong Kong became less productive. Rather, mainland China developed so rapidly.
Cities like Shanghai, Beijing, and neighboring Shenzhen have risen as regional and global financial hubs in their own right.
On the other side of the continent, Dubai has become increasingly attractive to wealthy families and investors from around the world.
But arguably the biggest rival to Hong Kong's financial dominance in Asia is Singapore.
If there has been a "winner" in the capital outflow from Hong Kong, it's Singapore.
Hongkongers are moving to Singapore in large numbers, taking their wealth and assets with them. One of our recent posts outlines the reasons why the world's wealthiest are going there.
And all this movement raises the question: Where is Asia's top financial center? Hong Kong or Singapore?
Based on a recent report, it's now Singapore, ranked 3rd globally and Hong Kong 4th.
Politics and a pandemic may have impacted the wealth landscape, but it’s not all doom and gloom.
After all, Hong Kong is still ranked 4th as a leading global financial center, and it topped other Asian cities where ultra-wealthy individuals maintain primary or secondary residences, estimated at 15,175 such residents.
And the easing of COVID restrictions is a step in the right direction, as Hong Kong seeks a return to pre-pandemic normalcy, economically at least.
To boost the economy, in which tourism plays an important role, the HK government is offering to pay the airfare for up to 500,000 people from around the world to vacation and spend money in the territory.
And it’s not just tourists the government wants. Hong Kong wants more family offices to boost post-COVID growth.
With competition from Singapore, Hong Kong political and business leaders know they must step up their game.
Retaining and bringing in new family offices is one area of focus, and the government-run InvestHK has set up a family office division to aid in those efforts.
Stephen Phillips, Director-General of Investment Promotion at InvestHK, shared the following:
"The establishment of our FamilyOfficeHK team is a milestone in InvestHK’s endeavour in promoting Hong Kong as an ideal location in which Hong Kong and overseas-based enterprises can set up a family office presence. I believe that the team will further promote Hong Kong’s unique advantages and offer one-stop services to family offices that are interested in setting up a base in Hong Kong, and consequently reinforce Hong Kong’s position as a prime family office hub in Asia."
Efforts have been made to attract wealthy families in in Europe, the Middle East, mainland China, and the rest of Asia.
And their efforts have already yielded early success.
The team has already helped 14 family overseas family offices set up in Hong Kong in the last year, and another 50 are planned to be set up.
In December 2022, legislators introduced a bill providing tax concessions for investments managed by eligible single-family offices
Known as the Inland Revenue (Amendment) Bill 2022, the exempts family-owned investment holding vehicles and their portfolios of special purpose entities from tax on transactions carried out by a Hong Kong-based family office.'
A government state on the bill said the following:
"The multiplier effect of attracting more family offices to set up and operate in Hong Kong could be tremendous, including generating increased demand for financial and related professional services, creating more high-quality employment opportunities, and channelling substantial capital to Hong Kong's capital markets, thus benefitting the economy as a whole.”
Learn more about the tax legislation for family offices in Hong Kong.
Granting permanent residency to wealthy individuals is another way Hong Kong seeks to regain its leading status.
The scheme aims to attract talent and new business by granting residency to people who make an investment of over HK$10 million (USD $1.27 million) in the local asset market, excluding property.
Alice Leung, tax partner at KPMG China, shared her thoughts on the new incentives:
“The tax incentives and the new capital investment entrant scheme can bring capital and talent to Hong Kong through family offices establishing their businesses in Hong Kong."
Hong Kong continues to be an ideal investment market in the Asia-Pacific region for family offices because of its "deep liquidity, diversified asset classes and investible products", as discussed in a financial forum organized by the South China Morning Post.
They expect returns to go positive in the latter half of 2023 once the effects of higher inflation and interest rates have subsided.
Grace Tam, chief investment adviser, Hong Kong, and managing director at BNP Paribas Wealth Management, shared the benefits of being established in the city:
"For family offices in Hong Kong, the good thing is that they can access really world-class private-equity and infrastructure funds through private banks and wealth management companies in the city."
Additionally, the city’s close ties with the mainland have enabled it to act as an investment hub into and out of China, enabling businesses to tap into a number of opportunities in the Guangdong, Hong Kong, Macau Bay area and the rest of the region.
Hong Kong is an ideal place for family offices to manage their charity work, noted according to Alice Chiu Tsang Hok, as she described it as "a transparent market with many financial professionals who can help charities achieve the best returns on donations they receive."
Campden FB also noted Hong Kong's "long and impressive history of philanthropy", a place home to some of the world’s greatest philanthropists. The city has long promoted private investment in welfare and fostering a culture that promotes individual social responsibility.
As family offices in Hong Kong maintain their presence and new ones establish themselves, there is increased demand for related services.
While there is certainly qualified to talent serve single- and multi-family offices, there's just not enough of it.
The Family Office Association of Hong Kong (FOAHK) warns of a 'talent gap' that could hinder growth.
FOAHK Chairman and Raffles Family Office founder Chi Man Kwan said that despite a large financial services industry, family offices need to develop specialized staff to excel.
Chi also noted that the growth and staff compensation are big challenges:
"In Hong Kong, …, there is definitely a shortage of talent simply because we are growing - the amount of billionaires that are being born every 48 hours."
"Sometimes it might be tough for [family offices] just to find the right people, and at the same time to afford them, because the costs play a big part as well. These professionals are not cheap."
By the end of 2021, half of all family offices in Asia-Pacific planned on increasing staff over the next year, according to The Asia-Pacific Family Office Report.
The most common reasons for hiring were to expand family office operations (23%), bring more services in-house (14%), and fill gaps in expertise (11%).
As if it was hard enough to keep up with compensation and the sector growing as is, strict COVID-19 measures up until recently didn't help matters, as financial services expat talent and graduates left Hong Kong in response.
The talent shortage for family offices is so pressing that recruiting talent is more important to address than financial concerns like tax domiciling, according to Professor Heinrich Liechtenstein of Barcelona's IESE Business School:
"You need an excellent team. How to attract the best team... is probably the biggest challenge for family offices."
Recruiting talent and putting together that excellent team is easier said than done, especially with family offices competing for the same limited talent.
With talent shortages and high staffing costs a reality, getting all local talent within desired budget isn't possible.
In that case, the next best options are to automate and outsource functions.
For a long time, Asia's family offices typically avoided outsourcing, instead preferring to hire relatives and doing so at a higher rate than other markets.
Hong Kong and Mainland China are no exception.
A sense of trust is the reason for this approach, which is understandable to an extent, but if the relative isn't truly qualified for the job they hold, then it's not the most efficient use of resources.
Nick Hayward, director at Campden Wealth, further illustrates the phenomenon:
“The biggest place where is a problem is China, because at the moment, families - particularly one with the patriarch or matriarch still there - insist on hiring people they know over a professional.”
The pandemic showed family offices in Hong Kong how important it is to have backup resources, and for that reason, firms are slowly opening up to outsourcing.
Trading is one of those functions being outsourced. Driven by intense competition, new regulation, and a push to streamline costs, family offices have more incentive to partner with third-party specialists.
Reflecting the change in attitudes toward outsourcing in the region, a Hubbis Digital Dialogue post-event survey revealed that a majority (85%) of respondents agreed that a family office should outsource middle- and back-office outsourcing to a third party.
And with this change in attitudes, family offices in Asia and globally turn to Empaxis outsourcing services for their middle and back office..
Outsourcing allows firms typically allows firms to access expertise at a lower cost, while allowing the business to focus on revenue-generating core competencies.
As more and more wealthy families in Hong Kong realize these benefits, they will take adopt the outsourced model for their operation.
Another solution to talent shortages (and a way to free up internal capacity) is leveraging automation technology.
Manual and routine processes can easily be automated, allowing work to get done faster, more consistently, and with great accuracy.
One particular area to make use of automation is alternative investment statement processing.
As family offices in Hong Kong invest in alternative asset classes like private equity and venture capital, they can surely benefit from streamlining the processes.
Outsourcing providers like Empaxis also implement these automated workflows.
Despite challenges the city faced in recent years with the economy, politics, COVID-19, and capital outflows, Hong Kong still enjoys a position of prominence as a major financial center.
And as it reopens and recovers from pandemic, the Chinese territory seeks to regain its lost footing as Asia's leading financial hub, taking new measures to attract family offices to the city.
Tax incentives, a favorable regulatory environment, and access to a broad range of investment classes and opportunities are some of the reasons family offices or remain or relocate to Hong Kong.
Just as the family offices set up, they will require services to support them (investing, accounting, taxes, IT, compliance, operations, etc.), but with the growth of family offices in the region, there isn't enough talent to serve them.
For those reasons, outsourcing and automation are increasingly popular ways to work around labor shortages, completing workflows in a time- and cost-efficient manner.
Indeed, family offices in Hong Kong have a lot going for them and can do a lot more with a reliable partner like Empaxis supporting their middle and back office.
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