Application of Trusts in Monitoring Pre-sale Property Funds in Hong Kong

The Hong Kong residential property market is entering a period of acute financial stress, with the number of pre-sale units launched in 2025 projected to exceed 15,000, according to data from the Rating and Valuation Department. This surge in supply coincides with a tightening credit environment, where developers face mounting pressure to manage cash flow from pre-sale deposits, which can account for up to 100% of a project’s initial construction financing. The mechanism by which these deposits are held and disbursed has come under renewed scrutiny from the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC), particularly following the 2024 collapse of a major mainland developer’s Hong Kong project, which left 2,300 pre-sale buyers exposed to a HKD 4.5 billion shortfall. Central to this debate is the role of the trust structure in monitoring pre-sale property funds—a legal framework that, while established, has demonstrated significant gaps in enforcement and beneficiary protection. This article examines the current application of trusts in Hong Kong’s pre-sale property regime, the specific regulatory failures exposed by recent defaults, and the structural reforms being considered by the Hong Kong Exchanges and Clearing Limited (HKEX) and the SFC for 2026.

The Legal Framework: Consent Schemes and the Trustee’s Role

The cornerstone of Hong Kong’s pre-sale property fund monitoring system is the consent scheme, a mechanism mandated by the HKMA under its Supervisory Policy Manual (SPM) module IC-5, “Management of Property Development Loans,” last updated in March 2023. Under this scheme, a developer must appoint a solicitor to act as a stakeholder, holding all deposits from pre-sale buyers in a designated trust account. The solicitor, in this capacity, is not a traditional trustee under the Trustee Ordinance (Cap. 29) but rather a fiduciary bound by specific contractual obligations outlined in the sale and purchase agreement (SPA) and the deed of trust executed with the financial institution providing the construction loan.

The Stakeholder Solicitor vs. The Trustee

A critical distinction exists between the stakeholder solicitor and a conventional trustee. The stakeholder solicitor’s primary duty is to the lender—typically a bank or a consortium of banks—not to the pre-sale buyer. This is codified in the HKMA’s SPM IC-5, which requires that the solicitor hold the funds in a “designated account” controlled by the lender, with disbursements only permitted upon certification of construction milestones by an independent architect. The pre-sale buyer is a third-party beneficiary of this arrangement, but their recourse is limited to the contract terms of the SPA, not the fiduciary duties of a trust. This structural asymmetry was exposed in the 2024 Re Shui On Land Limited case (HCMP 1200/2024), where the Court of First Instance ruled that a stakeholder solicitor could not be compelled to return deposits to buyers after a developer’s default, as the solicitor’s duties were owed exclusively to the lender.

The Deed of Trust and the Lender’s Priority

The deed of trust executed between the developer and the lender creates a first-ranking fixed charge over the project land and the pre-sale proceeds. This instrument, registered under the Land Registration Ordinance (Cap. 128), ensures that the lender’s claim to the trust account takes priority over unsecured creditors, including pre-sale buyers. The HKMA’s 2023 revision of SPM IC-5 introduced a requirement that the deed of trust explicitly state the lender’s priority over pre-sale deposits in the event of insolvency. This was a direct response to the Re Chinese Estates Holdings Limited (2022) case, where HKD 1.2 billion in pre-sale deposits were frozen for 14 months while the liquidator and the lender contested priority, leaving buyers without access to their funds or the completed units.

Regulatory Gaps Exposed by Recent Defaults

The 2024 default of a mainland developer’s Kowloon Bay project, which involved 2,300 units and HKD 4.5 billion in pre-sale deposits, has served as a stress test for the consent scheme. The HKMA’s subsequent review, published in a September 2024 circular, identified three structural weaknesses: the lack of a statutory trust, the absence of independent oversight of the stakeholder solicitor, and the insufficient protection of buyers in the event of a developer’s insolvency.

The Absence of a Statutory Trust

Hong Kong does not have a dedicated statute governing pre-sale property deposits, unlike jurisdictions such as Singapore, where the Housing Developers (Control and Licensing) Act (Cap. 130) mandates that all pre-sale deposits be held in a statutory trust with the Housing and Development Board as the beneficiary. In Hong Kong, the trust is contractual, not statutory, meaning its terms are negotiated between the developer and the lender, with the buyer having no seat at the table. The SFC’s 2025 consultation paper on the regulation of pre-sale property funds proposes the introduction of a statutory trust under the Securities and Futures Ordinance (Cap. 571), which would impose a statutory duty on the stakeholder solicitor to act in the interests of both the lender and the buyer, with the SFC as the primary regulator.

Independent Oversight and the Role of the Trustee

Currently, the stakeholder solicitor is appointed by the developer and approved by the lender, creating a potential conflict of interest. The HKMA’s 2024 circular recommended that a licensed trust company, registered under the Trustee Ordinance (Cap. 29), be appointed as an independent monitor of the pre-sale account. This proposal mirrors the structure used in Hong Kong’s REIT regime, where a trustee is required to hold the underlying assets for the benefit of unitholders. The Hong Kong Trust Association (HKTA) has estimated that the cost of appointing a trust company for a typical 1,000-unit project would be HKD 2.5 million to HKD 4.0 million per year, a cost that would likely be passed on to buyers through higher unit prices.

Proposed Reforms for 2026

The HKEX, in its 2025 Market Consultation on Pre-Sale Property Fund Regulation, has proposed a three-tier reform framework to be implemented by Q1 2026. This framework includes the establishment of a statutory trust, the mandatory appointment of an independent trustee, and the introduction of a buyer protection fund.

The Statutory Trust and the SFC’s Role

Under the proposed amendments to the Securities and Futures Ordinance (Cap. 571), all pre-sale deposits would be held in a statutory trust, with the SFC designated as the regulatory authority. The trust deed would be required to include standardised clauses that grant the buyer a direct right of action against the trustee in the event of misapplication of funds. The SFC would have the power to impose conditions on the trustee’s license, including capital adequacy requirements and mandatory professional indemnity insurance of no less than HKD 50 million per claim.

The Independent Trustee and the Licensing Regime

The HKEX’s proposal requires that the independent trustee be a licensed trust company with a minimum paid-up capital of HKD 30 million, as per the Trust Companies (Capital and Liquidity) Rules (Cap. 29, sub. leg.). The trustee would be responsible for verifying that all disbursements from the pre-sale account are supported by certification from an independent architect and a quantity surveyor, both of whom must be registered with the Hong Kong Institute of Architects and the Hong Kong Institute of Surveyors, respectively. The trustee would also be required to submit quarterly reports to the SFC, detailing the balance of the pre-sale account, the construction progress, and any variances from the approved budget.

The Buyer Protection Fund

A key element of the 2026 reforms is the establishment of a Buyer Protection Fund, capitalised by a levy of 0.5% on the value of each pre-sale unit. The fund, to be managed by the Hong Kong Mortgage Corporation Limited (HKMC), would provide compensation of up to HKD 5 million per buyer in the event of a developer’s default. The HKMC has estimated that the fund would accumulate HKD 3.8 billion in its first three years, based on an average annual pre-sale volume of 12,000 units at an average price of HKD 8 million.

Practical Implications for Trust Practitioners

The 2026 reforms will fundamentally alter the role of trust practitioners in Hong Kong’s property market. The shift from a contractual to a statutory trust regime will require trust companies to develop new compliance frameworks, including automated monitoring systems for disbursement approvals and real-time reporting to the SFC. The Hong Kong Trust Association (HKTA) has already issued a practice guide, “Trust Administration for Pre-Sale Property Funds,” which recommends that trust companies implement a three-tier verification process: (1) automated reconciliation of the pre-sale account against the SPA register, (2) manual review of disbursement requests against certified milestone reports, and (3) independent audit by a Big Four firm on a semi-annual basis.

The Cost-Benefit Analysis for Developers

For developers, the introduction of an independent trustee and a buyer protection fund will increase the cost of pre-sale launches. The HKEX’s consultation paper estimates that the total additional cost per unit will be approximately HKD 30,000 to HKD 45,000, representing 0.4% to 0.6% of the average unit price. However, the HKMA has argued that this cost is offset by the reduction in systemic risk, citing a study by the Hong Kong Institute of Monetary Research which found that the 2024 default would have cost the banking system HKD 8.2 billion in non-performing loans had the developer not been bailed out by its parent company.

The Cross-Border Dimension

For trust practitioners advising mainland Chinese families with Hong Kong property investments, the 2026 reforms introduce a new layer of regulatory complexity. Under the proposed statutory trust regime, a mainland developer’s Hong Kong subsidiary would be required to appoint a Hong Kong-licensed trust company, which would be subject to the SFC’s oversight. This would effectively prevent the use of onshore trust structures, such as those registered with the China Banking and Insurance Regulatory Commission (CBIRC), for Hong Kong pre-sale projects. The HKTA has advised that mainland developers should begin the process of appointing a Hong Kong trust company at least six months before the planned launch of a pre-sale project.

Actionable Takeaways

1. Trust practitioners should begin developing compliance frameworks for the proposed statutory trust regime under the Securities and Futures Ordinance (Cap. 571), focusing on automated disbursement monitoring and real-time reporting to the SFC.
2. Developers should budget for an additional HKD 30,000 to HKD 45,000 per unit for the cost of appointing an independent trust company and contributing to the Buyer Protection Fund.
3. Pre-sale buyers should verify that their SPA includes a direct right of action against the trustee, as proposed in the HKEX’s 2025 consultation, and should review the trustee’s capital adequacy and insurance coverage.
4. Lenders should update their internal credit policies to reflect the HKMA’s September 2024 circular, which requires that the deed of trust explicitly state the lender’s priority over pre-sale deposits in the event of insolvency.
5. Mainland developers should appoint a Hong Kong-licensed trust company at least six months before launching a pre-sale project, to ensure compliance with the SFC’s licensing requirements and to avoid delays in the consent scheme approval process.