Flaw space

PUBLISHED : Wednesday, 30 May, 2012, 12:00am
UPDATED : Wednesday, 30 May, 2012, 12:00am
 

The ruling requiring estate agents to advertise the actual area of a property offered for sale on the secondary market comes a bit late for Cindy Yiu.

A few years ago she bought a second-hand flat in La Cite Noble, a development in Tseung Kwan O, which according to the estate agent's assessment of the gross floor area covered 527 square feet.

Yiu, a marketing officer, was aware that 'gross floor area' was a notional estimate that included the common areas of the building, such as the clubhouse, lobby and the watchman's office.

So she asked the agent for the flat's efficiency ratio, which is its actual floor area - or 'saleable area' - divided by the gross floor area and expressed as a percentage.

'He could not give me a clear answer, saying only, 'It is about close to 80 per cent.' So I thought, 'It's about 79 per cent,' which was good, so I bought it,' said Yiu. Later, she learned from a relative working at a bank that the ratio was 77 per cent.

It meant her own space was about 406 square feet, as opposed to the 416 square feet she understood the agent to mean. Yiu said: 'I felt that the agent had been dishonest. The [two percentage point] difference means a difference of 10 square feet, a lot for this small home.

'My husband and I have a lot of personal belongings, so every square inch is important. It's no use giving me a share of the clubhouse area.'

Such misunderstandings have long plagued the city's residential property market.

So earlier this month, the Estate Agents Authority decided that property agents should advertise the 'saleable area' of a property - the space exclusively belonging to a flat, including balconies but excluding bay windows - from January 1.

Michael Choi Ngai-min, chairman of the public relations committee of the Institute of Real Estate Administrators, said the new requirement would 'expose the evil' in some residential projects.

He said the ruling would particularly affect 'single-block projects with pencil-like buildings and a large amount of common facilities'.

He added: 'Buyers will know a large part of the purchase price actually covers a lot of non-living space.'

The emphasis on gross floor area, for which different developers have different definitions, means a quoted flat size can include whatever space developers choose from common areas, ranging from the clubhouse to covered walkways.

Choi said: 'Once the flats' true size is exposed and is no longer covered up by inflated numbers, there may be a shift of buyers from less efficient projects to more efficient ones.'

That's because the decrease in the advertised size of a flat will mean an increase in the per-square-foot price.

Take, for example, Taikoo Shing, a 1980s development known for its high efficiency ratio of 90 per cent, and the nearby Grand Promenade, built six years ago, which has an efficiency ratio of about 72 per cent.

The per-square-foot price of a 1,029 sq ft flat in Taikoo Shing, resold for HK$11.03 million earlier this month, will rise from HK$10,719 to HK$11,963 - an 11.6 per cent increase - when the calculation is converted from gross floor area to saleable area. A similar conversion will lead to a much higher growth in the per-square-foot price of a similar-sized flat in Grand Promenade, from HK$12,791 to HK$17,790 - an increase of 39 per cent.

But this does not mean newer projects will become more valuable, said David Ng Ka-chun, head of Macquarie Capital Securities' China and Hong Kong property research.

'The second-hand market will be divided because of the new measure. The inefficient projects will be under pressure to reduce prices,' he said.

Newer projects, built since 1990 and priced according to gross floor area, will seem less attractive to local buyers when compared against older projects.

They will also be less competitive in the eyes of mainland buyers - who account for 10 to 15 per cent of home purchases on Hong Kong's secondary market - compared to properties back home, Ng added.

The government hopes its promotion of the use of the saleable area in the secondary market will ease opposition from developers to legislation that will bring the new-homes market into line next year.

But the Real Estate Developers Association argues that the use of gross floor area is a long-standing practice in the secondary market.

The developers say it should continue to be used for new homes so buyers can compare the sizes and prices of old and new flats.

Developers are also anxious to preserve the gross floor area measure because it was made lucrative under a policy launched in the early 2000s, whereby developers can win planning approval for additional floor area by building so-called green and amenity features such as grand entrance lobbies and sky gardens.

Such features are built at a relatively low cost, but are sold at a per-square-foot price of thousands of dollars by including them in the gross floor area of each flat in the development.

To counter developers' objections, the government decided to promote the use of the saleable area only in the secondary market, a move it first considered introducing 15 years ago when drafting a law to regulate estate agents' trade.

Under the new rule, agents who fail to specify the saleable area for second-hand homes will face a reprimand or could even have their licence revoked.

But they will still be allowed to advertise the gross floor area in promotional material so long as it is quoted in text no bigger than that stating the saleable area.

The authority says it is facing a 'colossal task to transform old habits', so much so that it cannot promise a timetable to phase out the gross floor area measure for the secondary market altogether.

Agents are understandably reluctant to accept the change, as it means they will have to overhaul their operations and reprint posters and brochures. They also fear technical problems with entering new data on their websites.

Further problems could be caused by the discrepancy in the sizes of properties recorded by the Rating and Valuation Department compared with those recorded by the Land Registry. As the South China Morning Post reported earlier this month, the two sources may have different figures for the same apartment's saleable area, which may vary by as much as 10 square feet.

This could mean a difference of tens of thousands to hundreds of thousands of dollars in the total value of the property.

Estate agents have also called for the Rating and Valuation Department - which records the saleable areas of all the city's 1.56 million private homes except village houses - to make its information freely accessible. Currently, the department charges HK$9 for an online search of its database.

The Land Registry records the sales agreement when a property is sold for the first time, but saleable area data has been provided by developers only in recent years.

Discrepancies may occur because the ratings department and the developers may have a different interpretation when it comes to thick walls and large columns that separate neighbouring flats.

The developer may allot a larger part of the wall to one unit and a smaller share to the adjacent one.

But the ratings department may see it the other way round, said Raymond Chan Yuk-ming, former president of the Institute of Surveyors.

'After all, the ratings department measures the area for the purpose of rates collection. It is not supposed to be a statutory standard, precise to 100 per cent,' Chan said. 'But still, it is a good reference because the gross floor area is too misleading.'

Although the Estate Agents Authority said it would not penalise agents who use either data source for advertising a property's saleable area, agents say they are worried that clients will sue if any discrepancy results in a financial loss when they resell or buy a property.

There could also be another reason for a possible discrepancy between information kept by the Rating and Valuation Department and that recorded by the Land Registry.

This is because there was no standard definition of saleable area until the Institute of Surveyors came up with one in 1999, which was later adopted by the government. Before that, developers used their own definitions, some counting communal areas outside a flat's main door.

Then there is the problem of about 150,000 village houses, for which there is no saleable area data filed with either the ratings department or in the first-sale agreement lodged with registry.

Danny Chung, a surveyor, said: 'It would be a big mistake to assume that the saleable area of a flat in a three-storey village house is 700 square feet on each level. This is because if the house has been split into flats, one on each floor, then the saleable area [of the lower levels] would exclude the space of the common staircase.'

Some common staircases can take up as much as 65 square feet on each floor. If the ground and second floors are sold as one home with an internal staircase, another staircase built exclusively for the top unit would enlarge its saleable area to more than 700 square feet.

Choi, of the Institute of Real Estate Administrators, said that to pave the way for the abolition of the use of gross floor area, the Rating and Valuation Department and the Land Registry, together with the Estate Agents Authority, should work out ways to share data to avoid possible disputes.

This view was supported by the ratings department, which said it was the government's 'longer-term' objective to integrate the departments' systems to provide a one-stop service for property information.

32%

The Estate Agents Authority warned in 2009 that this much of the quoted size of a flat may consist of communal or unusable space

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