Real estate marketing practices draw flak

PUBLISHED : Wednesday, 27 December, 2006, 12:00am
UPDATED : Wednesday, 27 December, 2006, 12:00am

Hong Kong's largest property developers, under pressure to curb questionable marketing practices among some of their members, face continued criticism after taking steps to police their own ranks.

At the core of complaints from the public is the long-standing practice by developers of providing would-be purchasers scant information on often uncompleted units they are buying, putting buyers at a disadvantage, according to analysts.

The lack of transparency, reflected in the government-sanctioned internal sales schemes, has enabled developers to create an impression that demand and housing prices may be stronger than they actually are.

Under internal sales, developers are free to control disclosure of information on a project, such as prices and the number of units available, and are free also to select buyers.

In contrast, they have to release a price list before an official launch for open sales.

Internal sales were originally reserved for developers' employees and until 2002 were limited to 30 per cent of the units in a project. The allotment was later thrown open to anyone who wanted to buy a flat before the official sale.

Most developers now choose to release most of their units at new projects through internal sales, as the absence of comparable prices can lead to higher revenue.

Prices fetched in these private transactions are then used as benchmarks in sales to the general public.

Analysts have criticised some developers for using the system in collaboration with property agents to boost sales, through overstating sales results and announcing exceptionally high transaction prices.

'Current marketing practices in Hong Kong's housing market are most unfair and disadvantageous to homebuyers,' independent legislator Albert Cheng King-hon said.

'However, it is most lamentable that the government isn't doing enough and can't seem to muster enough political will to go against the developers.

'This lack of transparency in the developers' marketing practices and government inaction are most ironic, especially because Hong Kong is reputed as having one of the world's freest economies.'

Developers are seeking higher prices after many delayed launching projects to the second half of the year amid rising interest rates. The number of new flats put on sale this year dropped to a four-year low of about 13,500 units.

The decline intensified competition for buyers, with average home prices showing only 2.4 per cent growth this year, according to Midland Realty.

Most proposals to regulate the business have been voted down in the Legislative Council due in large part to lack of government support, Mr Cheng said.

Questions on the government's resolve surfaced anew following recent complaints lodged with the Consumer Council.

In April, a property investor complained to the council that he was lured into buying two flats worth HK$84.3 million at a Wharf Group project on the Peak after being told by a Wharf executive that four flats in the 48-unit development had already been sold.

The investor demanded a refund after discovering that Wharf had not sold any units in the project and he was the first buyer. At the time of the complaint, Wharf offered a partial refund of the buyer's deposit.

Four months later, some potential homebuyers in Sun Hung Kai Properties' Park Island's Ocean Crest project in Ma Wan reportedly complained over being asked to pay deposits of HK$50,000 each before they were given price lists covering 50 units.

Cheung Kong (Holdings) was accused by media of not providing a price list when it began selling flats at Le Point, a project with more than 1,000 units, in Tsuen Kwan O.

Both developers denied ordering staff to demand deposits for flats before they handed out brochures and price lists.

In another well-publicised incident that generated complaints from homebuyers, Henderson Land Development last month allegedly collaborated with property agents in hyping interest in the Sherwood, a new 1,567-unit housing project in Tuen Mun.

The developer allegedly generated more than 12,000 cheques, which were never intended to be cashed, indicating interest in buying units at the project.

Henderson Land sold only 500 units on the first day of sale at an average of HK$2,500 per square foot.

Two complaints were lodged with the Estate Agents Authority (EAA) against agents who allegedly used their own cheques and collaborated with the developer in an apparent attempt to stir up interest in the project.

The complaints are still being investigated.

The EAA warned last month that the agents' use of their own cheques as initial deposits in support of their purported interest in buying flats might 'go against the principle of acting impartially and justly to all parties involved in a transaction'.

The authority can censure agents and remove their licences. Even so, analysts say homebuyers can do little to combat collusion between agents and developers, especially because most of the new flats are produced by only a few companies.

Centaline Property Agency, held by Centaline (Holdings) and one of the largest property agents in Hong Kong, estimated that Henderson Land, Sun Hung Kai Properties and Cheung Kong accounted for about 60 per cent of the 7,567 new flats sold during the first nine months of this year.

Gross sales for the period were estimated at HK$29.71 billion, of which about HK$1 billion was paid in commissions to agents.

The barrage of public criticism over the lack of transparency in the sale and marketing of new flats, alleged collusion between agents and developers, and other questionable marketing practices have prompted the government to ask developers to address the issues levelled against them.

The Real Estate Developers Association (Reda), which represents most of Hong Kong's developers, offered during a meeting last month with officials of the Consumer Council and the EAA to set up a compliance committee, comprised of developers and independent parties.

Earlier this month, Reda established the committee with 20 members. Eight came from its own ranks and 12 from the legal profession. Neither the government nor the Consumer Council is represented.

Henderson Land sales general manager Tony Tse said Reda deemed it best to appoint to the committee only those with intimate knowledge of the industry.

'There might be complications if we invite outsiders unfamiliar with practices in the real estate industry,' he said.

'In case anyone on the committee has any conflict of interest, arrangements can be made so that the involved parties are not present in the committee's deliberations. The industry's sales practices are highly transparent.'

Concerned parties disagree with Mr Tse's view, even as they criticise the composition of the self-regulatory watchdog.

Pang Shui-kee, the managing director of surveyors SK Pang, said: 'They have invited lawyers to sit as independent members. But let's not forget that many lawyers in town do business with and have close business relationships with developers. I wonder if the committee will ... become a mere gathering of friends.'

David Webb, a corporate governance activist and an independent director of the Hong Kong stock exchange, echoed Mr Pang's view.

'Reda represents developers' interests. If there wasn't pressure from the government, this group would not volunteer to come up with their own code of ethics and opt for self-regulation rather than be subjected to government regulation through legislation,' Mr Webb said.

As to whether Reda's compliance committee could stamp out questionable practices, including the alleged collusion between agents and developers in the sale of new flats, he said: 'I don't think Reda will be effective in policing its own ranks.'

He noted that developers pay agents for their help in selling flats and this meant agents represent the vendors' interests more than those of homebuyers.

'This is a kind of conflict of interest,' he said.

A Reda spokeswoman said representatives from developers at the centre of any complaints would be absent from any investigation in order to avoid conflict of interest. Lawyers who had business relations with developers that were the subject of complaints would similarly excuse themselves.

Mr Webb said it would be extremely difficult to achieve more transparency in the industry if it continued to be dominated by only a few large developers.

'If the government lowers the entry barrier to buying developable land and allows more small developers to come into the market, this would create more competition and help improve transparency,' he said.

The government, for example, could allow small developers to pay land premiums by instalment, so they had a higher chance of getting big development sites. In the most recent series of land auctions, a small developer won a site in Cheung Sha, Lantau, but larger and prime sites went to the leading developers.

It would also be difficult to break the cartel among Hong Kong's largest developers because they wield considerable political influence in the city, Mr Webb said.

In the absence of an effective mechanism that could protect homebuyers' interests, the public should exercise caution, Mr Webb said. They, for example, should not buy flats in housing projects for which developers do not provide adequate information, including price lists and brochures.

Legislator Ronnie Tong Ka-wah, representing the Civic Party, also believes the government should step in and enforce regulations aimed at improving transparency in the marketing of new flats.

Many countries had set up laws to protect consumers' basic rights, he said.

'If self-regulation does not work in a particular industry, it is normal to enforce regulations through legislation. Consumers' interests are not equivalent to what industry practitioners are seeking,' he said.

Mr Tong said he would urge the Civic Party to liaise with other political groups and press the government to scrutinise the lack of transparency in flat marketing and related issues.

The government, meanwhile, would wait and see before it took action on calls to regulate sales and marketing activities in the housing market, a senior official said.

'The government will continue to monitor closely the effectiveness of the self-regulatory regime and the new measures in improving sale arrangements for residential units,' Permanent Secretary for Housing, Planning and Lands Thomas Chan Chun-yuen said in a written reply to the South China Morning Post's questions. 'Should the new measures prove to be inadequate or ineffective, the government would not hesitate to step in or take more stringent action,' he said.

Other real estate industry leaders believe more discipline may be necessary to spruce up the tarnished image of the industry and to eliminate undesirable elements and practices.

'The EAA may have strict rules governing estate agents. But if some people are expecting these same rules to serve as an indirect way of ensuring order in the developers' sales of new housing units, they are mistaken,' said Centaline (Holdings) chairman Shih Wing-ching. The EAA only regulates estate agents and the heaviest penalty unethical agents face is losing their licence.

It was incumbent on the government to become more involved and creative in resolving problems and other difficulties that have buffeted homebuyers in recent months, he said.

'The Lands Department could perhaps hold up [developers'] pre-sale consent permits until they clean up their act,' Mr Shih said.

'This kind of action could delay the marketing launch of new housing projects and hurt errant developers' earnings. This, in my view, is a very effective way of ensuring best business practices among developers, including a high level of transparency in their sales and marketing of new flats.'

Mr Shih expressed doubts on the efficacy of the Reda-initiated compliance committee, citing its lack of independent members.

'Their move is more for show than anything else. It's mainly a public relations exercise aimed at easing complaints of disgruntled homebuyers,' he said.