A small area of concern

PUBLISHED : Friday, 18 April, 2008, 12:00am
UPDATED : Friday, 18 April, 2008, 12:00am

High land prices in densely populated Hong Kong have led property developers to go all out to maximise floor areas to get the best possible profit from each project. This numbers game has crept into marketing campaigns where flats are being sold to the extent that square footage, assumed by buyers to be living space, includes space between the apartment entrance and the lift, or even bay-window ledges and utility platforms.

Surveyors and other groups want legislation to impose a fair and transparent market, while developers want self-regulation. Meanwhile, bewildered homebuyers are getting fed up of being expected to approach deals with the maxim 'let the buyer beware' ringing around them when it comes to claims about measurements. More buyers are looking for big differences between the quoted floor area in sales brochures and the actual useable space in a flat.

The lack of a clear standard and legally binding formula in the calculation of gross floor area or saleable floor area is to blame. Over the past two decades, efficiency rates of new flats have become poorer - meaning the ratio of living space to gross floor area is lower. A ratio of 75 per cent is about what an average buyer will get for a new flat today, compared with an industry standard of 80 per cent or more in the 1980s and 1990s, and up to 90 per cent in the 1970s.

The decline of efficiency ratios is largely attributed to the flexibility of developers including more common and ancillary areas - from corridors to plant rooms, clubhouse, balconies and utility platforms - into the gross floor area and saleable floor area.

The Hong Kong Institute of Surveyors (HKIS) has issued a supplement to its code of practice for the calculation of saleable area. According to the institute's definition, the saleable area should not include items specified under ancillary accommodation such as cocklofts, bay windows, car parks, yards, terraces, gardens and roofs. But this is only a voluntary guideline and not binding for developers. Lawmakers and the Consumer Council have urged the government to step in with legislation or to standardise the definition of saleable area to prevent abuse of the system.

Midland Realty chief analyst Buggle Lau Ka-fai says homebuyers should inspect the show flats of a development to get a better understanding of the actual living space of the property they intend to purchase.

He says buyers now generally accept that new flats are not as efficient as old property, and they do not mind that the living space is smaller - which is often compensated for by access to comprehensive leisure facilities.

'Some people would just like to leave their old flat and move into new property with clubhouse facilities. Another attraction is the better quality of new flats and their greater potential to appreciate in value,' he says.

The shrinking living space of Hong Kong's new residential properties has long been controversial, largely due to the government's inaction in standardising the calculation of gross floor area and saleable area for property sales.

In the past, small flats were confined to small-sized, single-block developments. It is now commonplace in all new residential projects, large or small, to have efficiency rates much lower than those built 20 years ago.

The problem has worsened significantly in recent years as the trend of incorporating a larger clubhouse is increasing the common areas being included in the quoted floor area of a flat. The government's relaxation in building rules since 2003, allowing developers to build environmentally friendly features such as balconies and utility platforms at substantially lower land cost, has aggravated the problem.

Property in Hong Kong is sold on the basis of gross floor area. Inflating the quoted area will bring down the average price per sqft - a yardstick for people to compare and assess whether their flats are good value for money. Developers say that it costs money to build the common and ancillary areas for use by home owners so they believe their inclusion is reasonable.

Victor Lai Kin-fai, managing director of Centaline Surveyors, says the situation has worsened since the 1997 property slump when developers struggled to keep costs down in their expensive land banks to maximise gains or reduce the amount of loss.

'To attract buyers, developers chose to build more clubhouse and recreational facilities, thus increasing the amount of common areas. Before, developers followed the HKIS guideline by excluding bay windows and other ancillary areas in the saleable area. Everything is included in the quoted area today, and the result is a poorer efficiency rate. It is getting a bit out of control,' Mr Lai says.

'People are already accustomed to the practice and developers will not reverse the trend to provide flats with higher efficiency rates. Homebuyers have to be smart and do their homework carefully. The government should also play a more active role to educate the public and study whether it is necessary to resolve the problem through legislation.'

It is hard to imagine that the property industry, which adds billions of dollars to government revenues every year, is short of a clear, uniform definition of a quoted area for property sales.

Self-regulation by the industry does not seem to work effectively, at least not in the best interests of homebuyers. Critics say it is time the administration reviews its indecision and brings order to the chaos in the marketplace.

After all, the government has the responsibility to ensure a fair and transparent market environment for all players, including developers and buyers.