Rising profits

PUBLISHED : Saturday, 04 September, 2010, 12:00am
UPDATED : Saturday, 04 September, 2010, 12:00am

Local property developers are among some of the richest people in the world. The secret of their success is that they are the only developers who know a way to inflate the saleable floor space of an apartment, sometimes by 30 per cent or more, to maximise profits.

One prominent financial opinion leader has likened their success to the art of baking, saying that Hong Kong developers have a secret recipe to ensure that, no matter how expensive the flour is, they can always generate huge profits from the sale.

Using the baking analogy, the cost of the flour is the cost of the land, and if we add construction costs plus a reasonable level of profit, we would come up with the cost of a loaf of bread, which would be the property price. But, because developers often unfairly inflate the saleable size of the flat, they can push the price up to exceed market prices even before other necessary costs come into the equation.

In this way, their secret recipe bolsters their confidence to make a profit, no matter the cost of the land. Just this week, a piece of land in Kowloon set a record price of HK$16,587 per square foot.

In theory, property prices are dictated by supply and demand, the economic situation, as well as purchasing power and affordability. But, in reality, our powerful property developers are in full control. In order to artificially inflate prices, all they need to do is calibrate and control the supply, and use opaque sales tactics.

They also benefit from other favourable market conditions such as the free flow of capital from the mainland with virtually no government restrictions, and a sustained period of low interest rates allowing a strong inflow of foreign capital.

The government's introduction of a series of measures aimed at stabilising the property market in 2002 inadvertently made things worse. As a result, the supply of land decreased, thus creating the perception of a housing shortage. Again, it benefited property developers, allowing them to carry on with business as usual, reaping massive profits.

In fact, the tactic of inflating saleable floor areas by adding the proportionate share of common space to the unit is a guaranteed win-win situation for private developers.

One critical aspect that remains at the heart of Hong Kong's property development is that of plot ratio. A plot ratio is the actual amount of floor space that is permitted by law to be built on a development site. For example, if the plot ratio for a 100,000 sq ft site is 10, that means the total floor space allowed will be 1 million sq ft.

A handful of private developers, who often hire former officials from housing, building and lands departments, have monopolised the market. And with the help of the ex-officials' inside knowledge and expertise, developers are fully equipped to manipulate the system and maximise profits.

They can therefore offset the high land prices by inflating the saleable floor space - adding every square foot of land including the lift lobby, car park, club house, bay window, window ledges and 'green features' to the unit. Some even use the provision of public space to increase the saleable floor area. By using these tactics, developers can boost the saleable floor area by up to 50 per cent above the plot ratio.

By turning a blind eye to all these things, the government is giving private developers a hugely unfair advantage and sacrificing the community's interest. Is it a deliberate act or some sort of collusion? The government may have a lot to lose if it stamps out these unscrupulous activities.

It is not difficult to see that the government is also a big beneficiary of this 'inflated flat' practice. In fact, it is a double win for the administration - first, it gains from the high land premiums and then pockets more from the stamp duty because the bigger the unit, the higher the cost, and the higher the stamp duty.

The government should put public interest ahead of financial gain, no matter how substantial it is. If it doesn't do so, whatever measures it takes to stabilise the market and curb property speculation will be futile.

Albert Cheng King-hon is a political commentator