Wall-to-wall rules go long way to eliminating gross injustice

It's about time developers stopped lumping common areas into floor area calculations

PUBLISHED : Tuesday, 09 April, 2013, 12:00am
UPDATED : Tuesday, 09 April, 2013, 4:24am

Hong Kong touts itself as one of the world's elite cities and financial centres. However, the way it regulates the sale of new flats now is far from first class.

The new law governing home sales that is due to take effect on April 29 will be a big step forward.

For too long, Hong Kong homebuyers have been purchasing flats significantly smaller than what were advertised by developers.

For instance, the actual size of what was billed as 500 square foot units was only about 370 sq ft, as developers included pro rata allocations of portions of "common areas" such as lift lobbies, clubhouses, electricity meter rooms and rubbish collection areas in the calculation of prices based on "gross floor area".

So, what took the government so long to address this long-standing practice that is so unfair to homebuyers?

Although Hong Kong's property is the most expensive in the world, homebuyers seldom study the fine print in sales brochures.

Their tolerance for such unfair sales tactics may be attributed to the lack of strong competition in the city's real estate market. Hong Kong's supply of flats lies in the hands of a few big developers, leaving homebuyers with hardly any choice.

Given this pathetic situation, the average efficiency rate - the proportion of the gross floor area that can be lived in - of new flats in Hong Kong has dropped to about 70 per cent from 90 per cent in the 1990s.

But things will change dramatically in less than three weeks. A vital part of the new rule will prohibit developers from using "gross floor area" when quoting sizes of new flats offered for sale.

While common areas cost less than flats to build, developers often charged the same price - thousands of dollars per square foot - for them by including them in the gross floor area of all the flats in the project.

To avoid buyers being asked to pay unfairly high prices, developers are required from April 29 to specify the actual size of new flats in terms of "saleable floor area", a common practice in Britain, the United States and Australia.

The saleable floor area of a property will define exclusively the actual useable space of the flat, balcony, utility platform and verandas. Excluded from this definition are all so-called "common areas" that developers now include in the calculation of gross floor area.

Under the new regime, buyers will pay for actual living premises that will be measured wall to wall.

Understandably, developers have complained about details of the new rules, which they claim remain unclear and could become a trap for them. The law will also regulate the contents of sales brochures, price lists, show flats and sales arrangements, and will specify penalties, including a maximum punishment of seven years' jail and a HK$5 million fine for developers who provide false or misleading information.

Developers should not be seriously concerned, since most of them have a strong legal department. Their highly paid lawyers will advise on every new project to ensure it complies with the new rules.

With prices quoted in terms of saleable area, homebuyers will find flats more expensive if their efficiency rates are lower.

For instance, a flat that is 321 sq ft in saleable area, which includes a 22 sq ft balcony and 16 sq ft utility platform, on the third floor of Park Ivy in Tai Kok Tsui, a new project jointly built by Sino Land and the Urban Renewal Authority, is being offered at HK$17,984 per square foot, or HK$5.77 million. The flat has an efficiency ratio of 73 per cent.

Compare it with a recently sold flat, 897 sq ft in saleable area, at the blue-chip housing estate Taikoo Shing. It has an efficiency ratio of 91 per cent and went for HK$12,820 square foot of saleable area.

Homebuyers also need to spend time studying the sales brochures and make a site visit before signing the preliminary sales and purchase agreement. "If you spend thousands of dollars subscribing to new shares, you will study the prospectus issued by the listing candidate. But buying a flat will cost millions of dollars or one's life savings, so there's no reason for home seekers to ignore the sales brochures," Hong Kong Institute of Surveyors spokesman Lawrence Poon Wing-cheung said.