Putting an end to gross abuses

New rules mean developers can no longer use 'gross floor area' when advertising flats, but there are still problems that need ironing out

PUBLISHED : Thursday, 04 July, 2013, 12:00am
UPDATED : Thursday, 04 July, 2013, 3:48am

For years, people buying into Hong Kong's red-hot property market paid for space that was not even in their flats as developers exploited a loophole that allowed them to inflate the advertised size of apartments.

But under regulations that came into effect on April 29, the practice of using "gross floor area" - including each flat's share of common areas of a building - was banned when advertising flats in new developments.

A little over two months into the new regulatory regime, estate agents, surveyors and buyers are already noting the effects, not all of them expected.

The single most important aspect of the new Residential Properties (First-hand Sales) Ordinance is a requirement that developers ensure sales brochures for new residential projects specify the size of flats in terms of "saleable area", the usable space within the flat.

It brought to an end the questionable practice of using gross floor area, under which each flat in a development would be allocated, pro rata, a portion of common areas, including everything from lift lobbies and clubhouses to electricity meter rooms and rubbish collection areas.

The average efficiency ratio, calculated by dividing the saleable area by the gross floor area, of flats sold immediately before the rule change was 76 per cent, down from 93 per cent 30 years ago, according to Buildings Department figures. That offers a clue as to the extent to which developers had been abusing the loophole.

Lawrence Poon Wing-cheung, a spokesman for the Hong Kong Institute of Surveyors, said: "When all projects are quoted on the basis of saleable area, buyers will have a good idea which one is overpriced.

"Previously, purchasers were hardly able to come up with a fair comparison, as developers included all sorts of different common areas in the price calculation and prices therefore varied from one project to another."

Poon said he believed buyers would take about three months to adapt to the new regime, as all new flats were now sold under the new rules.

The rules do not just cover the disclosure of flat sizes. Developers must also disclose any features within 250 metres of their development that might prove problematic for buyers.

For example, in the brochure for the Reach in Yuen Long, one of the first developments offered after the new rules were implemented, developers Henderson Land Development and New World Development pointed out a nearby refuse collection point.

Swire Properties mentioned in literature for its Dunbar Place project in Ho Man Tin that it was just opposite Kowloon Hospital, while Sino Land pointed out that an addiction treatment centre operates within 250 metres of the Avery in Kowloon City.

"Prior to the new rule, it was common to see unpleasant features like landfill sites or graveyards replaced by slopes of greenery in sales brochures," Poon said. "But now it is prohibited to do this."

To ensure the protection of buyers, developers which contravene the regulations are liable to imprisonment for up to seven years and a fine of up to HK$5 million.

Only seven developments have gone on sale since the regulations came into effect, with about 200 units sold. Fifty other projects have been put on hold to allow the preparation of sales brochures that comply with the new regulations.

In response to the new regulatory regime, prices of flats for seven new residential projects, published on the website of the regulator, the Sales of First-hand Residential Properties Authority, are now set out based on saleable area, not gross floor area.

Swire offered flats at Dunbar Place at an average of HK$20,869 per square foot; Hong Kong Ferry pitched its Green Code in Fanling between HK$8,800 and HK$10,000 per square foot, Sino Land offered the Avery for HK$20,044 per square foot and Henderson and New World offered flats at the Reach at HK$10,086 per square foot.

Using the same, saleable area measurement, people seeking homes will find that old flats even in prime locations, such as Taikoo Shing, which was built from 1987, are more affordable, with average transaction at HK$13,000 per square foot.

As a side-effect of the new regulations, the sight of hundreds of prospective buyers and property agents milling around outside sales offices, giving the impression that flats were selling like hot cakes, has now disappeared.

"Now, it has to take at least one hour to close a deal," said a manager at a property agency who recently helped a buyer at Green Code, the first development offered for sale under the new regulatory regime.

It took longer because the developer's staff now had to go through the details of the project, such as the saleable area of the flat, the common areas the buyer would be sharing and the agencies and lawyers appointed by the developer.

They also had to tell the buyer about the special stamp duty and buyer's stamp duty, he said.

Previously, staff would not spend so much time explaining the details of projects to buyers.

"The sales practices of property agents have changed as well," the agency manager said. "We haven't printed our own leaflets to promote projects since the new rule took effect because all the promotion materials have to comply with the new ordinance.

"We can't reveal further details of the projects to anyone if the sales brochures don't mention them."

The new regulations are an attempt to increase the transparency of new projects but some basic information about projects, including details of clubhouses, management fees and commercial areas, is now missing from sales brochures.

Property investor Chung On-chu said such information should be included.

"It would be better to know the management fee as soon as possible as it is a long-term expense and would help us to have a budget," Chung said. "And it would be better to state the clubhouse and commercial area in the sales brochure.

"It would be clearer to the buyers if they state such information in the sales brochure, rather than looking at the model in the sales office."

A spokesman for the Sales of First-hand Residential Properties Authority said: "There has been public concern in the past that sales brochures contained more than necessary information, including elaborate information on clubhouse facilities.

"The approach which the ordinance has adopted is that a sales brochure must provide information as prescribed under the ordinance, and must not provide other information not specified or permitted under the ordinance."

If vendors considered they had already worked out the amount of management fees for each residential property in the development, there were means for them to let prospective buyers know the amount.

If vendors wished to set out further information on clubhouses and commercial space, they could do so in their promotional publications.

A Consumer Council spokesman said it had met the authority and had suggested including management fees in sales brochures.

The chairman of the Real Estate Developers Association, Stewart Leung Chi-kin, said that not having management fees in sales brochures "may cause disputes between the buyers and developers".

"It would be the developers' responsibility if we state the information in the sales brochure," he said. "Now, our responsibilities may even be less than before.

"We want to state the information and help the buyers to understand the project clearly. But we have to follow the ordinance strictly. We are not able to provide more information."

Leung criticised the ordinance as too rigid. "I've never seen such stubborn ordinance," he said.

Lawyer Daniel Wong Kwok-tung said information about clubhouses and management fees was a major consideration for people buying homes, and they would not be well informed if such information was excluded from sales brochures.

The sale and purchase agreement would state the details of the clubhouse and management fees, he said, but "it would be too late for the buyers to get that information".