Mobile Edition
Print
Get the Mag
Weekly UpdatesApart from the use of administrative measures under the Consent Scheme, self-regulatory measures are also taken by the Real Estate Developers' Association of Hong Kong (REDA) with the aim to build up the reputation of the developers in the industry as a whole in order to mitigate the agency costs incurred by some non-performed unscrupulous developers. The self-regulatory measures are used to guide the developers in the presales to enhance the transparency of the presales and the accuracy of sales information released to the public (Appendix 1). Furthermore, the Consumer Council (CC) and the Estate Agent Authority (EAA) also play a part to undertake activities to enhance consumer protection. For example, a pamphlet has been published by CC and EAA to be inserted in presales brochures to remind prospective buyers of the issues that they need to pay attention to (Appendix 2). Furthermore, awareness-raising and educational measures are undertaken by CC to teach buyers on how to take appropriate action on their own behalf to safeguard their rights. The government believes that this three-pronged approach, i.e. the REDA, CC and EAA, together with the administrative measures stipulated in the Consent Scheme can on one hand protect consumers' interest and would not fetter the market operation on the other.
3.2. Measures to deter presale property problems
Through the use of the hard administrative scheme and the soft self-regulatory three-pronged system, a number of measures have been taken to deter the presale property problems, and they are discussed as follows:
To deter developer's default risk on the development project
In order to ensure that the development is adequately financed, documentation like guarantee from banks/associated company to show the developer's financial ability to complete the development are required. Furthermore, to protect the payments that the buyers made, the solicitor of the developer will hold the money as stakeholders in an escrow account and is entitled to release only the amount certified by the architect as having been expended on the building. Since the measures introduced in the Consent Scheme, presale buyers have received effective protection against unscrupulous developers from defaults of construction.
To deter delay on completion
As stipulated in the Consent Scheme, if the developer fails to complete the construction on/ before the date specified other than force majeure reasons, the buyer has the right to rescind the agreement or receive the interest loss on the payment made and other necessary expenses if no extension of the construction has been approved. So far, the enforcement of the measures has been effective with the commitment of the parties concerned. For example, the CC took the initiative to help the buyers claim compensation from a developer on the delayed delivery of the properties. At the end, the developer agreed to compensate to avoid a lawsuit (Next Magazine, 2005).
To deter higher building defects
A warranty clause must be made by the developer in the ASP to ensure that "the building work is done in a good and workmanlike manner that the materials used are good and proper, and that the property will be reasonably fit for human habitation or for the purpose for which it is built." A liability warranty of one year will be issued and the developer shall remedy any defects to the completed property as soon as "reasonably practicable" upon receipt of a written notice of the buyer within the year. In practice, developers would undertake the rectification works but in a very slow manner which often caused inconvenience to the buyers.
To deter exaggeration of saleable areas
It is mandatory that the "saleable floor area" together with the "gross floor area" must be specified in the presales brochures, and compensation must be rendered to the buyer if the saleable area of the completed property differs from that is stated in the forward contract. The "saleable area" refers to the floor area contained within the enclosing walls of a residential property measured up to the external edge of the enclosing wall or the centre line of a separating wall between two adjoining units. Whereas, the "gross floor area" is an apportioned share of the total domestic gross floor area of the development (LC Papers, 2000a and 2000b). However, the methods of apportionment and the main components of common areas to be included in the calculations so as the ancillary facilities like the utility platforms detached to the flat have not been standardized.
Twenty years ago, developers adopted the standard used by the Buildings Department in calculating the saleable areas of buildings which contained neither podium and parking lot nor the ancillary facilities. But now, developers counts whatever they can find to "inflate" the saleable areas in order to make more room for sales because of the lack of standardized methods for measuring floor areas. The "net internal floor area" that can be used by buyers in recently-built properties is only around 60% of the "gross floor area" claimed (5). A consultation paper prepared by the government in 2000 (LC Paper, 2000c) recommended that the "internal floor area", the common areas and the ancillary facilities that are included in calculating the "gross" and "saleable" areas, should all be indicated in the sales brochures, but the recommendations were turned down with the objection of REDA.
To deter features mismatch upon completion
It is stipulated in the Consent Scheme that the ASP should contain a description of the fittings and finishes, for example, the door panels, the type of kitchenware and bathing facilities. However, the descriptions made there are usually vague and subject to change. Many developments have been disguised as up-market estates in the sample flats and presales brochures. But they turn out to be no difference from ordinary residential flats without the luxurious internal fittings/decoration inside and outside, nor the communal/recreational facilities prescribed in the presales. To obviate disputes over the state of the completed properties, the consultation paper (LC Paper, 2000c) recommended that developers should keep the relevant sales brochures, miniature models and photographs depicting the interior of the sample properties as evidence to facilitate proof in court if necessary. However, the recommendations were also turned down because REDA considered them impractical.
To deter unscrupulous marketing/sales tactics
To enable prospective buyers to get hold of adequate and accurate information when considering a purchase, the REDA, at the request of the government, set up a self-regulatory system in June 2001 which requires its members to comply with the guidelines issued when pre-selling uncompleted flats. The guidelines require developers to include in sales brochures a variety of information with the aims at enhancing the transparency of the market. However, incidences showed that developers kept using grey areas for not adhering to the requirements stipulated. For example, two leading developers in recent presales breached the internal guidelines by withholding price lists from potential buyers. Another developer was even alleged to have demanded HK$50,000 from potential buyers before a price list was given (Apple Daily, 2006). As a result, the government urged REDA to step up its efforts to ensure compliance with the guidelines, but no further disciplinary action was taken on the developers.
4. CRITICAL FACTORS FOR DEVELOPMENT OF THE FORWARD PROPERTY MARKET
The operation mechanism of the forward property market in Hong Kong, through the use of the administrative measures contained in the Consent Scheme and the three-pronged system, has been considered effective in boosting up the economy, yet presale problems are still commonly found in the market. Based on the review of the measures taken in correcting the imperfection information problem and in deterring the presale property problems as discussed above, insights can be drawn on the factors which are critical for enhancing the development of the forward property market as shown in Figure 3.
[FIGURE 3 OMITTED]
Property as an investment asset
Property in Hong Kong has been considered a safe investment which generates reliable incomes accompanied with capital growth, and thus it has been a popular investment alternative with high transaction volume. Furthermore, the business tactics of developers, on one hand, focusing on large-scale self-contained condo projects maximizing floor area which are favoured by buyers and, on the other, get access to low-cost finance through presales, have earned them generous profits. These have made presales of uncompleted properties, as substitutes of spot properties, popular in Hong Kong.
A favourable macro-economic environment
A number of macro-economic factors have exacerbated the strong demand for properties in Hong Kong in the past two decades, despite the up-and-down cyclical movements over the years. These included the continued population growth from around 4 million in 1980 to nearly 7 million in 2006 caused by the influx of immigrants, the foreign capital influx and the home-ownership policy promoted by the government. More important, the negative interest rates resulted from the linked exchange system coupled with the boom economy in Hong Kong in the 1980s and early 1990s had exacerbated the already surging demand for property. Despite the Asian Economic Turmoil in 1997, there has been a robust recovery of the economy in years from 2004 to 2006 because of the strong trade and financial industry growth. The economy picks up again with an impressive increase in GDP of 7.3% in 2005, and so as the sales of spot properties and the presales of uncompleted properties.
FEED