Asymmetric information in the Hong Kong forward property market.

Transparency of the forward property market

Transparency of the forward property market is of utmost importance to facilitate effective valuation of presale property investments. The mandatory disclosure of information required in the Consent Scheme and the voluntary self-regulatory measures taken by the REDA, to a certain extent, allow presale properties to be traded effectively. Investors' awareness of the forward risks relating to their affordability is also enhanced through educational activities taken by CC and EAA. The measures, to a certain extent, create a favourable environment for investment decisions.

A well-developed legal system

Hong Kong offers a sound legal system with a corruption-free environment in protecting property investors' interests. They include the strong foreclosure laws, the availability of recourse lending and the tight underwriting standards relating to transacting presale properties. Apart from the Consent Scheme guiding the arrangement of the ASPs, the formation of equitable mortgage also standardise the procedure for financing a purchase of a presale property. There are also strong and efficient regulatory bodies like the Lands Department to oversee the various conditions stipulated in the Consent Scheme, which the developer and his solicitor must comply. These criteria and conditions are refined from time to time in response to the prevailing social and economic environment.

A well-developed financial system

Hong Kong has a well-established financial system to support the building project finance through, for example, issue of debts, bonds and/ or securitization of investment assets. To ensure that the developer must be able to meet the construction expenses, two methods of financing the outstanding construction costs are accepted by the government, they are building mortgage and/or bank undertaking. Both methods must be undertaken by either a licensed bank or registered deposit taking company to guarantee completion of the development. For the buyers, equitable mortgage has been popularly used for financing a purchase of a presale property.

Standardization of presale procedures

The procedure on transacting presale properties and the practice on conducting the presales have been standardized through the set up of the Consent Scheme and the self-regulatory guidelines taken by REDA to safeguard the rights of the buyers. As such, the operation of the forward property market has been streamlined and confusion could be, to a certain extent, avoided. The standardized ASPs for pre-selling uncompleted properties and the formation of the sample equitable mortgage contract have also facilitated the financing matters relating to presales.

Commitment of the market players

Commitment of the government to protect presale property buyers is of utmost importance for the success of the forward property market. Apart from the administrative measures, the government meet regularly with REDA, CC and EAA to monitor the presale mechanism and solicits views from the public. However, the guidelines set by REDA and EAA are on voluntary basis only with no legal binding. Incidences showed that developers were not committed to adhering to the guidelines and disseminating misleading information for boosting the sales. Also, the consultant paper prepared in 2000 made a number of recommendations to address the inadequacy of protection for presale property buyers. Despite the urge of the public, many of the recommendations such as the use of "internal floor area" that can be used by buyers and the keeping of sample flats for future reference were turned down largely due to the objection of REDA. Furthermore, measures being used in other places, such as the use of retention money to enhance developers in correcting defects and the sales brochures to be attached to the ASP to prove the subject commodity for sale, should also be considered.

5. CONCLUSION

There has been an increasing use of forward contracts to pre-sell uncompleted units of large-scale housing projects by developers to release their financial burden. However, numerous problems have been found using this financing means because of the asymmetric information problem embedded in the forward property market. They include default of the project in the mid-way of construction, snagging problems and others. By referencing the development of the forward property market in Hong Kong for the past five decades and the various government initiatives in monitoring the operation of the market, the set of factors which can enhance the development of an effective forward property market has been identified as follows:

--property market as an investment asset,

--a favourable macro-economic environment,

--transparency of the forward property market,

--a well-developed legal system,

--a well-developed financial system,

--standardization of presale procedures,

--commitment of the government.

The operation mechanism adopted in Hong Kong which includes both administrative measures and self-regulatory system has provided, to a certain extent, protection to presale property buyers against unscrupulous developers. It also lays down the important references for the development of a forward property market, despite the rooms for improvement. Yet, further research are needed to investigate how the monitoring system can be enhanced and whether similar mechanism for pre-selling uncompleted properties can be applied in different places where socio-cultural and economic environment are different.

APPENDIX 1

Real Estate Developers' Association of Hong Kong--Guidelines for Sales Descriptions of Uncompleted Residential Properties

To enhance the transparency of the private sale mechanism, the following guidelines, which have been revised on 25 August 2006, are to be adopted by all members of REDA.

1. Sales brochures should be made available to prospective purchasers at least 24 hours before the private sale.

2. Sales brochures should contain essential information in respect of the property offered for sale, including but not limited to the following:

--floor area and floor plan,

--prominent fittings and finishes,

--location plan and drawn to scale,

--disposition plan,

--salient conditions of the Government lease,

--salient provisions of the draft the Deed of Mutual Covenant (DMC),

--obligations for slope maintenance if any,

--anticipated completion date,

--management fee details.

3. A copy of the draft the DMC and the Government lease should be provided at the sales office for free inspection by prospective purchasers.

4. An enquiry counter should be set up at the sales office and a hotline be made available to provide information relating to the property being offered for sale.

5. Leaflets on useful information for flat purchasers published by the Consumer Council and/or the Estate Agents Authority should be made available at the sales office.

6. Reasonable steps should be taken to inform purchasers of subsequent materials changes with regard to the information provided in the sales brochures.

7. The price list and the list of flats on offer should be made available at the sales office to prospective purchasers and also through estate agents (if engaged).

8. The price list of the flats to be offered in first launch (which should not be less than 20 flats or 20% of the total number of flats on offer at the first batch, whichever is the higher) should be provided to potential purchasers at least 24 hours before such flats are put up for sale.

9. For subsequent batches, an up-to-date price list should be made available and posted at the sales office immediately prior to the time when such flats are put up for sale.

10. Members are free to decide on whether or not to make public the results of their sales. If they choose to publicize, any information provided must be as accurate as possible.

11. Members should ensure that their sales activities are conducted in an orderly manner.

12. Members should specify in their promotional materials the name of any estate agency engaged by them.

13. Clear instructions on sales arrangements must be provided to the engaged estate agency.

14. Appropriate action should be taken against any estate agent (if estate agency is engaged) who is found to have adopted unprofessional sales practices.

15. Random check on the compliance with these Guidelines by members will be conducted by the REDA Secretariat.

APPENDIX 2

Notes to Purchasers of Uncompleted Properties Issued by Consumer Council and Estate Agents Authority (2006)

1. Before the purchase of uncompleted properties:

--remember that buying uncompleted flats is different from acquiring completed ones,

--calculate the total expenses of the purchase, such as solicitors' fees, mortgage charges, insurance fees and stamp duty,

--select the appropriate payment method; calculate the amount of the mortgage loan to ensure it is within your repayment ability,

--visit the development site and get to know the surroundings of the property, and check town planning proposals and decisions which may affect the property,

--study the Sales Brochure carefully for details, the expected completion date, management fees and find out the salient terms of the Government Lease, terms of the Deed of Mutual Covenant (DMC), etc.

--have the right to request to read the Government Lease and the DMC free of charge,

--check recent transaction prices of comparable properties for comparison,

--ensure that any important matters explained or guaranteed to you by the developers staff or other persons are written into both the provisional and formal agreements for sale and purchase as part of the contractual terms; or a separate written agreement.

Print Get the Mag Weekly Updates