Hong Kong Property: Floor Area Inflation3 November, 2010, 18:35. Posted by Zarathustra
Tags: Economy, Hong Kong, Politics, Real Estate
One Silversea, an ultra-expensive residential development by Sino Land (83.HK),
which is located at a highly polluted seaside with extremely unpleasant smell
(Update: I was not aware of the television programme talking about the same issue, which was shown a few days before I wrote this. They also discussed some examples of GFA inflation in addition to my example here. If you are interested and if you can understand Cantonese, you can watch it here for more information)
The land sale for the site Inverness Road Kowloon Tong today disappointed the market, although the property sector still gained a lot in today’s trading because of an oddly positive mood over tonight QE2 announcement. Sun Hung Kai Properties (16.HK) gained 6.42%, top gainer in today’s trading. Sino Land (83.HK), New World Development (17.HK) and Henderson Land (12.HK) gained 3.39%, 2.92%, and 2.67% respectively.
A rather peculiar aspect of Hong Kong Real Estate Development is this: the government told you how much you could build at most, but developers always find ways to build more than told, such that the actual Sellable or Marketable Floor Area can be much more than the “Statutory” Gross Floor Area (GFA).
For example, a building site of the land surface area of 10,000 sq ft and a plot ratio of 5x would allow developer to build 50,000 (i.e. 10,000 x 5) sq ft of floor area. However, developers can, in reality, build more than the stated GFA. One classic example, according to this blog by Arch-Traveller, a local Hong Kong architect, is the Pacific Place by Swire Pacific (19.HK). The site for the whole commercial complex is located at a hill-side, including offices, hotel, serviced apartments and shopping mall. According to Arch-Traveller, the building regulation at the time stated that basement of hotel would not be counted towards the total GFA. That means as long as you could call something a “basement”, you could build as much“basement” as you wish. Because it did not count towards the final GFA, developers would not have paid the land premium for those area, but those area was still marketable. What the architect ingeniously did was that they designated the “Ground Floor” to be somewhere at the hill-side, few levels elevated from the true ground level, and everything below was “basement”. As a result, the almost the whole of Shopping Mall was built with zero land premium. Strange as it might seem, it was absolutely legal at that time. Of course, after this incident, the regulations changed to include basement as well.
Over the past decades, the government would make various exemption to encourage property developers to build certain features in their development. For example, balconies, club houses, car parks, etc. The interesting thing here is that, the statutory GFA might be 50,000 sq ft, but because of all these exemptions, property developer might end up building 60,000 sq ft (or more, depending on the skills of the architect in finding loopholes), and sell 60,000 sq ft to you and me.
The recent rise in property prices in Hong Kong triggered the public concern on this issue, but there are some common misunderstandings in it.
Most people believe that these inflated area were given to developers for free. To better illustrate, assume that the stated GFA is 50,000 sq ft for a site, and a developer buys is for HK$5,000,000 (implying an AV of HK$10,000 per sq ft), but the developer may end up building 60,000 sq ft, so 10,000 sq ft of floor area was “given for free”. The misunderstanding here is that, developers must certainly include consideration of floor area inflation. In other words, if they could build more than stated, they should be willing to pay more in the bidding process, so those area is absolutely not given “for free”. Should GFA inflation be not allowed, a property developer might only be willing to pay an AV of HK$9,000 per sq ft, for example.
Also, because many people in Hong Kong thought those area is given for free, they thought developers are gaining big profit from building more than stated on free land cost, so they say this is another demonstration of “collusion between the government and businesses”. This is also not true. Judging from the recent land transaction in Hong Kong, even if we factor in the GFA inflation, the profit margins of these projects, using recent properties transactions as best estimates, can hardly be come close to 20%, not to mention the risk that prices may drop even below the land cost when the projects are completed few years later. Judging from this, Hong Kong Real Estate Development is NOT lucrative, compared to 30-40% profit margins in China, which have been achieved by many developers.
But on their part, the government has done a very bad job in clearing up the misunderstanding. GFA inflation is one of the weirdest thing in Hong Kong Real Estate Sector, and it probably would not happen anywhere else. Now the government is introducing a 10% cap. My question for the government is: why do you bother to allow GFA inflation AT ALL? If building balconies for residential projects are something the government wish to encourage, the government can easily make balconies compulsory: just make it into law instead of dealing with all these GFA inflation nonsense.