Caveat Emptor

January 20, 2010

Before making a purchase, buyers need to check with the proper authorities that their new property doesn’t contain any illegal structures.

Despite the financial burden, buying a property in Hong Kong for self use can be taxing. Hong Kong is notorious for its high property prices due to extremely limited space available and an ever-escalating demand from first-time buyers, upgraders and investors. To make sure that you will not regret what you have bought after all the hassles and investing tens of millions, one has to be careful with some of the preliminaries before you sign on the dotted line.

It has become a common phenomenon that people make full use of whatever space is available in and around their property. Some owners build a projected balcony off their apartment; some enclose the open-sided balcony with windows so that the living space is enlarged; some erect a room on the open roof terrace, often constructing an internal staircase to it; and some even enclose part of the common corridor adjacent to their main door for self use. All of these alterations need the approval by Hong Kong’s Buildings Department and, sometimes, the building manager’s consent according to the Deed of Mutual Covenant and Management Agreement before any structure is built.

Making an on-site inspection is therefore an essential part of the preliminaries. Make sure you enquire from the owner or the property agent if any of these alterations are “legal”, i.e. approved by the relevant authorities. If they are illegal, you run the risk of demolishing or restoring the structures at your own cost. Failing to comply with such requests may attract statutory orders to be registered against your property (your property is “encumbered”) which may cause banks to refuse or terminate your mortgage thus scaring away buyers and tenants.

There are some violations of the Buildings Regulations that are less obvious to laymen and sometimes even escape the professional eye. An owner may have obtained approval to construct an internal staircase leading to the open roof but he “expanded” the approval by erecting a family room next to the staircase. When making enquiries, one has to be specific with each constituent part of the new structure. Another false assumption which many owners of older buildings would use is the unapproved alteration is “exempted” from the relevant authorities’ enforcement actions because it has been in existence for a long period of time. It is true that Hong Kong is faced with the formidable task of enforcement on illegal structures and it may take years for the authority to come knocking at your door. But that doesn’t mean they will not take any action. If you accept what the unscrupulous owner has told you, you are sitting on a time-bomb.

If you think house owners don’t squeeze out every square foot of space they can, you are wrong again. “Illegal” alterations and additions are common among townhouses and single houses. Examples include the coverage of open space (often the garden or yard), coverage of a open staircase, addition of an extra storey or room on the roof, conversion of a carpark into living space and conversion of void space under the house into living space or play room.

As a rule, all conversions, alterations and additions need the Buildings Department’s approval. For some minor works a certificate from an “Authorised Person” (usually a registered architect or a building surveyor) may exempt you from such approval. But in all these cases you need to obtain written evidence to such effect.

More contentious in recent years is the floor area. Let’s admit there are loopholes in the building regulations so that there is always confusion when it comes to floor area for sale. Some owners inflate the floor area so the unit price per square foot appears lower. This malpractice started with some unscrupulous developers and was quickly adopted by some individual owners. Some owners take advantage of the building’s old age and absence of sales brochures in order to “round-up” or inflate the floor area. Some include their illegal addition in the floor area. Some simply use the saleable area (net area) and “gross up” with efficiency ratio of newer buildings (it is common older buildings have higher saleable-to-gross efficiency ratio than new ones). Typically, older buildings have 80 percent or above efficiency ratio and new buildings are usually in the range of 70 percent. Buyers are therefore advised to check with property agents or the Ratings & Valuations Department regarding the saleable area of the property and compare prices based on saleable areas of the properties.

Similar to housing in Hong Kong, I have limited space. So I will continue this topic of Buyer Beware in the next issue of The Key.

By K.S. Koh