22 July 1996

PROPERTY developers said yesterday (22 July) that findings of a Consumer Council (the Council) study had accurately identified the various elements that had contributed to the success of the property industry and the factors that had shaped the property market structure.

But they disagreed with the report’s analysis of the primary and the secondary residential markets and had grave reservations about measures proposed to further interfere with the market.

Commenting on the Council’s report entitled “How Competitive is the Private Residential Property Market” released last week, a REDA spokesman said that the report had provided the property industry with an outsider’s perspective to help explore ways to preserve the much-valued free market economy and improve the workings of the property market.

“REDA is pleased to note the findings of the Council’s extensive and comprehensive study that:

there is no suggestion of collusion amongst developers;

whatever developers do are commercial responses to the prevailing market structure;

any measure of the success and profitability of developers should also take into account the risks involved;

there was and is no legal barrier to entry in Hong Kong;

the greatest obstacle has been the limited availability of land;

a high degree of market concentration among developers from 1991-94 is not necessarily bad or anti-competitive;

market concentration to some extent reflects the efficiencies resulting from economies of scale, successful business strategies and confidence in the market even in market downturns;

the market behaviour of property developers makes perfect business sense and does not constitute any contravention of the law of Hong Kong; and

developers have complete freedom to decide when to sell being a matter of commercial discretion in the free market.

However, the spokesman said that there were two major points of disagreement.

“Firstly, the report says that the influence of individual owners selling property in the secondary market is much smaller than the influence of developers in the primary market in setting price levels. This is wrong in view of the overwhelming percentage of secondary transactions.

“The number of transactions of newly completed units consistently represents only about 20 per cent of the average annual total of residential transactions in recent years. These secondary transactions obviously set the prices for residential properties at any moment.

“By so doing, the Council through its report has over-emphasized the importance of the primary market in setting market price levels.





No. of S&P

No. of S&P

Total No.

Private Primary

Private Secondary

of Private


Residential Market

Residental Market

Residential S&P



































































Data Source:

Centaline Property Agency based on Lands Registry's day book

“Any individual development company, even if it is the most resourceful one producing thousands of flats per year, is bound to fail miserably if it ever has the slightest misconception of being able to counter the forces of the secondary market which has a housing stock of some 900,000 units involving transactions (sale and purchase agreements) totaling 140,501 in 1992, 136,768 in 1993, 120,497 in 1994 and 99,054 in 1995. This indicates that the market is very competitive indeed.

“The current climate of the property market, which has been at a downturn since early 1994, has been an excellent case in point showing that the primary market could not be analyzed in a vacuum: few developers could sell any newly completed units unless such units are priced according to secondary market levels.”

Secondly, said the spokesman, REDA was disappointed that the Council was seeking to interfere with the fundamentals of the free market economy by proposing to impose a deadline for sale of newly completed units.

“There is already a very tight Building Covenant requiring developments be completed before the specified time limits. Imposing a further deadline on the timing of sale would mean depriving a businessman of the opportunity of making sensible business decisions in response to market conditions.

“It is doubtful whether the market will remain free and competitive if businessmen are deprived of the fundamental right to decide when to buy and sell and at what prices.”

The spokesman reiterated that Hong Kong property developers practised in a commercial free market without any oligopolistic practices as confirmed by the Council’s report.

Furthermore, developers through REDA had for years been working closely with the professional institutes with a view to ensuring that the property market and the economy would continue to perform in a stable and healthy manner and that end-users would achieve home ownership.

REDA’s Comments on the Consumer Council’s Report
“How Competitive is the Private Residential Property Market”

1 Lower Barriers to Entry

    1.1 As confirmed by the report, there was and is no legal barriers to entry. REDA wishes to point out that there is no administrative, financial or trade barriers either.

    1.2 Few developers in Hong Kong started as property developers; most developers entered the market at one time or another from other industries such as garment-making, trading, textiles, wholesaling, jewellery, transport, shipping, etc. Over the past 30 years some developers grew to the size they are today whereas some “shrink” either in size or in terms of activity. Some left the residential market and switched to commercial, hotel, industrial or infrastructural developments whereas others stayed on and focused on residential production.

    1.3 It is a widely acknowledged fact that property development is a risky and highly capital-intensive business and it requires experience, commitment and confidence to excel or even to survive. Few places around the world have a significant number of its property developers being overseas investors but Hong Kong has attracted a large number of overseas investors into the market. Companies and governmental agencies notably from Singapore, Taiwan, Indonesia, Malaysia and China have large property interests in Hong Kong as well as own and trade property stocks. Whatever the Consumer Council’s view may be the last thing it would want to do would be to paint an unfair picture about the Hong Kong property scene and discourage major players from overseas to enter the market.

    1.4 The Council has also missed the point that the residential side is the most regulated segment of the local property market in respect of development processing and sales procedures and such restrictions, many of which championed by the Council, are the major factors deterring newcomers, foreign or local.

    1.5 The so-called barriers mentioned in the report exist in each and every trade in which the more successful, efficient and reputable players usually but not necessarily enjoy a financial and competitive edge over newcomers.

    1.6 Section 17.a) of the report overlooks the fact that every investor is free to trade land exchange entitlements and build up their land reserves, only if they do not mind to have their capital tied up in land resources that is virtually undevelopable and could remain so for decades.

    1.7 S17.a) also reveals that the Council is not familiar with the workings of the property market by presuming that developers with land banks would always bid high to deter new entrants and increase asset value. On the contrary, developers with land reserves are generally more cautious and conservative at auctions and tenders because the land sales results would directly affect the amounts of lease modification premia for their new projects using sites from their land reserves; whereas developers who rely on public auctions and tenders as their sole source of land supply might tend to bid higher in their quest for land.

2 Review the size of lots in Government land auctions

    2.1 REDA in principle has no objection to this concept but is concerned that it may not be what the public want. Consumers want well-designed, well-built, large and secure estates with full amenities which could not be achieved through smaller lots.

    2.2 In addition, REDA is concerned about the technical difficulties:

  1. Reducing the size of lots may be less desirable in terms of urban planning;
  2. Reducing the size of lots may not necessarily mean that the sites would only go to the so-called “smaller” developers, which is difficult to define;
  3. Reducing the size of the lots may result in the Government not being able to benefit from the marriage value;
  4. Smaller sites mean more projects, resulting in a heavier burden on Government processing authorities; and
  5. Smaller sites mean more piece-meal, “pencil-block” type of developments.

2.3 It should be pointed out that public auctions and tenders are not the only source of land. Up to 2/3 of Hong Kong’s annual new private residential production came from redevelopment schemes which involved privately-held sites of varied sizes developed not only by REDA Members but also by investors from various industries locally or from overseas.

3 Improve the development control mechanism

    3.1 REDA agrees entirely. REDA and the professional institutes have been trying very hard in the past few years to streamline the development/redevelopment processing procedures which are becoming more and more complicated and time-consuming.

    3.2 “Fast-tracking” is helpful but there is little to fast-track if the procedures could not be streamlined and some of the unaffordable guidelines and requirements not made more realistic.

4 Nurture new entrants

    4.1 The telecommunications market used to be a monopoly franchised by the Government and is therefore a totally inappropriate and incomparable analogy. The residential property market, in the private sector’s view, is highly competitive and operates in accordance with market conditions.

    4.2 The proposal to use Government or quasi-Government bodies to “nurture” new entrants and enable them “to develop the capacity to take on larger projects” is a very dangerous one. It should be noted that the Housing Authority is in fact the biggest developer in Hong Kong producing about 40,000 rental and home ownership units annually and the Land Development Corporation, when it is upgraded to be the Urban Renewal Authority, looks set to be the second largest developer. Implementing the Council’s proposal may run the risk of resulting in the market being dominated by Government, quasi-Government and Government-nurtured big private developers.

5 Improve Residential Land Supply

    5.1 REDA supports the report’s proposals under this heading.

6 Estimates of available supply of flats

    6.1 REDA would not know why supply had been over-forecasted by the Government. REDA was not consulted on these forecasts as it is now.

    6.2 There could be many good reasons why this is so. Businesses do move in cycles and the property business is particularly susceptible to economic and political influences. The increasing length of the production process also contributes to such difficulties. Developers would not know if they should be commended or should be accused of colluding with the Government if they consistently met the Government’s forecasted production targets regardless of the ups and downs of the market and other economic, political, demographical and social circumstances.

    6.3 The supply forecasting methodology is not necessary at fault. It is probably the result of certain Government offices not realising the additional time for development and redevelopment processing procedures, the time wasted on solving conflicting departmental requirements, the delays resulting from unclear planning and environmental requirements, etc. An excellent case in point is that the Lands Department, having recognised the difficulties in meeting the complex development processing requirements, has responded positively to a REDA proposal that as a general policy the Building Covenant (B.C.) period for new leases with a Master Layout Plan requirement will be extended from 48 to 60 months, that applications for B.C. extensions would be processed in a flexible manner and that the B.C. period could be even more flexible to reflect the complexity of the development.

7 Entrusted infrastructure

    7.1 S58.a) is identical to a REDA proposal submitted to the Government in late 1993, asking the Government to entrust developers with the task of providing the basic infrastructural facilities for land lots already scheduled for disposal so as to speed up supply. There have been cases involving sites which are earmarked for private development but have yet to be made available pending the provision of the necessary infrastructural facilities for which public funds has been planned for but not yet allocated under the Public Works Programme. REDA proposed then that the Government should entrust the developer with the responsibility to provide such facilities and reimburse the latter when the funds is available or discount the cost from the land premium.

8 Accelerate the property development process

    8.1 As to 58.b), REDA and the professional institutes have for years been asking the Government to streamline the development and redevelopment processing procedures which are becoming more and more complicated and time-consuming. Various proposals have been made and numerous meetings held in respect of planning processing procedures, environmental requirements, fire safety legislation and codes of practice, energy efficiency matters, lease modification and land exchange processing, G/I/C/ facilities in private developments, urban renewal, housing supply, strategic planning for further developing Hong Kong, pre-sale consent applications, restaurant licensing requirements, etc.

9 Modify Building Covenants to facilitate housing supply

    9.1 Section 60.a) indicates that the Council is seeking to interfere with the fundamentals of the free market economy by proposing to impose a deadline for sale of newly completed units.

    9.2 Imposing a further deadline on the timing of sale would mean depriving a businessman of his opportunity to make sensible business decisions in response to market conditions. It is doubtful whether the market will remain free and competitive if businessmen are deprived of the fundamental right to decide when to buy and sell and at what prices.

    9.3 Developers are operating within tight Government and market constraints and there would be disastrous results in terms of corporate planning and financing if the units being scare products (which take at least four to five years to develop and, once sold, to replenish) are not disposed of at the right time. Developers simply do not delay construction owing to heavy interest cost (when land premium accounts for up to 70% of total development cost) as well as the hefty fines and the threat of re-entry for failing to complete within the Building Covenant (BC) period.

    9.4 Hoarding units ties up capital, tightens cash flow for new projects, incurs interest expenses and other expenses such as management, rates, etc., all of which, plus the usual market risks, together serve as a great deterrent. Hoarding after completion is also greatly discouraged by the pressing need for a smooth cash flow for funding new projects. Many major developers consider a project a failure if most of the flats are not sold prior to completion.

10 Releasing units in batches

    10.1 Nobody in the free market could accurately anticipate market response and sentiments before launching sale exercises. Releasing flats in batches allows the developer the flexibility to respond to competitor’s acts. Whether a sale exercise is successful depends on a wide range of factors, the most important of which being not prices nor flat sizes but buyers and investors’ outlook on the immediate-to-medium future of the economy and the market. There have been times such as the June 4th incident in 1989, the Stock Market crash in 1987 and the Mar-Aug period in 1994 when the Task Force was at work when few developers could sell regardless of prices.

    10.2 It is unfair for the Council to jump to the conclusion that releasing units in batches is intended to regulate supply. A closer look at the sales exercises will clearly reveal that the number of units sold always far exceeds the initial number of flats available if the response is good.

    10.3 Some of the very stringent and inflexible pre-sale conditions under the Consent Scheme constitute another major factor for adopting such a cautious sales approach. Many of these restrictions were championed by the Consumer Council.

    10.4 For instance, the developer is not allowed to reduce the number of units available and change the price lists once they are advertised. The first requirement means that the developer can only increase the number of flats put up for sale and could not reduce it in accordance with market sentiments; the second condition totally deprives the developer of its pricing ability, not allowing it to cut down the prices to attract buyers even if the response is not good. A third condition was the cumbersome computer balloting requirements (which were made reasonable only very recently) which forced the developer to conduct three rounds of computer balloting offering the same batch of unsold units at the same prices to the initial group of potential purchasers before any remaining unsold units could be offered to other potential buyers, “freezing” such units for months on end.

11Vacancy Rate

    11.1 The vacancy rate quoted by the Council is misleading because:

  1. the Council does not take into account the fact that the market had mostly been at a downturn during the specified period of Jan 1994 and April 1996 in which it was basically a situation of developers not being able to sell;
  2. the Council fails to recognise that the issuance of pre-sale consent is a moving target that developers have no way of foretelling when the consent will be granted and what specific conditions would be required therein and therefore preparation work for launching a pre-sale exercise could not be finalised until consent has been secured;
  3. the so-called vacancies include flats that are reserved for leasing, or held by investors as an investment or hedge;
  4. residential flats are valuable commodities and it takes time for the market to digest the new production; and
  5. first-hand properties are not the sole source of residential supply when there is a private housing stock of 900,000 and the transactions of first-hand properties represent only about 20% of annual total private residential transactions.

11.2 Given the above circumstances, a 11% vacancy rate is not unreasonable.

12 Mortgaging financing

    12.1 REDA has suggested to the Government and certain banking institutions to treat new and old units equally. REDA suggested that an older unit should enjoy the same mortgage lending policies if it has a clean title, is properly maintained and is certified by a recognised professional as structurally safe.

    12.2 However, REDA stresses that the banks should be allowed to exercise their prudent commercial discretion in accordance with market circumstances.

13 Improve consumer information

    13.1 For Consent Scheme projects which now covers a substantial majority of annual private sector new supply, a developer is not allowed to launch pre-sale unless it has proved to the satisfaction of the Government that all necessary measures have been put in place to ensure adequate consumer protection and that adequate and accurate information is provided in the sales literature. For Non-Consent Scheme projects, REDA Members voluntarily observe similar requirements and procedures to ensure consumer protection.

    13.2 REDA is very disappointed that the Council has been repeatedly sending the wrong message that REDA Members do not provide adequate and accurate information in sales brochures.

14 Mandatory use of saleable floor area

    14.1 REDA has been supportive of the call to standardise the GFA calculations but stresses that the saleable area calculations are already very clearly prescribed and defined.

15 Consumer access to reliable property information

    15.1 Developers’ development programmes are highly transparent owing to the abundance of information available, including land disposal programme, land sales results, planning approvals, general building plan approvals, building consent, pre-sale consent, occupation permits, certificate of compliance, major developers’ annual reports, Rating & Valuation Department forecasts, independent property consultants’ forecasts and audits, etc.

Last Updated on 20 Aug, 1998