For discussion FCR(97-98)15
on 13 June 1997

ITEM FOR FINANCE COMMITTEE

LOAN FUND
NEW HEAD "LOAN TO ESTATE AGENTS AUTHORITY"

    Members are invited to approve the creation of a new Head "Loan to Estate Agents Authority" under the Loan Fund with a commitment of $40 million to provide a loan to help finance the setting up and initial operating costs of the Estate Agents Authoritywe .



PROBLEM

The Estate Agents Ordinance provides for the setting up of an Estate Agents Authority (EAA) to implement a regulatory and licensing system for estate agents. The EAA requires funds to finance its establishment and initial operations.

PROPOSAL

2. We propose to grant a loan of $40 million on the following terms to the EAA to meet its setting up and initial operating costs -

Loan amount

: $40 million

Interest

: 5% per annum to be calculated on simple interest basis on the outstanding loan balance.

Repayment

: by ten equal annual instalments.

Grace period

: 24 months from the date of first drawdown in 1997-98.

Drawdown

: first tranche in 1997-98; the second and final tranche in
1998-99written notice in advance.

Interest payment

: annually on the anniversary of the first drawdown except for interest accrued during the grace period which will be paid in 2008-09, together with the last repayment instalment.

JUSTIFICATION

Functions of the EAA

3. The Estate Agents May 1997. The Estate Agents Ordinance 1997 (the Ordinance) was gazetted on 30 May 1997. The Ordinance aims to establish a regulatory framework on the conduct and practice of estate agents, to enhance the standard of the trade and protection for consumers. The Ordinance provides for the setting up of an Estate Agents Authority to implement the regulatory and licensing system. The main functions and powers of the EAA are to -

  1. regulate and control the practice of estate agents to ensure compliance with the provisions of the Ordinance;

  2. promote integrity and competence of the estate agents and in so doing, enhance the status of the estate agents;

  3. liaise with educational institutions for the purposes of providing training courses to ensure competence in the trade and to establish standards of conduct;

  4. draw up practising guidelines and prescribe other regulations and rules pursuant to the Ordinance;

  5. determine licensing requirements and process applications for licences;

  6. conduct investigations or inquiries, upon receipt of complaints or on its own initiative, on suspected breaches of the provisions of the Ordinance;

  7. take disciplinary action against any violation of the Ordinance; and

  8. help arbitrate disputes relating to commission sought by parties involved.

Resource requirements of the EAA

4. In estimating the resource requirements of the EAA, we have taken into account its functions, the nature of its regulatory work, the estimated number of estate agents in the territory and the operational experience of other similar local statutory bodies. Based on an assumed staff establishment of 26 people (which is subject to the agreement of the EAA), a projected cashflow analysis for the EAA is at Enclosure 1.

Proposed loan to the EAA

5. The proposed terms of the loan to the EAA are generally in line with those offered to other statutory bodies such as the Land Development Corporation and the Hong Kong Housing Society. We estimate that the EAA would be able to maintain an operational surplus as from its second year of operation. It should not therefore have difficulties in repaying the loan. On the other hand, it is essential that the EAA maintains an adequate cash buffer to guard against any income fluctuations as a result of caused by a reduction in the size of the trade. We therefore propose to grant a grace period of two years for the repayment of the loan and interest to the EAA, and that the interest for the first two years be accrued and repaid together with the last principal repayment in 2008-09. cashflow analysis for the EAA is at Enclosure 3.

FINANCIAL IMPLICATIONS

6. While the EAA will be self-financing and we expect that it would be able to meet its operating cost through licence fees and other fees for its services, it would require a working capital to finance its initial operations before a licensing system has been put in place. We estimate that the annual operating cost of the EAA will be around $32 million, largely comprising staff costs, office rental and administrative overheads.

7. We propose to make a loan of $40 million to the EAA comprising -

  1. $22 million to cover operating costs for the remainder of the financial year 1997-98;

  2. $13 million to cover operating costs for the first few months of 1998-99 until it receives cash income from licence fees when a licensing system is in place; and

  3. $5 million to cover the fitting-out of the office and procurement of office furniture and equipment.

8. Details of the estimated setting up costs and operating costs of the EAA are at Enclosure 2.

9. The loan will be a one-off commitment under the Loan Fund. There are no recurrent implications as we expect the EAA to be self-financing. If Members approve the proposed loan, Government will sign a loan agreement with the EAA.

BACKGROUND INFORMATION

10. Members passed the Estate Agents Bill on 21 May 1997 which provides for the setting up of a statutory Estate Agents Authority. We aim to set up the EAA within three months. We estimate that the EAA will be able to make all the necessary regulations and rules under the Ordinance, and start issuing provisional licences to the trade within a year.

Housing Branch
June 1997


Enclosure 1 to FCR(97-98)15

Office of the Estate Agents Authority Projected Cashflow Analysis ($ million)

Loan of $40 million, interest at 5% per annum, repayable by ten equal annual instalments


1997-98

1998-99

1999-2000

2000-2001

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

Income













loan

30

10

0

0

0

0

0

0

0

0

0

0

licensing fee

0

48

48

52

52

56

56

60

60

67

67

75

other fees

0

1

1

1

1

1

1

1

1

1

1

1

Total

30

59

49

53

53

57

57

61

61

68

68

76

Expenses













operating expenses

22

35

38

41

44

48

52

56

60

65

70

76

setting-up cost

5

0

0

0

0

0

0

0

0

0

0

0

repayment of loan principal

0

0

4

4

4

4

4

4

4

4

4

4

interest

0

0

2

1.8

1.6

1.4

1.2

1

0.8

0.6

0.4

4.2

Total

27

35

44

46.8

49.6

53.4

57.2

61

64.8

69.6

74.4

84.2

Income brought forward

0

3

27

32

38.2

41.6

45.2

45

45

41.2

39.6

33.2

Balance

3

27

32

38.2

41.6

45.2

45

45

41.2

39.6

33.2

25


Enclosure 2 to FCR(97-98)15

Estimated Annual Operating Cost and Setting-up Cost of the Estate Agents Authority

I. Annually recurrent cost

1. Staff cost$19 million
2. Office rental$3.6 million
3. Administrative overheads$9.2 million
~ $32 million

II. Non-recurrent setting-up cost

1. Office furniture/equipment$2 million
2. Office fitting-out work$2.9 million
~ $5 million


Last Updated on 5 August 1999