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Tuesday, August 15, 2017, 13:18
Homeowners locked into upkeep contracts
By Evelyn Yu
Tuesday, August 15, 2017, 13:18 By Evelyn Yu

Homebuyers are locked into property management contracts. Evelyn Yu finds developers both sell and manage properties. Owners cannot exercise competitive tendering without 50 percent votes to remove the manager. Residents’ share can fall below the 50-percent threshold within mixed-use complexes. The Home Affairs Dept has yet to revise regulations.


The Covenant can easily run over 100 pages. It is impossible for the first purchaser to scrutinize it carefully, especially when the buyer is eager to move into a new apartment.

Davis Wong, president of Federation of Hong Kong Property Management Industry

Property developers can, under existing Building Management Ordinance (BMO) regulations, foist their own property management subsidiaries on homebuyers. The agreement — Deed of Mutual Covenant (DMC) — to contract a property management company for an entire development, can be sealed by the first unit buyer.

Davis Wong, president of the Federation of Hong Kong Property Management Industry, cautions that “The covenant can easily run over 100 pages. It is impossible for the first purchaser to scrutinize it carefully, especially when the buyer is eager to move into a new apartment.”

Even for multi-block housing complexes like Whampoa Garden, Mei Foo Sun Chuen and Laguna City, the first purchaser signing the DMC contract locks in all residents to the document — without choice.

In many cases, developers would name their subsidiary companies to manage the property under the DMC. If individual homeowners later find the manager’s performance unsatisfactory, agreement is needed from 50 percent of undivided shares to terminate the contract. This is often difficult to muster.

Individual owners are at the mercy of corporations who hold considerable shares of shopping malls or parking lots. If developers rent these commercial units out rather than sell them, developers remain the dominant owners.

This fundamental inequity imposed on citizens investing their life savings, continues without challenge. The BMO mechanism, in the matter of property management, favors developers.


Ongoing litigation

The hundreds of clauses in the legal jargon of the DMC can hide traps for homebuyers. Wong cites many cases of unfair DMCs signed in the 1980s where owners had to pay maintenance for public areas, or maintenance of external walls, while advertising income derived from them go to the developers.

Legislator and a member of the Business and Professionals Alliance for Hong Kong, Priscilla Leung Mei-fun, said there is a growing number of disputes between property management companies and owners, especially over large-scale maintenance projects.

Where owners fail to agree on the construction contractor, or suspect bid-rigging and corruption, complaints can be referred to lawmakers or the Independent Commission Against Corruption (ICAC).


No tendering



Even if small owners are united, major owners have an overwhelmingly undivided share of the common parts of car parks, shopping arcades, clubhouses and even Mass Transit Railway stations. It is hard for individual owners to secure a share of more than 50 percent.

Priscilla Leung Mei-fun, legislator and a member of Business and Professionals Alliance for Hong Kong

The major property developers use their wholly-owned subsidiaries to manage their properties post-sale. Competitive tendering may be an option for owners, only if they can coalesce a 50-percent consensus to remove the incumbent manager.

“Major owners have an overwhelmingly undivided share of the common parts of car parks, shopping arcades, clubhouses and even Mass Transit Railway (MTR) stations. It is hard for individual owners to secure a share of more than 50 percent,” says legislator Leung.

The low participation rate of individual owners at general meetings is another reason why DMC managers have wide leeway to take major decisions unilaterally.


Owners’ corporation option

Apart from the DMC, owners can form their own independent body corporate to hire and supervise building managers. It is not mandatory to set up an owners’ corporation under the BMO, but a housing estate can have only one DMC manager and one owners’ corporation. Termination of the owners’ corporation has to conform with the provisions in the BMO that apply to the DMC.

Responding to a China Daily enquiry, the Home Affairs Department confirms there are currently about 40,500 private buildings in Hong Kong, of which 26,100 are serviced by property management companies. About 8,800 buildings are managed by owners’ corporations or other informal resident bodies.

About 5,600 buildings are without any form of property management.


2014 public consultation

In 2014, the Home Affairs Department launched a public consultation exercise to review the BMO. The key points were to consider lowering the threshold for terminating the DMC from 50 percent to 30 percent aggregate share, and to limit the DMC appointment term to five years.

The department retained the threshold for termination at 50 percent, citing a lack of consensus to lower it. The Department feared that “lowering the threshold for the termination of appointment might lead to disputes and affect the quality of building management”.

However, the Home Affairs Department proposes that the term of DMC appointment be automatically terminated five years after the formation of the owners’ corporation. That would allow the owners’ corporation to renegotiate terms, or replace the DMC manager through open tender. So far, no regulatory revision has come into force.




Rising cost of management

Data from the Census and Statistics Department show average management, upkeep and repair charges for apartments in private housing complexes have climbed to HK$1,276 per month, accounting for 8.6 percent of household monthly expenditure for 2014-15.

Davis Wong sees rising management fees as an inevitable trend. He disclosed that it costs HK$2 to HK$3 per sq ft to maintain old buildings. Current monthly management charges for new buildings without the luxury of a swimming pool or clubhouse stand at about HK$4 per sq ft. Those with such facilities charge HK$5 per sq ft. For a typical Hong Kong flat sized at 500 sq ft, the management fee could double from HK$1,000 for an old building to HK$2,000 for a new building without swimming pool and clubhouse.

Wong noted that most private residences in Hong Kong experienced a 10-percent annual rise in management fees. Small housing estates with fewer owners sharing expenses, carry significant Homeowners locked into upkeep contracts First buyer commits all others to complex legal pact cost burdens.

The Composite Consumer Price Index increase for year 2015-16 is 3 percent and 2.4 percent respectively, from the Census and Statistics Department data.

Wong cited the city’s acute labor shortage, graying population, continuing new developments, and the minimum wage policy, as factors pushing up building management fees.

In the luxury sector, like Swire Properties’ Opus Hong Kong — a five-year-old residential block of 12 units on Stubbs Road, designed by Frank Gehry — owners paid a management rate of HK$9.3 per sq ft last year. From the official websites of Swire Property, the block boasts 12 unique luxury apartments ranging in size from 4,819 to 5,444 sq ft. Calculations indicate monthly fees up to HK$50,000. Swire Properties replied to China Daily’s enquiry that the fees would be reviewed this year — but did not confirm if the price would go up.

Listed property management company Kong Shum Union Property Management (Holding) Ltd declared the total cost of service at HK$231.8 million for the fiscal year ending March 31, 2013 and HK$312.2 million in year 2017 — an increase of 26 percent in four years. The company attributes the cost rise mainly to the wage increases for the group’s frontline staff.


Property management income

The property management fee is based on the “income equals expenditure” formula. Management companies set their fees annually, projecting expenditure. Profits or losses are carried over to the next financial year.

Property management income derives from fees, interest from bank deposits of management fees, sinking funds, and miscellaneous revenue, such as clubhouse fees.

General management expenses vary on the scope of services offered. They include staff costs, cleaning charges, contract maintenance, repairs, building improvement, electricity and managers’ remuneration — which usually takes up 10 percent of total management expenses.


Minimum wage impact

Hong Kong implemented an hourly minimum wage of HK$28 ($3.60) for workers in May 2011. The policy, subject to a biennial review, saw the minimum wage lifted to HK$30 in 2013, HK$32.5 in 2015 and HK$34.5 per hour from May 1, 2017.

“Prior to 2011, for HK$5,000 to HK$6,000 a month, companies could hire a concierge or cleaner. It has doubled to HK$12,000,” said Wong. In many housing estates on Hong Kong Island, the hourly wage could be HK$40 an hour.

Amid a rapidly graying population, the dearth of labor has worsened, prompting the government in 2015, to extend the upper age limit for Category B security personnel from 65 to 70.

Wong agreed the relaxation has helped alleviate the problem but with more new residences being built, labor supply lags demand, forcing property companies to hike wages constantly to retain staff. “I can only see property management fees going up, not down,” lamented Wong.





SUMMARY

• Homeowners are locked into maintenance contracts when the fi rst buyer signs

• The 50-percent owner threshold can rarely be met to remove property managers

• Legal disputes between owners and managers are on the rise

• Owners lack expertise and regulatory familiarity to manage their own properties

• Rising wages are driven by labor shortage, more new development, and loss of

aging workers. Minimum wage legislation is one factor

• Should the 50-percent owner threshold be reduced? Should a time limit be put on

property manager tenure?

• The Home Aff airs Dept has yet to revise the Building Management Ordinance


Contact the writer at evelyn@chinadailyhk.com

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