Inflated Floor Areas Part 1: Feel Taken? Just Deflate Them!

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

November 2010

Your humble author is supportive of using a floor area measurement method based on the concept of exclusivity i.e. floor space which is exclusively-only meant to be possessed, owned, enjoyed, and utilized by the owner of a property unit, be it residential, office, retail, or industrial. 

Using a high rise residential unit as an illustration, the living room, dining room, kitchen, utility room, washroom(s), bedroom(s), and the like are exclusive to the unit owner, while the common lobbies, elevator shafts, staircases, machinery and plant rooms, parking areas, and the like are not, but are shared by all the relevant owners-occupants in the building.

In North America, condominiums, which are similar to the strata-titled units we have here in Hong Kong, are sold on a NET floor area basis which only includes the exclusive (internal) floor area of a unit plus the full thickness of its external walls and half the thickness of its shared-party walls.

However, in Hong Kong, strata-titled units are sold on a GROSS floor area (GFA) basis which includes not just the exclusive floor areas but also their shares of the ‘common areas’. Moreover, there is no uniform method in delineating this gross floor area i.e. it is generally up to the developer’s fancy as to which and how much common areas are to be included.

And this is done despite there is actually a uniform SALEABLE floor area basis, publicized by the Hong Kong Institute of Surveyors and adopted by government departments and practitioners in recent times. Presale projects are also obliged now to provide the saleable areas too. It resembles the NET floor area used in North America. 

Hence, we also have a utilization percentage which is obtained by dividing the exclusive floor area of a unit by its gross floor area. As such, different buildings-complexes would have different utilization percentages because the proportions between the unit-exclusive areas and common areas vary from building to building. Typically, these percentages range from 60% to 90%. However, some may go below 60%. Naturally, assuming all other factors being equal, a real estate buyer would pay more for a unit in a building which has a higher utilization percentage.

As such, some purchasers of new properties feel ‘taken’ by the developers when they realize the units they have bought appear way smaller than what the gross floor areas suggest, especially with buildings which harbor a significant amount of common areas. An advertised 1000 ft2 residential unit may well turn out to contain only 650 ft2, sometimes even less.

Such significant amounts of common areas have also come about in recent years owing to government exemption of certain (types of) floor areas, which otherwise would be restricted by building regulations, to encourage greener, healthier, and generally better built environments.

And with the average residential price per square foot hovering around HK$5,000 / ft2 on a gross floor area basis (or US$640 / ft2), it is no wonder that there have been cries, rightly or wrongly, of foul play.

Is there a solution? Yes, and technically it is easy = just stipulate that from now on (or some start date), properties are to be sold on an exclusivity of floor area basis and in Hong Kong, that would probably mean adopting the SALEABLE floor area basis, as it already exists. And analysts like your humble author would welcome this, for at least we do not need to bother with the utilization ratios anymore.

Any inconvenience? Yes, for one, prices per square foot would become and sound much higher. For instance, say a 75% utilization ratio building, a HK$8,000 / ft2 based on gross floor area would become HK$10,667 / ft2 based on saleable floor area overnight, although the total unit price would remain the same.

It will also take the pubic at large some time to get used to it but at the same time, purchasers will have NO more reason to fear or feel taken by inflated floor sizes.

Inflated prices still? Yes, but that’s another story for another time.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.    

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