Over half of Hong Kong’s population lives in private housing, many of which are multi-owned residential buildings. Under Hong Kong’s unique conveyancing system, all owners of these buildings share co-ownership of the common areas and facilities, thus are jointly responsible for the costs in managing and maintaining these common parts in the form of management fees. The total revenue of property management services in the residential market in Hong Kong was forecasted to reach HK$55.1 billion (about 2.0% of Hong Kong’s GDP) in 2022. According to the Consumer Council’s survey, the monthly management fees paid by the respondent owners ranged from HK$200 to HK$3,700, approximately 7.4% of their monthly household income on average. As residential properties continue to age, a general rising trend in management fees is expected.
Property owners are legally obliged to pay management fees in recurring, sizeable and cumulative sums, so that the property management company (“PMC”) can fulfil its duties under the Deed of Mutual Covenant (“DMC”), yet Hong Kong’s property management fee market is marked by distinct characteristics, such as the requirement of collective action by owners to influence decisions, and a bargaining power asymmetry between owners and developers. At the same time, owners have shown a general unwillingness to participate in building management matters, while the Council has also received property management complaints from time to time. In view of the above, the Council conducted a study titled “Transparency and Governance – Optimising Value of Property Management Fee in Hong Kong” (“the Study”) to better understand, identify and assess the effectiveness of the existing system of private residential property management in Hong Kong, and issues giving rise to consumer concern.
The Study identified 6 prevailing issues in the market and puts forward 8 recommendations for enhancing consumer protection. Apart from enhancing the current regulatory regime, the Council stresses that information transparency on property management fees and active participation of owners are equally important for championing a fair, healthy, competitive and sustainable property management market in Hong Kong with better safeguard for consumer interests.
Management Fee Liability Determined by Number of Undivided / Management Shares Among Owners
One special feature of property ownership in multi-owned buildings in Hong Kong is the allocation of “undivided shares” and “management shares” (if any) among co-owners as tenants-in-common, with the former defining ownership and the latter defining the sharing of property management and maintenance expenses that the owners should bear from the moment they take ownership of the property. Shareholding of the undivided shares is normally set out in the DMC of the building or multi-building developments. The DMC may also stipulate the allocation of management shares which form the basis on which management fees are charged.
In gist, property management involves management of the common areas of the building and provision of related services, such as security, cleaning, financial management, repair and maintenance, tailored to the needs of that particular property. Where a PMC is hired to provide property management services, the PMC usually collects management fees from the owners on a regular basis. The Council’s survey with owners’ organisations (“OOs”) found that “staff salaries and related expenses” (40.4%) was the major component of the management fee budget, followed by “repairs and maintenance related expenses” (27.7%) and “cleaning related expenses” (10.8%).
Dual Ordinances and Various Regulatory Bodies Governing Property Management in Hong Kong
To define the scope of the Study, the Council reviewed the key statutory and regulatory requirements governing property management in Hong Kong. The management of multi-owned buildings in Hong Kong is mainly governed by the Building Management Ordinance (“BMO”, Cap. 344) and their respective DMCs, while property management services are regulated under the Property Management Services Ordinance (“PMSO”, Cap. 626).
On the one hand, the BMO provides a statutory framework for the formation of owners’ corporations (“OCs”) to facilitate the management and control of the common parts of buildings. In particular, the formation of an OC avoids multiplicity of lawsuits involving numerous owners and allow the majority rule in decision making so as to avoid the need for unanimous consent of all owners in property management matters. On the other hand, draft DMCs are examined and approved by the Legal Advisory and Conveyancing Office (LACO) of the Lands Department to ensure compliance with the BMO and the Guidelines for Deeds of Mutual Covenant (“DMC Guidelines”), which is a set of guidelines drawn up for the purpose of providing a system of building management in private residential developments. It should be noted that the DMC is mainly drafted by the developer without the involvement of prospective purchasers. In the pre-purchase and initial stages of property sales, before the units are sold and the shares are transferred to the purchaser, the developer remains the major shareholder with undiluted control in decision-making. The ultimate owners of the property have no influence on the DMC but to take it as it is.
The PMSO provides for the licensing of PMCs and property management practitioners (“PMPs”), regulates the provision of property management services and established the Property Management Services Authority (PMSA), which is the industry regulator in Hong Kong. The PMSA regulates and controls the provision of property management services through a mandatory licensing regime, disciplinary actions and promotion of industry development. Apart from the PMSA, the Home Affairs Department (HAD) has been dedicating efforts to encourage and support the formation of OCs in private buildings.
6 Identified Issues Related to Property Management Fees in Hong Kong
In addition to the statutory and regulatory review mentioned above, the Study took a holistic and comprehensive approach[1] to collect market insight and views from stakeholders. Upon reviewing the findings, the Council has identified 6 key issues of concern:
Issue 1: Lack of Transparency in the Basis of Allocation of Shares
In the past 11 years (2012 to 2022), the Council has received 694 complaints concerning property management services, about half of which were related to pricing and charges disputes, involving questions of apportionment of shares, whether certain parts of the building were common parts, or whether the sharing of expenses was fair.
The Study found that although the allocation of undivided shares and management shares (if any) is disclosed in the development’s DMC and sales brochure, no explanation on the calculation and formula that determine the allocation could be found. Despite mention of the basis of share allocation in the SD of a building, not only is the SD not a sales document for public reference, but many consumers are not even aware of its existence or know how to access this document. The calculation leading to allocation of undivided and/or management shares is an essential piece of information that enables prospective purchasers to understand their obligations and make informed purchase decisions, hence its absence is unsatisfactory from a consumer protection perspective and may lead to liability for property management and maintenance expenses that exceeds the owner’s household budget.
Issue 2: Difficulty in Obtaining Unanimous Owners’ Consent to Amend Unfair Terms in DMCs
Under the current legal framework, the DMC registered with the Land Registry binds successors in title of the covenantor and the persons deriving title from them, regardless of whether they have actual notice of the DMC, and requires unanimous consent from all parties to be amended. However, relevant court cases in the Council’s research show that some DMCs drafted by developers may no longer fit the prevailing interests and benefits of owners, leading to disputes. Despite advocacy by the Legislative Council’s (LegCo) Panel of Home Affairs years ago for a mechanism to amend unfair provisions in a DMC by a resolution of less than 100% of shareholding of owners, such changes were not adopted due to concerns over minority owners' interests. As a result, the requirement for unanimous consent to amend DMC terms persists till today, posing challenges for owners, particularly in large-scale housing estates or when some owners are untraceable, uninformed, or indifferent.
Issue 3: Potential Influence of the Developer or Major Owner or Management Committee (“MC”) Members on Property Management Matters
The allocation of undivided shares in residential developments can impact residential owners’ ability to make property management decisions. In some cases, developers hold a substantial amount of undivided shares, including those of all unsold residential units, and thus have control over major property management decisions, such as establishment of the OC, termination of the PMC, etc. According to the Study’s analysis of sampled DMC documents, residential owners in 5 out of the 249 reviewed developments held less than 50% of the total undivided shares, making it difficult for them to pass resolutions.
The DMC analysis further revealed that 75% of DMC managers (i.e. the first PMC specified in the DMC) in the reviewed developments were found to be affiliated with the developers, while the top 10 DMC managers managed 47% of the reviewed developments. Potential conflict of interest may arise when a developer appoints its affiliate as the DMC manager for a development which has less than 50% of the total undivided shares allocated to residential owners. When the major stakeholder exerts its influence to pass certain property management decisions, it may result in substantial expenses to be borne by all residential owners who had no say in the matter.
Issue 4: Service Quality Issues of PMCs Including Financial Risks and Dissatisfaction over Performance
Among the 694 complaints concerning property management received by the Council from 2012 to 2022, the most common types of complaints were price and charges disputes (around 50%), such as allegations of misapplication of management fees, and dissatisfaction about the quality of service (42.7%). Despite mandatory requirements for regular disclosure of PMCs’ financial operations, as well as owners’ right to access management-related financial information, there have still been allegations against PMCs regarding such issues and improper collection of management fees, while some PMCs were reported to have refused disclosure of financial and operational information.
The Study also revealed an expectation gap between PMCs and owners/OOs on the former’s performance. 71.4%-100% of the PMCs surveyed considered their performance in various aspects (e.g. communication channels, disclosure of information) was up to expectation, compared with 43.7-56.4% of the owners and 54.8-65.9% of the OOs surveyed. Apart from the expectation gap, 87% of the owners indicated that they did not know the procedures to terminate unsatisfactory PMCs, and many owners (40.4%) and OOs (33.3%) found it difficult to choose a suitable PMC due to a lack of adequate market information.
Issue 5: Passive Owners’ Participation in Property Management Matters and Insufficient Communication between OOs/OCs, PMCs and Owners
According to the Council’s survey, about 60% of owners were passive to attend general meetings (63%), opine (62.7%) or vote (58%) on building management-related matters across all age groups, education levels, employment status and years of residence at the property, while a majority of owners (over 78%) lacked an understanding of building management and related regulations, a possible reason for their low participation. The survey further found that over 97% of the owners were unwilling to join OOs as chairpersons or members with reasons such as “no spare time” (58.9%), “no interest” (12.2%), “no opinion” (12.2%) and “too old to participate” (9.7%).
Statistics from the LegCo’s Research Office revealed that only 47% of the private buildings in Hong Kong had formed OCs as at the end of 2021, the percentage of which has remained similar for years despite the Government’s longstanding efforts. Stakeholders pointed out that the key obstacle for setting up OCs was the unwillingness of owners. Not only do the owners’ indifference and lack of involvement in property management matters increase the risk of mismanagement or possibly manipulation which ultimately harm their rights and interests, but it may also lead to misunderstanding or disputes between owners, OOs and PMCs due to a lack of communication.
Issue 6: Substantial Rises in Management Fees Especially for Maintenance Costs
From the PMC survey, the leading reasons for increased management fees were “inflation” (100%), “a rise in minimum wages” (72.4%) and “repair and maintenance of the building” (31.6%) as claimed by the PMCs. When asked about the acceptable magnitude of management fee increase, close to half (45%) of the respondent owners considered below 5% to be acceptable, and only 12.5% would accept an increase of 10% or above.
Despite the DMC Guidelines’ stipulation to establish a Special Fund (“SF”) for covering irregular expenses, such as renovation, improvement, and repair, a 2017 study by the Urban Renewal Authority revealed that only one-third of the surveyed buildings in Hong Kong had set up a SF, some of which had inadequate balances to cover the costs of major maintenance works. One of the key reasons for the low reserve in the SF is the lack of professional knowledge of owners to determine the level of reserves required to cover such expenditure. Without SF or sufficient reserve, owners may have to bear astronomical project costs, causing financial strain especially on retirees and the elderly. An affordable and sustainable mechanism to accumulate funds for maintenance and repair is therefore a key protection for owners.
With an overarching objective to promote a healthy, competitive and sustainable marketplace in property management for the benefit of consumers in Hong Kong, the Council puts forward 8 key recommendations in hopes of enhancing market transparency, fairness and efficiency, encouraging participation of owners, and enabling safe and sustainable buildings in the long run:
Enhancing Market Transparency, Fairness and Efficiency
Recommendation 1: To boost transparency on the basis upon which property management fees are shared between owners
The Council recommends that the disclosure of the calculation and allocation basis of the undivided shares and management shares should be made by developers in first-hand sale of private residential properties, as a good corporate practice to satisfy consumers’ right to know. The sales brochures should present such information in salient points, together with a link to the development’s website displaying the detailed calculation. Different categories of expense items should be displayed in tabular form in the sales brochures for ease of reference. When the allocation of undivided shares differs from that for management shares, a clear explanation for the difference should be given.
Recommendation 2: To make available updated property management information to promote the general public’s understanding and knowledge of the industry
The Council proposes that the PMSA could in the long run consider developing a reference database on the levels of management fees across Hong Kong, referencing similar tools by the Electrical and Mechanical Services Department and the MPF Fund Platform. It should contain key information such as building age, number of building units, location, facilities and services provided, area of horticulture, number of property management staff employed, etc. for owners’ reference. Competitively sensitive information such as PMC and building names would be anonymised before publication while the scale of information provision is suggested to take a progressive arrangement.
Recommendation 3: To promote fairness through allowing amendment of the terms of DMC (other than those on undivided shares) with majority consent
Drawing experience from the Mainland and Singapore, the Council calls for a relaxation of the requirement of unanimous consent, such as by amending the BMO to allow amendment of the terms in a DMC by majority consent of owners, except for terms relating to the allocation of undivided shares. In reference to the Companies Ordinance which allows amendment of the articles of association of a company by a majority of at least 75% of the number (not shareholding) of the members who vote in person or by proxy, the Council proposes taking 75% of undivided shares as a reference point for determining “majority consent” for the purpose of amending the DMC terms. To address the concerns of potential abuse of the power and the need to protect minority interests, the proposed amendment mechanism should only be available to buildings of not less than 10 years of age, conducted under stringent procedures and subject to appeal.
Recommendation 4: To avoid conflict of interest from over-engagement in property management decisions
With reference to measures adopted in the Mainland and Victoria of Australia, the Council recommends introducing the following provisions in the Residential Properties (First-hand Sales) Ordinance and/or the DMC Guidelines:
- Disclosure of relationships between the developer and DMC manager in the sales brochure. Where the DMC manager is yet to be appointed, the sales brochure should clearly indicate when and how the disclosure will be made;
- Relationship between any major owner holding 30% or more undivided shares or any MC members, the PMCs or other service providers should also be disclosed as soon as the latter is proposed for selection;
- Declaration of interest by the developer, major owner with 30% or more undivided shares and any MC members when a conflict-of-interest situation arises. Where appropriate, he/she should withdraw from the meeting and abstain from voting;
- Bidding practice should be adopted to procure services from PMCs (after completion of the first DMC manager’s appointment) and other service providers for substantial scale projects and where nature of the service is critical.
Recommendation 5: To improve performance efficiency of property management services with new technologies and intelligent solutions
The industry is encouraged to adopt the following technological and intelligent solutions:
- Roll out new intelligent solutions for services such as cleaning, security, communication, etc. at a suitable pace and priority;
- Enhance communication and sharing of information with owners through social media, communication tools and/or dedicated websites, in addition or alternative to conventional display of circulars;
- Involve owners in all key project milestones from initial stages to post-launch;
- Explore bespoke software, apps, platforms or templates to facilitate cost-efficiency and proper handling of personal data. Synergising efforts of the industry, the PMSA and the innovation and technology sector should be considered.
Encouraging Participation of Owners
Recommendation 6: To promote active participation of owners with more effective communication in property management activities
The Council suggests strengthening owners’ engagement and participation in property management matters in a progressive manner. This could include an “information pack for owners” introducing their rights and obligation, to be prepared and provided to all purchasers upon completion of purchase through different channels; introduction to the management of the property upon moving in, such as through welcome gatherings or periodic workshops held by PMCs; interactive learning kits or regular workshops by the HAD to continue informing and engaging owners during the course of ownership. PMCs could also increase the use of digital means, such as social media, websites and virtual owners’ meetings to strengthen mutual communication.
The Council also calls for owners to play their part in property management and get involved from the beginning of their ownership, including review of expense documents, attending owners’ meetings regularly, and voicing their opinion before major decisions are made.
Recommendation 7: To facilitate the early set-up of OCs or join forces of owners to address property management issues
In light of the survey finding that half of the respondent owners did not know the procedure to form an OC, while a majority (97.3%) indicated that they would not consider joining any OOs, the Council recommends education and publicity programmes to enhance the public’s understanding of the importance of OCs in property management so as to increase their interest and willingness in forming OCs.
The Council also calls for a review of the required timeframe for a manager to call the first owners’ meeting, currently stipulated in the DMC Guidelines as within 9 months from the DMC date. The Council suggests that this meeting should take place as soon as residential owners hold over 50% of the undivided shares in aggregate, so as to facilitate the earlier set-up of an OC. To motivate owners to join the MC, the HAD may introduce an award scheme to recognise the efforts and achievements of MCs or individual members in promoting good property management, while the maximum allowance payable to specific MC members under the BMO may be reviewed to better reflect the value of their contribution.
For buildings without OCs or other forms of OOs, the PMCs should hold general meetings of owners at least twice per year, to increase frequency of engagement with owners, instead of the current practice of once every 12 to 15 months.
Enabling Safe and Sustainable Buildings
Recommendation 8: To maintain building sustainability for expected repair and maintenance expenditures with reasonably sufficient reserve in the Special Fund
Referencing those in Shenzhen and Australia, the Council recommends establishing a capital works fund with a 10-year maintenance plan and owners should be required by law to make regular and reasonable contributions which are not transferable, so as to avoid financial strain arising from substantial one-off contributions. Contributions could be determined based on the following options: (i) a maintenance budget prepared by independent qualified professionals; (ii) an amount equivalent to a certain percentage of the annual budget of property management fees; (iii) a hybrid model with a seed fund paid by the developer plus contributions by owners equivalent to 2 months’ management fees, followed by owners’ monthly contributions; or (iv) the current practice of a budget prepared by the PMC or OC.
The Council proposes that first-hand residential property owners should start contributing from the second year onwards, while owners of buildings up to 10 years old should decide based on forthcoming maintenance needs. Buildings over 10 years may face major repair and maintenance needs and should seek advice from professionals for the required expenses. The fund should be kept in a designated, interest-bearing account as per current requirement, with a list of specified maintenance projects.
Collective Efforts to Enhance Transparency and Champion Better Governance and Consumer Protection in the Property Management Market
Effective property management with high quality service and good maintenance could bring more than positive impact on the living environment, but also benefit the market value of the building. To achieve this win-win situation and seek effective, workable solutions in the long run, the joint efforts of all stakeholders are crucial. Apart from regular review on the regulatory regime, the Council reiterates the importance of information transparency in all stages and the enforcement of owners’ rights and obligations in a fair manner throughout their ownership. At the same time, owners are encouraged to proactively participate in and supervise building management issues so as to safeguard their own rights. By conducting this Study and putting forward the 8 recommendations, and with informed and constructive discussion with all stakeholders involved, the Council hopes that a fair marketplace with strengthened consumer protection could be achieved and that the value of owners’ contributions to the management fee could be truly optimised.
[1]The Council carried out an in-depth review of 694 consumer complaint cases received during the last 11 years; solicited views from a range of stakeholders including relevant Government departments, regulatory authorities, public bodies, trade associations and professionals; conducted desktop research into 249 DMCs, 50 sales brochures, and 2 statutory declarations (“SDs”) of first-hand private residential developments in Hong Kong, with a focus on the DMC manager’s remuneration and the presentation of allocation of undivided shares and management shares in the DMC; and conducted 3 sets of surveys and in-depth interviews with owners, OOs and PMCs of multi-owned private residential buildings across Hong Kong. The Council also reviewed the regulatory regimes of 5 selected markets, namely Australia, Mainland China (“the Mainland”), Singapore, Taiwan and the United Kingdom.
Visit www.consumer.org.hk/en/advocacy/study-report/property_management_fee to view the full electronic version of the “Transparency and Governance – Optimising Value of Property Management Fee in Hong Kong” report.