PROPERTY JOURNAL

The case for measurement standards in commercial property

The challenges of providing transparent and consistent commercial space measurements in Hong Kong illustrate the need for international standards

Author: Tom Parker

19 March 2020

In real estate, size matters. With offices in particular, size affects every element of property decision-making, from assessing workspace layout and suitability, to planning and predicting likely running costs fit-out expenses and reinstatement values. It is also a crucial factor in determining the total amount of rent an occupier will pay.

In Hong Kong, there are four principal methods of measurement prescribed by the Hong Kong Institute of Surveyors (HKIS):

  • Gross floor area

    Broadly similar to gross internal area, and equal to International Property Measurement Standard (IPMS) 1 plus B (external balcony)

  • Saleable area

    The area exclusively allocated to a unit including balconies, but excluding common areas; equal to IPMS 1 plus B (external balcony) minus common parts minus plant room

  • Lettable area

    The area exclusively allocated, including toilets and lift lobbies but excluding common areas, except where the unit is one of several making up an entire floor; equal to IPMS 3 minus half the thickness of the common wall with adjoining occupier minus difference in area from internal dominant face

  • Internal floor area

    The enclosed internal space of the unit for the exclusive use of the occupier; it is measured between the internal faces of the walls and includes internal partitions and columns, and it is equivalent to IPMS 3.

These standards work particularly well for residential properties, and it is mandatory that all marketing particulars for residential properties state the saleable area, allowing occupiers to compare properties quickly and easily.

The existing standards are also consistently applied in property valuation, and valuers in Hong Kong are accustomed to dual reporting in line with both HKIS Code of Measuring Practice and the RICS Property measurement professional statement, second edition of January 2018. This enables valuers and their clients to compare both domestic and international properties consistently and accurately through the use of IPMS as stated.

The main issue we have in Hong Kong is how consistently these standards are applied when it comes to commercial property – particularly in office leasing, where the city's landlords have formed their own basis for property measurement:

  • Gross area

    The enclosed internal space of a floor

  • Lettable area

    As above but excluding staircases lift shafts plant rooms and risers

  • Net area

    The enclosed internal space exclusively available to an occupier.

Landlords will then often quote an efficiency for the space, which will indicate what percentage of the quoted floor area is actually available exclusively for the use of the occupier.

While there is a broadly accepted definition for each basis of measurement, the way it is applied can often be quite inconsistent. So with multiple methods and interpretations for measurement, comparing properties can often be challenging and decision-making is then neither transparent nor quick.

To give an example, one landlord may choose to measure their property on a net basis, that is 100 per cent efficiency, quoting HK$1,075/m2. Another landlord may also be quoting the same rate for the same quoted area, but they measure their property on a gross basis, with a 60 per cent efficiency. Effectively, this means that while the unit rate and the quoted area are the same, the actual price you are paying for the useable space in the second property is around HK$1,795/m2. With different efficiencies being quoted for different buildings, you cannot compare properties using the unit rate without first having made a number of adjustments to the figures.

Another example of where confusion may arise is when occupiers are looking at property options. Due to the different methods of measurement that have been applied, an occupier looking for cost savings may end up taking an office at a higher unit rate than they are currently paying, or an occupier looking for a larger office may actually end up in a space that quotes a smaller area than that of their existing premises, although in actual fact it is physically larger.

Lack of transparency

The measurement process also often lacks transparency, and while independent measurement is usually possible, it tends to take place much later in the decision-making process when landlords are generally unwilling to renegotiate. For properties measured on a gross or lettable basis, the quoted efficiency can sometimes be higher than the actual efficiency.

As real-estate professionals, we are now working in an increasingly global context, and several years ago concerns were raised by businesses professionals and RICS on ensuring consistent measurement standards globally. In January 2016, the IPMS were introduced for office properties to provide a universal method that would enable decision-makers to compare property sizes in different cities around the world in a consistent and accurate way.

This is particularly important in a global city such as Hong Kong, where around 60 per cent of occupiers of grade-A office space are multinational companies. With corporate real-estate professionals and decision-makers frequently involved in regional or even global roles, quick and consistent comparison of properties across geographies is crucial.

As RICS members we should promote trust in the profession by applying consistent and transparent standards; but with so many potential uncertainties in property measurement in Hong Kong, you can forgive occupiers for getting confused and frustrated with the process. IPMS therefore present a great opportunity to work alongside existing standards to provide a consistent, transparent basis for measurement that enables quick comparisons between properties, simplifying real-estate decision-making in the process and avoiding confusion and frustration.

"As RICS members we should promote trust in the profession by applying consistent and transparent standards"

At present, there has been limited appetite from Hong Kong landlords to apply a universal method of measurement. However, I see it very much as an ongoing process. We as property professionals need to demonstrate the benefits of adopting IPMS, such as creating an easier environment for occupiers while at the same time helping to improve trust between occupiers and landlords during the process.

For the past few years vacancy rates in Hong Kong have been at historically low levels, but since the start of 2019 we have started to see levels rising, creating a more competitive leasing environment for landlords. Potentially, this could also act as a catalyst for adopting IPMS across Hong Kong.

Tom Parker MRICS is assistant manager valuation and advisory services Colliers  tom.parker@colliers.com

Related competencies include: Measurement

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