“This building may be acquired as it is almost 60 years old.” If a building has an age of over 50 years, people may be associate it with the potential to be acquired in order to inflate its value. As of the end of 2016, over 7,000 old buildings aged over 50 years were acquired. It is not reliable to judge whether a building has the potential to be acquired based merely on its age. You have to think from the perspective of a developer.
Property site has to be large enough
For developers, they would consider whether the property site is big enough or the properties nearby are of similar age so that they could acquire a few properties to form a larger site for building large-scale residential or commercial projects. if the property is a single or twin buildings with new buildings nearby, and the property site are is rather small, the chance of being acquired would be much smaller.
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Whether the actual plot ratio is comparatively Low
Developers would usually choose low-rise buildings if they acquire properties. First, the cost of acquisition would be lower if the building involves fewer units. Second, low-rise properties obviously did not fully utilise the plot ratio. The developer could then fully utilise it, making the profit margin higher.
What is plot ratio?
Plot ratio is defined as the ratio between the gross floor area of the building and the area of the site on which it is erected. The higher the ratio, the higher the building could be. Usually the maximum plot ratio of residential buildings ranges from 1:8 to 1:10, whereas the maximum plot ratio of commercial buildings is 1:15. For a 2,000-square-feet-site, the plot ratio is 1:10 and the maximum buildable area would be 20,000 square feet.
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If the maximum plot ratio of a property is 1:9 but the property is just 4-storey-high, the developer could raise the plot ratio after acquiring it. The developer could build an extra 2 to 3 units per unit acquired, bringing high profits. In the opposite, if the property has over 10 storeys, the plot ratio is almost used up, the developer could only build 1 unit per unit acquired, hence the profit would be lower.
Is the property located in a commercial area?
Compared to residential buildings, if the acquired properties could be transformed into commercial buildings, the profit would be higher. In recent years some developers acquire old buildings in commercial areas like Mong Kok or Causeway Bay and transform them into commercial buildings. First, the maximum plot ratio would be higher; second, the rent per square foot and the price of commercial units are far higher than residential buildings. Therefore, if the property is located in commercial area, the value and chance of acquisition would be higher than those in residential areas.
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Is it worth buying an old building in a bid to be acquired?
We talked about the characteristics of buildings with the potential to be acquired. However, there are a lot of old buildings in Hong Kong. It is not easy to choose the right one. Sometimes the building may be acquired just 1 or 2 years after you bought it, sometimes you may have to wait over 10 years. In addition, the developer may not offer a good deal while acquiring the units and the acquisition would not be completed unless most owners are willing to sell their properties. The process is more complicated than directly selling a property.
Even if you locate an old building with high chance of being acquired, the owner may raise the selling price significantly, lowering the risk/return ratio. Therefore, investors do not necessarily need to buy old buildings in a bid to be acquired. The yield may be higher if you buy a good property at a low price and wait for the property price to go up.