21/09/2002 Published in NST-PROP A Buyer Watch Article by National House Buyers Association

The property industry’s decades-old practice of “selling off-the-plan” passes the financial burden that ought to be borne by developers squarely on house buyers.

This is because, when house buyers are made to pay progressive payments, they are shouldering a large proportion of developers’ financing needs. It may not be as obvious as having all the progressive interest lumbered into the basic cost of the houses they are buying, but this is certainly the case.

When you sign the Sale and Purchase Agreement (SPA) for your house, you have to pay 10 per cent up front, even though the construction of houses has not even begun. When the foundation is up, the developer will demand the next progressive payment and this process goes on until the house is completed (if all goes well, that is).

There are those who may argue that this system of selling houses is actually to the buyers’ advantage because it keeps house prices down. But is this claim true?

If it were, house prices in Malaysia should be cheaper than in countries with similar per capita income. But this is not so. The pricing for houses in Malaysia is among the highest compared with countries of similar economic standing. This only goes to show that the developers are making hefty profits and it is a fallacy that under the present progressive payment system, buyers are getting cheaper houses. In addition, the system makes house buyers shoulder the risks that rightly should be carried by developers and their financiers.

To get a better perspective of the whole issue, we have to take a look at the various players in the property industry. First, there are the developers who are the business proprietors and whose sole aim is to make as much money as possible. We have no quarrel over this as they are businessmen and to maximise profit is only natural.

Next are the bridging financiers who lend money (bridging finance) to the developers to build the houses. They collect profits (interest) from the developers.

Another category is the end financiers who provide housing loans to the buyers. They are also in it to make money.

House buyers are the fourth group. Their aim is simply to buy houses to provide a permanent roof over the heads of their loved ones. Of course, there are speculators but we will leave them aside for this discussion.

It is not difficult to see that the only party not out for an immediate profit is the house buyers. Yet, they are the ones who are shouldering the costs and more crucially, the risks in development.

When any housing project fails, house buyers are the ones who bear the brunt. The developers would have come out with very little funds. The bulk of their preliminary expenses would have been from the mortgage for the original land titles. Even if the land had belonged to them, the initial expenses would have been minimal compared with their likely gains. Their expenses would have been covered mainly from the progressive payments made by house buyers.

The bridging financiers, on the other hand, would have been happily secured because the land would have been charged to them for whatever money they dished out. As the construction of the projects progressed, the houses (unmovable fixtures) although not completed yet, would actually have added value to the collateral (the main land title).

The end financiers are the ones that give out housing loans with the sole intention of collecting interests for profits. Their exposure is covered by way of collateral from the houses they have financed. The developers’ bridging financiers may be obliged to progressively release from their hold those particular lots that have been sold. The end financiers then take over these houses as security for the house buyers’ loan.

They are well insulated because come hell or high water, buyers still have to repay their loans. There are thousands of house buyers who are paying hefty interests for nothing because the houses they purchased are now abandoned. Pursuit of the matter in court may not be viable because the financial institutions would be ahead of the house buyers in grabbing whatever is left.

In some instances when the end financiers are also the developers’ bridging financiers, they will make house buyers agree that they cannot sue the developers for whatever reasons without their prior consent. So, as you can see, they are well protected against risk.

It does not take too much to appreciate that the present situation is completely out of order. Business cannot be done using customers’ funds and at customers’ risk. Clearly, any developer that aspires to be an industry player should have access to ample capital to see its project through without exposing the customer to risk.

The House Buyers Association contends that the inevitable solution is to adopt the system of build then sell.

Numerous calls for the introduction of such a delivery system where only completed houses are sold have been made in the past, but the wheels of change in the property industry grind very slowly.

As early as 1991 the then Minister of Housing and Local Government, Datuk Dr Ting Chew Peh had called for the implementation of the build then sell concept which was the long-term objective of his Ministry. More than a decade ago the Government had also organised a national seminar to explore the possibility of implementing the concept in the country.

The public of course, loved the idea for the simple reason that they could at least see what they were buying. Developers on the other hand, described the build then sell concept as a good idea but felt that it was not opportune at that moment to implement such a concept.

That was more than 12 years ago. Although the concept would have alleviated the bulk of the problems afflicting the property industry, developers are still opposed to it. They warn that house prices will spiral through the roof.

Bankers have stated that they cannot share the risks of such a concept. Of course, to them it is all right for property buyers to be exposed to the risks!

In 1996, the Government endorsed the concept of build first then sell as reflected in the Seventh Malaysia Plan that was tabled in the Dewan Rakyat by Prime Minister Datuk Seri Dr Mahathir Mohamad. The rakyat is still awaiting its implementation.