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Having a Say in
the Way We Pay
01/09/2004 Malaysian Business - Housing & Property By National House Buyers Association of
Malaysia
For the past two decades, the subject of ‘build
then sell’, or rather a better system of purchasing homes from
housing developers, has been debated and studied, but it has still
remained a voluntary concept. Surely the time is ripe for the
Government to seriously address the hazards, risks and uncertainties
experienced by home purchases in Malaysia.
While it may be difficult for all developers to move straight into
the ‘build-then-sell’ system, the National House Buyers Association
is proposing a variant to the ‘buying-off-the-plan’ concept. With
this variant (or the 10:90 concept), house buyers place a 10% down
payment with the developer upon the signing of the sales and
purchase agreement. This money serves as a confirmation of sales to
enable the developer to obtain the necessary financing. It, however,
must be placed in an escrow account and cannot be touched by the
developer. The buyer only has to pay the remaining 90% of the
purchase price to the developer upon completion of the property.
Many in the housing industry have publicly said
that the ‘build-then-sell’ concept or the recommended variant is a
‘good ‘proposal but also raised the assumptions that it will not
work due to certain obstacles. Here we also briefly explore some
issues or concern developers have raised.
House prices will increase
House prices will naturally increase with time, just like every
other product. Invariably, house prices too, are set by the forces
of supply and demand. Demand and supply determine prices, not
methods. This is an elementary law of economics. House prices will
find its own realistic levels driven by the forces of supply and
demand.
Completed houses are more attractive to buyers and banks because of
their intrinsic values, compared with houses that are yet to be
built. Buyers are ready to pay more for completed houses. However
these price-increase factors will be offset by the developers’
keenness to secure sales so that they can proceed with their
projects.
This situation is more of win-win situation, thanks to more ready
buyers vis-à-vis willing financiers. Within an expanding market,
developers will not be deterred from building houses. The 10:90
concept will also make prices more competitive in strategic
locations.
Less houses will be built
Another argument is that smaller developers may be driven out of
business, thereby jeopardizing the construction of the 150,000
houses required annually under the Eighth Malaysia Plan. However,
few, if any, developers actually mobilize their own funds to fully
support their housing projects. Financing has always been an
integral part pf property development. This has to do with
risk-spreading, taxation and funds leverage. Financiers lend based
on the viability of projects rather than the size of the developer.
In any case, even the big corporations invariably incorporate
smaller subsidiary companies to undertake different projects, rather
than putting all projects under the parent company. Hence it is at
best a conjecture that only big and cash-rich developers can
continue business or that the will build less. Currently, the
increase in the number of houses is negated by the number of
abandoned housing units.
Small developers will be out of business
We contend that small companies will benefit more than the proposed’
buying-off-the-plan’ variant. Small developers are more risk averse
and, hence, will carry out more extensive viability and feasibility
studies. They are also more focused and exercise tighter management
principles. All these virtues make them more attractive customers to
financiers, and they should have no difficulty in seeking funding
for their projects.
Policies facilitating the merger of developers, especially smaller
ones, may be necessary, not unlike that which was put in place for
financial institutions not so long ago. Despite objections to the
mergers, the banking industry is now stronger and in a better
position to complete and offer its services to the market.
Financiers will not be keen to lend because of higher risks
One of the reasons financiers shy away from bridging financing could
be that the developers are not systematically organized. Often, the
company seeking financing is part of a bigger group and the
credentials presented for assessment do not carry the total
financial picture of the group and that of their subsidiaries. There
is difficulty in assessing the track record of developers since they
keep having new identities. It is not unusual for a parent company
to hold each of it housing projects under a different subsidiary.
With the 10:90 concept, developers will obviously exercise more
stringent viability studies before embarking on any projects. This
tenet is favourable for the industry and is also in line with the
Ministry of Housing and Local Government’s repeated calls for
developers to carry out detailed feasibility studies before
embarking on projects.
Hence, banks will find it less risky to finance projects that have
undergone the stringent viability audit. As far as end-financing is
concerned, it is even more attractive for banks to finance completed
house with the risk of abandonment totally removed. They may even
pass such advantages to house buyers such as higher percentage of
end-financing or even full financing.
Quality
The quality of house under our proposed 10:90 concept will certainly
improve as developers will not build substandard houses and risk
disputes with buyers upon handover and full payment. There will be
more competition for developers on the finished products, which
means better quality. Construction standards will improve and the
quality of Malaysia properties would rise almost immediately.
Industry self-regulation
The requirement for governmental enforcement of the Housing
Development Act will be greatly reduced as developers are not paid
before they deliver their products in full.
Downstream activities will suffer
We see professional’s services in the construction industry being
employed more by banks and financial institutions because they would
need these services for verifying the quality of construction works
at various stages. Contractors and their sub-cons will be more
serious with their standards of construction and not hand in shoddy
workmanship. Moving towards the betterment of the entire housing
industry, the burden is on the developer to employ good consultants
and contractors and to pay them promptly in order for work to be
done efficiently.
Conclusion
Like any product, every market has two sides. In this case, the two
sides are buyers and sellers, the demand and supply. Before
construction or while under construction, any proposed development
is just that – ‘proposed’. Our theory is that until construction is
completed, there is no product to sell. So rightfully. The buyers
should only pay fully when construction is completed. It is time
that buyers have a say in how they want to pay for their homes.
Developers must be honest enough to admit their shortcomings and
brave enough to accept changes. |
