No to build then sell

NST 21/09/2002 By Eileen Ng

The build then sell concept is not applicable in Malaysia now as the country’s property market has yet to mature and there is still strong demand for housing, said Real Estate and Housing Developers’ Association (Rehda) president Datuk Jeffrey Ng.

“If the concept is put into practice, only big developers with sound financial standing will be able to implement it, while smaller developers with little financial capital will be forced to close down,” he said.

He said under the present legislation, there is nothing to prohibit developers from adopting the concept but very few had done so. He added that while it is good for the House Buyers Association (HBA) to suggest the Australian system, it should also look at the implications to developers.

“Developers under the Australian system only build a few hundred houses compared with their Malaysian counterparts, which build thousands. Besides that, the Australian developers have to finance land costs and interest during construction before taking loans from banks to complete the development. If this is implemented here, developers will need very deep pockets to complete their projects,” he said.

He added the build then sell concept has its own merits but it will have to wait until the property market achieves maturity. And judging by the government allocation for 615,000 houses to be built under the Eighth Malaysian Plan (2001 to 2005), it will take some time before the country’s demand for housing is met.

Rehda’s immediate past president Datuk Eddy Chen said the build then sell concept could only work in Malaysia if the banking sector is willing to accept a higher risk. At this point, when banks are reluctant to give bridging loans to developers, this is unlikely to happen.

“Chen pointed out that currently, banks would not finance the build then sell concept as it is not their policy to finance the construction of buildings that have not been sold.

“Banks will only extend bridging loans to developers provided we have proof that we have sold between 70 and 80 per cent of the houses. If the concept is implemented, how are developers going to build without loans?” he queried.

“Even those few developers who can afford to implement this concept will only be able to build limited quantities of about 100 units a year.

“If all developers follow this concept, it will lead to speculative building and in time, there will be a shortfall. Although the demand is there, developers would not be able to produce houses in a large volume and this will cause house prices to escalate and go out of reach for ordinary folks,” he said.

Chen pooh-poohed HBA’s suggestion that developers adopt the Australian system. He pointed out that the system is only applicable for high-rise buildings in Australia and the 10 per cent actually goes into a trust account that developers are not allowed to touch until the project is completed. The concept also comes with various clauses that buyers must fulfil, he said.

MK Land Holdings executive director P. Kasi said buyers have to understand that there are different issues that need to be addressed before the concept can be accepted.

“The laws may need to be amended and banks will have to indicate a willingness to fund developers who adopt the concept. We must also be prepared for the fact that less houses will be built,” he pointed out.

He said the current property industry is cash-flow driven, whereby developers sell first off the plan to collect money to fund development, especially where mass housing is concerned, as the risks involved are lower.

He said where the Australian system is concerned, the risks are borne by both the developer and banker. But due to clauses on specific performance, the developer can sue the buyers if they decided to back out after signing the sale and purchase agreement.

“Buyers have more to lose. Besides that, the build then sell concept will result in higher pricing for houses,” he said. Currently, the standard SPA only forfeits the 10 per cent deposit if buyers decide to renege on the deal, provided the property is less than 50 per cent completed.

He said the new concept could be introduced in the future, provided that it is allowed to co-exist with the present system, as this will give people the choice of which type of concept they want. However, he cautioned that the implication of this had to be looked at in greater detail.

“International Real Estate Federation (Fiabci) Malaysian Chapter president Kumar Tharmalingam said the build then sell concept could be implemented but it would see the cost of houses soaring.

He said in order for the concept to work, buyers would have to place a larger deposit for the property of at least 20 per cent. Currently, the downpayment ranges between five and 10 per cent.

“A mechanism would have to be put in place to ensure that purchasers go through with the purchase, irrespective of market conditions,”
he said.