Build and sell or sell and build?

30/05/2004 NST-Focus

Concerned about the plight of house buyers in abandoned housing schemes Prime Minister Datuk Seri Abdullah Ahmad Badawi has indicated that developers may no longer be allowed to sell houses before they are built. YONG TIAM KUI, K.T. CHELVI and ANNA MARIA talk to house buyers, the people in the industry and others. BUILD and sell? No way, say developers. That should be the way, say the authorities and consumers.

Why not a middle way? Perhaps, the less stringent Australian variant.

There’s a good deal of debate on whether the housing industry should adopt the "build-and-sell’’ concept. Prime Minister Datuk Seri Abdullah Ahmad Badawi has said it was not right that house buyers have to pay before they can get their houses.

Consumer advocates are, of course, 100 per cent in favour of the concept because they think it could solve most, if not all, of the problems that have bedevilled Malaysian house buyers, including late delivery of houses, substandard workmanship and abandoned housing schemes.

Housing developers, however, are adamantly opposed to the concept because the current "sell-and-build" system favours them in every imaginable way.

Bankers and economists, however, warn that the adoption of the "build- and-sell’’ concept could be detrimental to the interests of house buyers as it would almost certainly raise the purchase price of new houses.

The idea of making it compulsory for developers to build houses before they sell them has been around since Tun Abdul Razak’s time, but developers have always argued that the housing industry is not ready for such a major paradigm shift.

While acknowledging that the "build-and-sell" concept could help address house buyers’ complaints about late delivery and substandard construction work, Real Estate and Housing Developers’ Association president Datuk Jeffrey Ng Tiong Lip claims that it could lead to a drop in the number of new houses being built every year and force out small-time developers .

"The country needs between 100,000 and 150,000 new houses per annum. It is unrealistic to expect developers to build that many houses and face the risk of not having buyers.

"Adoption of the ‘build-and-sell’ concept will result in a significant reduction in house building and market players, and this could have potentially severe social and economic implications," says Ng.

Developers also claim that the ‘build and sell’ concept would make it more difficult for them to secure bank loans to finance housing projects because it involves greater risk. They also warn that it could cause the prices of house to go up.

"The ‘build-and-sell’ concept would require major changes in financing of development projects as financial institutions would be unlikely to lend when they cannot gauge the viability of projects.

"Even under the present ‘sell-and-build’ system where developers can demonstrate viability based on sales, banks have been known to be reluctant to lend when conditions are not risk-proof," says Ng.

Bumiputra Commerce Bank Berhad’s executive vice-president Nik Hassan Nik Mohd Amin says banks will only loan money to developers who can show that they have sold 80 per cent of their housing units.

"With the ‘build-and-sell’ concept, we won’t know how many units would be taken up by buyers. The banks would be taking a higher risk. With higher risks, come higher interest rates," he adds.

And, that’s not all. Once the "build- and-sell" concept is made mandatory, developers would no longer be getting progressive payments from buyers.

This would force them to take bigger bank loans to finance their projects and consequently pay even more interest to the banks.

Nik Hassan says capital requirements of developers could increase by as much as 400 per cent.

"Developers would have to get a bigger loan to start a project and interest costs would have to be passed on to buyers.

"I am not sure they will be receptive to this," says Master Builders Association Malaysia president Lau Mun Cheong.

Nik Hassan speculates that the purchase price of housing units could go up by at least 20 per cent!

Some developers also argue that the "build-and-sell" concept isn’t really necessary because the vast majority of house buyers are more or less satisfied with their purchases.

They say the current "sell-and-build" system has generally worked well for the country and helped meet the national objectives of building homes for Malaysians and generating economic growth.

Developers also stress that the Housing Developers (Control and Licensing) (Amendment) Act 2002 and the Tribunal for Homebuyers’ Claims already provide a lot of protection for house buyers.

In other words, why fix it if it’s not broken?

However, advocates of the "build- and-sell" concept point to disturbing facts like shoddy workmanship, delivery of vacant possession without certificates of fitness for occupation and, most troubling of all, the large number of abandoned housing schemes which clearly indicate that there is something rotten in the housing industry.

Housing and Local Government Ministry statistics indicate that, up to 2002, there were 544 abandoned housing projects involving 125,649 units and 80,070 affected house buyers.

National House Buyers Association secretary-general Chang Kim Loong says the association is "strongly in support of the ‘build-and-sell’ concept because it is a safer and more secure mode of buying a house".

But, being reasonable people, Chang says association members are aware of the fact that the "build-and-sell" concept is probably too big a paradigm shift for the local housing industry.

So they are suggesting that it adopt the less stringent Australian variant. He says the Australian "build-and-sell" model requires buyers to make a down payment of 10 per cent upon signing the sale and purchase agreement.

But, the developer has no access to this money as it is held in a trust account by his lawyer.

When the house has been built and the certificate of fitness is issued, the buyer is given three months to secure a loan to pay for the remaining 90 per cent of the purchase price.

The buyer has the right to terminate the sales and purchase agreement and ask for a refund, including any interest that may have accrued, if the developer does not complete the project in time or if the house does not meet industry standards.

"We see this concept as a fair, equitable and practical variant of the absolute ‘build-and-sell’ concept," says Chang.

"The vendors are assured of the number of buyers who have paid the 10 per cent deposit and they can then concentrate on building good homes and delivering them in good time.

"The buyers are not exposed to the risk of getting a house with substandard workmanship or, in a worse-case scenario, facing an abandoned housing project after having paid the bulk of the cost.

"We are not insisting on the 10 per cent figure. We are also open to a 20 or 30 per cent down payment."

Federation of Malaysian Consumers’ Association president Professor Datuk Hamdan Adnan acknowledges that it won’t be easy for the country to adopt the "build-and-sell" concept all at once.

But, he stresses that we have to at least start moving in that direction.

"It’s something that Fomca has been campaigning for years. If we cannot have houses that are 100 per cent ready, we can try 50 per cent," says Hamdan.

At least that’s a start. Now, they are selling houses on hot air and artists’ impressions!

"I hope the Government won’t back down this time. This concept has been around for a long time. Tun Abdul Razak also wanted to implement the concept, but he stopped talking about it when people said small-time Bumiputra developers would be affected."

Chang says it is disingenuous of developers to claim that it would be difficult for them to secure bank loans and that small-time developers who are cash poor would be pushed out of the industry if the "build-and-sell" concept is adopted.

"It is a fallacious argument. The question is the viability of the project. If the project is viable, the banks will finance it.

"The question of whether you have money or not is irrelevant. Even cash-rich developers resort to financing. They don’t use their own money."

Chang says the association expects developers to fight tooth and nail to maintain the "sell-and-build" status quo because it is greatly in their favour.

And, like Hamdan, he says the association is hoping that the Government has the political will to make the housing industry adopt the "build-and-sell" concept because house buyers have been getting a raw deal for far too long.

"Developers are businessmen. As businessmen they have to be prepared to face the risk that their projects could go belly-up. Why should house buyers have to share that risk?" he adds.

Chang says the argument that the country cannot afford to adopt the "build-and- sell" concept because it needs to build 150,000 new houses every year is even more laughable.

"It shows that developers don’t have to worry about building houses that can’t be sold. If we are reluctant to adopt the ‘build-and-sell’ concept in such a lucrative market, we will never be able to adopt it."

MIDF Bhd senior economist Azrul Azwar says there will be far fewer abandoned housing schemes once the "build-and-sell" concept is implemented. This is because developers would be forced to be extra careful to ensure that development projects are economically viable before they proceed with them.

"Since a huge portion of their capital is currently financed by house buyers, not many developers actually take the trouble to conduct a thorough feasibility study on new projects.

"However, I think they will be more careful if they have to use their own money first," says Azrul.

Stockbroking house MIDF Securities analyst Asnul Badrisyah Morni says the developers are probably right when they say that the "build-and-sell" concept could affect the growth rate of the housing industry as it would discourage developers from developing housing projects in non-prime areas and reduce the number of players in the market.

But, he adds that such a situation could prove to be advantageous in the long run, as it would weed out bad developers and presumably result in better quality houses for buyers in the future.

Associate Professor Dr Goh Ban Lee, meanwhile, says the "build-and- sell" concept should not be imposed on the housing industry, even though it was a good concept, because nobody knows how that will affect the industry.

"Don’t punish the whole industry just because a few developers are causing problems to house buyers. The ‘build-and-sell’ concept is an ideal and it should be encouraged.

"But it should not be legislated. In will be even worse if you can’t enforce it."

Goh, a social science lecturer at Universiti Sains Malaysia, says a lot of the problems that we are seeing in the housing industry can be minimised, if not eradicated completely, if existing laws and regulations are seriously enforced.

"The housing industry is one of the most heavily regulated industries in the country. The main problem is we don’t enforce those regulations," he adds. "The Housing and Local Government Ministry must enforce existing regulations. That would solve a lot of the problems."

Chang, however, says that kind of enforcement would only be possible if the Housing and Local Government Ministry employed thousands of enforcement officers and that would be extremely costly.

"Why should the Government spend so much money on enforcement when the ‘build-and-sell’ concept will solve the problems?" asks Chang.