Build-then-sell: Are we ready?
03/08/2004 www. theedge.daily My Space: By Au Foong Yee

Developers can hardly be considered an easily excitable lot. But if there is a topic that's sure to get them agitated, it must be the proposal that they first build homes before putting them on the market.

Make no mistake about the intensity of feeling that the proposal is generating. Some developers — though, I am certain, only a small number — would certainly welcome it. But the majority would be aghast as the plan, if adopted, would show them the exit from the industry.

There is no denying that the government has noble intentions in rekindling the discussion on the build-then-sell concept which, as the local housing fraternity would attest, has been bandied about for many years now.

This time around, however, the government appears serious enough to have the Housing and Local Government Ministry compile a report on the subject for consideration by the Cabinet. According to its minister Datuk Seri Ong Ka Ting, the report will comprise the pros and cons of the concept in addition to feedback, ideas and suggestions from various parties.

As far as the property-investing community in general is concerned, the build-then-sell proposal is a godsend. Most consumers, it appears, would like to see a stop to developers selling homes off plans. That's understandable: The nightmare faced by buyers who ploughed their life savings buying a house only to end up with a shoddy piece of work is a not uncommon experience.

Then, there are others who found themselves in a quandary because of the late delivery, or even non-delivery, of their homes.

So, is buying a completed home the solution? Yes and no.

Let's examine the reasons why the government is considering getting developers to build homes before selling them, a concept which is actually not alien to Malaysia. A handful (a very small handful) of developers are already doing this.

If the proposal is made into law, in effect, the market would be rid of shoddy developers overnight and complaints from homebuyers would vanish. But at what cost to those whose interest is at the core of the whole discussion — the consumers? You and I?

Let us sit back and imagine that from tomorrow, there will be no more new buy-then-build home launches. Since it will take two to three years before the next new launch hits the market — that's how long it normally takes to build landed and strata-tilted homes, respectively — what happens in the meantime? According to the Real Estate and Housing Developers' Association of Malaysia, the country needs between 100,000 and 150,000 new houses every year.

The immediate "artificial" shortage will push up demand for homes and, in turn, prices. Another consequence is that a significant number of developers would call it a day simply because they do not have the financial muscle to first build before selling the homes.

Thus, the strong boys will get stronger while the weaker (not necessarily bad) boys will disappear.
Ironically, not all the big boys will be exactly gleeful either, in particular those with huge landbank, who incur huge overheads that's funded by selling and building several hundred or even thousands of homes every year. That will no longer be possible in a build-then-sell environment. So, what will happen to such companies and those on their payrolls?

The bleeding does not stop there. Let's not forget the well-being of those dependent on the more than 150 upstream industries involved in property development — bar benders, masons, mosaic and tile layers, carpenters, electricians and others.

Now, what is going to happen when the hand brakes are pulled on property development activities? I'd rather not imagine.

The way out
While the woes of home buyers must not be ignored, we must not forget the source of the problem. Much has been said about the government's move to blacklist developers who have betrayed the trust of homebuyers. The fact that the black sheep of the industry are still around says much.

Don't stick to merely blacklisting errant development companies. Haul up the culprits and make sure that these people pay one way or another. In extreme cases, make sure that these black sheep are never allowed to surface in the property development arena again — be it on their own or through their nominees. We know that only when the punishment is sufficiently painful will it yield the desired results.

A highly respected and successful developer friend who is worried about the adverse implications of the build-then-sell concept on the industry's health has this suggestion: Have specific complaints such as shoddy workmanship addressed by a body such as the Construction Industry Development Board.
Alternatively, the housing tribunal could appoint a panel of arbitrators comprising respectable institutions such as the Architects Association of Malaysia to arbitrate on the complaint. For this to work, the complainant will have to pay a cash deposit which will be forfeited if the complaint is found to be untrue. Conversely, an erring developer would pay for the arbitration fees plus make good all the shoddy workmanship if the complaint is found to be legitimate.

The big boys
True, the build-then-sell practice works in some countries, but to be fair, these countries boast a mature housing market where selling hundreds of new homes at one go is almost unheard of.

A case in point: During a study tour headed by a Malaysian minister to the UK a few years ago, a "big" developer there was defined as one that could build more than 100 houses! In Malaysia, the majority of developers are in that league and they are not considered big by our standards.

Ready houses aplenty
To all intents and purposes, there is currently no lack of completed homes for sale. There's an active secondary market with ample choice, as is the primary market. So, why the complaint about buying off plans?

For those who don't fancy a lived-in house, there's an abundant supply of new homes. It is common knowledge that 30% or even more of buyers at some launches are investors waiting to cash out, with a premium, the moment the units are ready for occupation. Indeed, this group of investors deserves the capital gain — don't forget that they took the risk in the first place.

The prospect of attractive capital gains explains why potential buyers have been known to queue for several days and nights just to buy a new house that has yet to be built in sought-after locations.
In the same context, we can expect developers who build before selling homes to work into their tags a similar premium.

All things considered, it is too premature to force developers to build before selling. It's a step that's too drastic — to the point it will hurt the market and those dependent on it for their livelihood. Any change from current practice, if at all, should be gradual, and made less painful, for both consumers and the industry.

Admittedly, there are black sheep in the industry. But why penalise everyone else? Deal with the wrongdoers without fear or favour.