A skip and a hope away

11/09/2004 NST-PROP BY ANDREW WONG

THE voices of hope are getting louder and it appears to be a matter of "when" rather than "if" a build-then-sell method of housing delivery will be implemented and made part of the development industry's selling template.

Certainly, that's call for celebration all round, even if the Government's backroom boys are still trying to find ways to implement it. After all, market commentators already seem to have found the solution - it was a system I too suggested shortly after Prime Minister Datuk Seri Abdullah Ahmad Badawi made the call in May for an end to the present method of selling before building, which has caused of a lot of nightmares and heartaches for buyers. 

Since then, the system has been given all kinds of names - some call it the Australian approach; others, the 10:90 concept as it involves a buyer placing a 10 per cent deposit for a developer unit into a stakeholder account and only raising the balance upon its completion.

As opposed to the manner by which we progressively pay for homes at strategic points in the construction process, it's far more protective of the welfare of buyers. But it's not new. The Aussie model was something I first described at length in an editorial during the mid 90s. At that time, though, it was not in vogue and merely met with polite nods but not much else, even though it was said during an era that was responsible for a lot of abandoned projects and defective houses.

What's different in this day and age is that the crises towards the end of the 20th century put buyers into the driver's seat of the property sector and gave them voice. And, with the Government listening
attentively, the disgruntled weren't about to miss the opportunity to make changes.

That's brought us to where we are today... a skip and a hope away from adopting a build-then-sell method of delivery. Only thing is, while trying to overcome some issues, could it cause new problems?

Before I play devil's advocate, let me point out that nobody put any gun to my head to "take sides", nor do I think issues such as getting stuck in an abandoned or defective scheme "won't happen to me". Indeed, if Selangor Mentri Besar Datuk Seri Dr Mohamad Khir Toyo can be a victim, it can happen to anybody.

As I said in my May editorial, I too don't want frayed nerves and bitten finger nails as I wait for my yet-to-be-delivered property to be finished in the way it was promised in the glossy brochures. But at what price?

The Rating Agency of Malaysia said in a recent report that the 10:90 concept could achieve three things: Force industry players to place greater emphasis on purchasers' requirement thereby putting an end to sub-standard quality; prevent overhang from recurring; and put the onus on developers to carry out more comprehensive surveys to ascertain demand before building.

The first objective is a given - if buyers don't like what they see, they can seek remedy in the form of specific performance before paying the balance of the purchase price. The other two, though, need examination.

Overhang is a consequence of over-approvals by the local authorities and bridging financiers and so can be controlled by the imposition of freezes of certain property developments or the denial of loans.

As for the need for comprehensive studies to determine demand, this should be tied back to the application for approvals stage. Without a proper qualified report undertaken by professional valuers, there should be no green light.

Furthermore, there are other courses of action that can be taken. The Real Estate and Housing Developers' Association (Rehda), for instance, recently suggested that insurance companies offer policies to developers to cover the risk of their project becoming abandoned.

"If the project is abandoned for whatever reason," said Rehda's president Datuk Jeffrey Ng, "house buyers will be protected. They will either get the final product or their money back."

Selangor Mentri Besar Datuk Seri Mohamad Khir Toyo also made a suggestion that, if implemented, would see the State's developers depositing 40 per cent of their overall development cost with a bank before land conversion is carried out.

According to Khir, this would ensure that a housing project is completed (more details in related story). Since there are courses of action for these two purposes, applying the 10:90 concept could be akin to using a bazooka to bring down an army of one.

Even then, I need to ask, if buyers are so worried about getting stuck with an abandoned or defective product, why don't they avoid buying from developers altogether and source stock from the secondary market featuring used and completed properties instead?

It's not because there aren't enough to go around. According to Government statistics, of the 164,723 houses worth over RM23 billion that changed hands last year, only 20-odd per cent or 38,472 units came from developers valued at RM4.8 billion.

The answer could lie in the way individual used houses are currently promoted - largely on an ad-hoc, private treaty basis by real estate agencies without the benefit of massive marketing hypes to excite buyers as developers are so clever in doing.

There's another explanation: Quite simply, buyers are tempted by primary development stock for its tendency to enjoy greater capital gains compared to units which can be seen, touched and inspected. In short, buyers want to play the no risk, no gain, game. Some have lost, and are saddled with bad stock, yes, but what if the "risk" element was eliminated with the adoption of a build-then-sell approach - would it mean less gain and subsequently, less interest to buy?

RAM answered the question by saying the 10:90 method would bump up prices by at least 7.5 per cent. It went on to say that "those with fairly strong purchasing power may not be too perturbed... but buyers in the low-to medium-income brackets could feel a much sharper pinch".

So true. Based on RAM's estimate, a RM150,000 house would escalate to RM161,250, giving rise to an additional RM80 in loan repayment every month, or almost RM1,000 in a year, which would be equivalent to a one-month loan repayment based on the sell-then-build price of RM150,000.

However, RAM's expected increase, calculated simply by carrying the financing cost of a house over two years, has not considered many other facets. In a developing nation such as ours, building a house is only part of a developer's duty. In many cases, especially in new townships, it also has to clear the land, create roads, drains, low-cost houses and a gamut of other expensive infrastructure. The only way a developer gets to pay for these items is through the profit it makes by selling its products.

Without the ability to derive revenue in stages, the developer would have to carry millions of ringgit in facility cost till completion, which would incur, I think, more than a 7.5 per cent increase in house price.

Furthermore, although RAM said the system would "weed out smaller `niche' players, thereby reducing competition", it didn't factor on what such an impact would have.

Datuk Michael Yam of Sunrise Bhd said in a recent report that with the build-then-sell, the number of developers that would be able to operate could shrink from the present 2,000 to "less than 10 per cent".

Fewer builders could mean the return of a developer-led market where buyers would be exposed to less choice - and hence competition, leading to less innovations - as well as prices that would include premiums to make it attractive for developers to stay in the game.

The fact is, until we have reached the tail end of our agenda to create a developed country and a fully-housed population, a build-then-sell approach that employs the 10:90 or whatever other concept is only suitable if it applies to "plug-and-build" projects. These are small niche schemes that can be connected straight into an area's infrastructure without the need for extensive improvements.

For township-type ventures involving the creation of thousands of units a year on virgin tracts of land, the method would most likely thwart any intention a developer has to house the masses, causing it to focus attention on other areas of development that will not be so financially risky or exhausting.

Like many other innovations in property development, a plan such as build-then-sell can survive only if it starts at the top of the housing hierarchy (where prices are high and the rewards, lucrative) and later be permitted to filter down the ranks.

This complements concepts such as gated-and-guarded living as well as landscaped townships that have been introduced in recent times.

Quite likely, opinions against the build-then-sell strategy will not go down too well with certain groups who want to see an end to errant developers and short-changed buyers. I too harbour the same desire, but if it is to come at the expense of higher property prices and fewer choices, then a decision has to be made between the lesser of the two evils.

Different though our opinions might be, our intentions are the same: To find solutions to make our development processes more effective and less harmful. With the industry all walking the same walk, it's a matter of time before we find the right path.