Build-and-sell system: The pros and cons

01/09/2004 The Star

StarBiz: There are also merits of the system. Are there any proponents for the build-and-sell system? 

Kasi: It is a good suggestion but we have to examine the idea carefully to see how it can work to improve the current situation. I prefer to allow both models to co-exist for a while. The build-and-sell and the sell-then-build models. 

There is some miscommunication on this build-and- sell issue. One of the things we have to look at is where in the world has the build-and-sell model been really implemented and the way the public perceives build and sell.  

It is not true that in Australia or elsewhere that this is what is happening. The actual house is not ready for you to see before purchase. 

What is happening out there is you would pay 10% deposit to buy a home; you don't pay the balance until completion. So the 10% is held by a stakeholder and the 90% is paid at the end of the construction. In Malaysia, it is the private sector that is the driving force behind the housing industry. The Government does not bear the burden . More than 70% to 80% of the houses are delivered by the private sector.  

Not only have we delivered the homes, we have also catered to a lot of social needs like the 30% quota for bumiputra buyers, 30% for low cost, space for schools and other social facilities.  

The industry has worked out an economically sustainable model. 

The strength of our system of the sell-then-build is that we have a track record of 40 years. We are a country that has a Housing Developers' Act, standard sale and purchase agreements and Housing Development Trust Accounts.  

You just have to go to other developing countries like India or China where there are no standard S&P agreements and trust accounts, and see how difficult it is to buy a house and have it delivered properly. They are worse off than we are. 

What we have to understand is the limitations of our present system. There are two grouses I can think of. One is abandoned projects and the other is related to quality issues. Instead of throwing out the whole system, what we can do is see how we can address the two major grouses effectively. Allow both the systems to co-exist for sometime and let the market decide which is better. 

Lim: In my opinion, the build-and-sell system can only apply in Kuala Lumpur. Assuming we own 1,000 acres of land, under the build-and-sell concept, we will need a lot of infrastructure, for example, a treatment plant. In Kuala Lumpur, we have the central sewer lines and all the piping, we will be able to just tap the lines. It is easy. 

Yam: I think it is back to perception again. When people talk about build-and-sell, the problem is actually caused by abandoned projects. This is actually very low in the city; those are probably due to people thinking that fraud is the best way to make money. 

The other issue is, I pay 10% and when the unit is completed, I am going to take a look at it and if the quality is no good, I am not going to pay the 90%. This is totally wrong because overseas, it is about specific performance; you still have to pay.  

In other words, you still have not corrected the quality issue and that is something that the whole industry will have to look at. 

As a consequence, the Construction Industry Development Board (CIDB) was set up but it will take another 20 years before everything gets on an even keel. So the existing Housing Developers' Act is brilliant for a developing country like Malaysia. The problem is enforcement.  

There is no abandonment; the quality issue is something we have to live with because we haven't the skills level.

There are 2,000 developers but if we build-and-sell, I think there will probably be less than 10% around. We have talked to banks about it and they prefer to take on the risk of 300 buyers rather than one single developer.  

If you look at listed companies again, those companies with RM500mil or more market capitalisation is less than 20, which means to say that if you are either a RM300mil market-cap company or less, how many build-and-sell projects can you handle? 

Wong: I think we should take heed the Government's wishes. Of course, being property developers that work towards the build-and-sell system, we all know the problems associated with it – banking is one, the other one is demand. We will only build where there is demand, and where we can sell. 

As Kasi said earlier, some of us are doing it together – we have those who build-and-sell and others who sell-and-build. In the case of high-rise apartments, most of the time, we are sold out even before we start. But to the other developers, when you are building a multi-storey high-rise, by the time you sell 50% of it, you will still need to build it all. That, in some ways, is build-and-sell, too. 

We must take up this challenge as per what the Prime Minister said. Of course, to the house buyer, it makes a lot of sense for them to actually see what they are going to buy.  

StarBiz: Some developers have stated that the current financing and government approval systems do not allow for a build-and-sell system to be implemented. How can these concerns be addressed? 

Kasi: The public’s expectations seem to be that they can buy completed homes. The Government has come out to say that it would like to encourage the build-and-sell concept. To me, there is nothing wrong with the concept. It can work on a smaller scale and in certain locations.  

We can give it an opportunity to be practised in the industry in a limited way, and build up the system. including the financing means. 

Currently, banks are not used to funding projects which do not have confirmed sales.  

We have to develop the financial system to get around that constraint. By starting now, maybe in 10 or 20 years’ time, we may have a more developed system for the build-and-sell.  

One of the things I suggested is that if the Government is very serious about this concept, it can actually come up with some incentives to encourage developers to implement the new system. For example, it can give some tax rebates for people who practice build-and-sell, change some rules to say, if you do build-and-sell, the approval is faster, low-cost content is lower, etc.  

To me, I am not for it or against it. I am merely saying that if public expectations are there and the Government wants it, we should try and see.  

At the end of the day, we are property developers meeting market demand. We have to meet market expectations and the Government’s aspirations. If that is what the rules are and what the market wants, we have to develop our products to meet them.  

Koh: I think the build-and-sell concept will be attractive, you will get premium prices. That is sufficient for developers to try it out.  

I agree with Kasi that the Government need not come up with a law to get everybody to abide by this concept.  

If you look at high-rise buildings, they are very capital-intensive and if you do that, you will shift the risk too much to the banks. I am not sure if the banks are prepared at the moment to take all the risks of a development project. 

Yam: The banks would most probably move to the UK or Australian models where they will give bridging finance but the drawdown usually will be based on about 65% to 70% sales.

Given the Malaysian context, if I have pre-sold the system, then I do not need your money. I would sink all the cost into the debt financing. It is a far higher price because they charge a commercial rate of 7.5% to 8% than if it is funded by the buyer, which at the moment, is 1.8% to 2%. So there is a difference of 6% which we don't charge and that savings could subtly be passed back. 

Kasi: One of the complaints of buyers is that they get all kind of promises. I always tell developers to under-promise and over-deliver. Traditional public perception is that property developers over-promise and under-deliver. This is really the main grouse of purchasers. 

If you can finish the house and they can see it, it is good for them but funding need not necessarily have to be a problem. We are used to the current system of financing. We have to understand what the banks want.  

They do not want to carry too much risk if the houses are not sold. If you want to do a build-and-sell system ... if we encourage it ... there could be intermediaries who come in and actually underwrite the construction and take on the risk. 

Gan: I think the real issue here is whether ultimately, the rights of the purchasers are protected. I think it was the original intention of the Government when it wanted to introduce the build-and-sell approach. But as you can see from all the comments received around the table, that it may not necessarily, at the end of the day, benefit the purchasers. 

First of all, if you want to take delivery of the house after two or three years, and the developer is allowed to price according to the prevailing market prices, then the purchaser would effectively be paying a much higher price than under the current concept of progressive dealings. 

And if the other concern is about protecting house buyers in terms of non-delivery of houses, I think that should already have been taken care of as investors have the option to buy in the secondary market.