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Build-and-sell system: The
pros and cons
The Star 01/09/2004
Starbiz: There are also merit 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 net 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 far 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 awn 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 law 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 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 consequent, 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 300 buyers rather than one single developer. If you look at
listed companies again, those companies with RM500mil or more market
capitalization 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 a where there is demand, and where we can sell.
As Kasi said earlier, some of us are doing it together – we have those whose
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 more developed system for the
build-and-sell. One of the thing 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 Government's aspirations. If that is what the rules are and
what 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 the savings could subtly be
passed back.
Kasi: One of the
complaints of buyers is that they get all kind promises. I always tell
developers to underpromises 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 build-and-send 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 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.
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