Rehda explains why developers are saying ‘no’

01/10/2005 NST

The Government’s move to consider adopting the build-then-sell concept of housing delivery, a model the National House Buyers Association argues has been successfully adopted in several countries, notably Australia, has met with strong opposition from the Real Estate and Housing Developers’ Association (Rehda).

Here, its president, Datuk Jeffrey Ng Tiong Lip outlines 11 reasons why the country can’t afford to implement it just yet:

1. Build-then-sell should not be made mandatory, but it can co-exist with the present system of sell-then-build, a proven method that has successfully delivered more than three million houses to the nation.

House buyers must be given the right to choose whether to buy completed houses in the primary or secondary market, or units under construction, based on their needs and affordability.

Thousands of completed houses are made available to buyers to choose from under the present system, which essentially is what build-then-sell is all about!

Ultimately, the co-existence of both systems and the success of any one system will be determined by market forces of demand and supply. If all house buyers prefer to buy completed units, then developers will eventually move in that direction.

2. Under the proposed 10:90 model, the construction industry will shrink further in terms of business activities and employment. Demand for building materials, professional services and related downstream businesses will decline. Construction jobs will be at stake, manufacturers of cement, steel and other building materials will need to adjust to lower capacities and architects, lawyers, engineers, surveyors will need to retrench in order to survive.

3. House prices will spiral upwards between 30 and 50 per cent and annual housing production will be reduced by at least 60 per cent.

The gap between house prices and household income will widen and housing affordability will need to be addressed.

Prices of Government-controlled low- and low-medium cost housing must be increased as economies of scale savings and cross-subsidies cannot be sustained.

Limited resources will force even large property developers to scale down the size and number of their projects.

4. Many industry players and trade associations do not support the build-then-sell concept. They include Pertubuhan Akitek Malaysia, Institution of Engineers Malaysia, Association of Consulting Engineers Malaysia, Master Builders Association of Malaysia, Institution of Surveyors Malaysia, Malaysian Institute of Planners, the Malaysian chapter of the International Real Estate Federation (Fiabci) and the Association of Chinese Chambers of Commerce and Industry Malaysia.

5. Financial institutions are not likely to support small property developers with weak financial rating, or even projects in small towns or in non-prime locations.

Credit risk exposure will be definitely higher for these types of borrowers. Similarly, project loans under build-then-sell will carry great credit risk compared to bridging loans because lending criteria is based more on financial/market feasibility assessment rather than pre-sales achieved before the funds can be drawn down.

6. The amended Housing Development Act is now very strict and punitive against errant developers. Early warning signs of problematic projects can be readily detected by the Ministry of Housing and Local Government. This Act is now in the process of incorporating more amendments to give even greater protection to house buyers in 2006.

7. The ministry should exercise more effective enforcement against errant developers and publicise the punishments.

8. The proposed 10:90 model is a copy of the Australian system. It is all too simplistic to embrace a foreign idea just because it protects house buyers.

In Australia, property developers are not forced to subsidise low-cost housing, make capital contributions to utility companies, build infrastructure works or comply with Bumiputera quota and discounts.

However, Malaysian developers are very much involved in the socio-economic engineering of housing the population via the subsidy concept.

9. In times of recession, the housing industry is one of the key engines of growth to drive the economy. With the expected smaller number of property developers in the country and lesser housing production due to limited financial resources, contribution to economic recovery will be slower and lower.

The population is still growing and housing needs reflected in the 9th Malaysia Plan are unlikely to be met under the build-then-sell method.

10. The cost of doing business will increase yet again due to higher financing costs. Property developers will be exposed to the further risk of house buyers reneging on their Sale and Purchase Agreement obligations after the houses are completed. All these additional costs and business risks will be factored into higher house prices.

11. There must be a balance between the national economic interest and a small group of vested interests.

Rehda fully agrees that house buyers should not be made to suffer hardship caused by errant developers. Tough laws to protect buyers are in place and it is a matter of greater effort to achieve more effective enforcement against non-compliant developers.

In any case, if house buyers do not trust the existing legislation to protect them under the present system, they also have the choice to buy completed houses with the Certificate of Fitness for Occupation issued from developers or in the secondary market. So, it is important to acknowledge that there are many house buyers who are satisfied with the present system delivered by responsible developers in terms of product satisfaction, price affordability and lifestyle creation.

Rehda is of the view that changing the present system to weed out errant developers and hurting all players in the industry at the same time is like “using a sledge hammer to kill an ant”.