Tread carefully on 'build-then-sell'
05/10/2005 www. theedge.daily My Space: By Au Foong Yee

Politicians, the Malaysian property and related trade and professional bodies, investors and prospective buyers continue to debate the virtues of the build-then-sell way to market homes as opposed to the sell-then-build concept we have grown up with as this issue is going to print.

Members of Rehda (Real Estate and Housing Developers' Association Malaysia) are joined by the likes of Fiabci (International Real Estate Federation) Malaysian Chapter in their disagreement to the build-then-sell model that has been suggested as a solution to weed out errant developers.

Some quarters have proposed instead a 10:90 variant model practised in Australia, where buyers pay just 10% towards the purchase initially, with the rest to be settled upon completion of the property.

Rehda says many industry players and trade associations do not support the build-then-sell practice. It quotes a list that thus far includes PAM (Malaysian Institute of Architects), ACCCIM (Associated Chinese Chambers of Commerce and Industry Malaysia), ISM (Institution of Surveyors Malaysia), MBAM (Master Builders Association Malaysia), ACEM (Association of Consulting Engineers Malaysia), IEM (Institution of Engineers Malaysia) and MIP (Malaysian Institute of Planners).

The prospect of buying a completed house — without having to experience the nightmare of being saddled with a home not built to specifications or that is simply abandoned — sounds good. So, does that mean bye-bye errant developers, bye-bye problems?

Unfortunately, life is not so simple. Let us look at the big picture for the benefit of the man on the street, whose well-being is what this discussion is all about.

What are the pros and cons of the build-then-sell concept, besides the notion that it will wipe out rogue developers?

The fact is that unlike the days when the property market was sizzling, developers are working much harder and enjoying thinner margins. Competition is intense while the market is definitely more discerning.

What would happen if the government were to put a stop to buying homes off-the-plan completely? Or, go with a 10:90 variant?

Supply and pricing
It doesn't take a genius to figure out that supply will plunge. Rehda president Datuk Jeffrey Ng, who puts the housing production last year at about 200,000 units, says supply will dry up by as much as about 60%. Consequently, prices would escalate, Rehda reckons, by as much as 30% to 50%. That would be good news for those who have accumulated a load of properties, but bad news for the rest!

This will be a likely scenario because even the big players will be forced to scale down their activities because of the funding issue. The smaller, though not necessarily insignificant developers — unless they have sufficient financial muscle — would have to call it a day. As a banker friend puts it, financial institutions will only bank the established names.

So what will become of modest development projects in the smaller towns or less sexy locations? For a financial institution, the credit risk with the build-then-sell option is far higher as it will be based on financial/market feasibility assessment rather than pre-sales achieved before funding is drawn down. Who will then meet the housing needs of the folks in small towns?

In the meantime, the gap between house prices and household income will widen. The government-controlled prices of affordable homes will have no choice but to creep up in tandem as sharply reduced building activities will have an impact on economies of scale and cross-subsidies (low-cost housing, infrastructural costs, bumiputera quota and discounts).

Even with a 10:90 variant, developers of mass housing would find themselves exposed to the risk of buyers reneging on their sales and purchase contracts after the units are completed for such reasons as weaker market sentiments or higher interest rates.

All these additional costs and business risks will, needless to say, translate into more expensive homes.
By how much more, one might ask. Would the small group of developers that are able to continue their activities if the build-then-sell option is adopted form a cartel and dictate the prices of new houses?
It may also be too simplistic to compare the Malaysian property scene with that of Australia's, where the 10:90 variant is practised. As Rehda's Ng points out, Australia operates on a different playing field.

There, property developers are not forced to subsidise low-cost housing, make capital contributions to utility companies, build infrastructure works and comply with bumiputera quotas and discounts. In short, the Australian system functions on a different set of operating costs.

All said and done, given our expanding population and housing needs as set out in Ninth Malaysia Plan, it is questionable whether the target can be met should the build-then-sell concept be made mandatory.

The greater economy
Now, look beyond housing needs. What happens when property development — a proven key engine of economic growth particularly in depressed times — is largely downsized?

The property sector covers 140 or more spin-off industries. If the sector is in trouble, it is not just the developers, their immediate staff and business associates that feel the brunt but also the thousands dependent on the industry.

You have the architects, engineers, quantity surveyors, engineers, clerk of works, contractors and sub-contractors. There are the cement plant workers, lorry drivers and workshop employees who service and repair the lorries. What about the brick layers, painters, grille makers, landscape designers, awnings fitters and air-conditioner manufacturers? There are also those who make a living from providing interior finishings and other fixtures.

What is to become of them if the housing industry were to shrink by, say, 60%. What about the listed property development companies that build aggressively for the masses and businesses that ride on the industry?

Of course, not all developers are troubled by the build-then-sell possibility. Those who are financially strong, offer good branding and build for niche upmarket clientele should not worry. Some of them are already practising the build-then-sell concept or the 10:90 or 20:80 financing variants, with bankers more than happy to partner them. Should the build-then-sell option be made mandatory, this group of developers will, no doubt, be in the forefront of activities.

Best of both worlds
In reality, the build-then-sell concept already exists in Malaysia. Rather than buying off-the-plan, one can opt to buy a completed home from the secondary market.

And if anyone has a grouse against those who are seemingly making money from the sub-sale of a new home, surely these investors cannot be faulted. After all, they took a risk two years earlier when they bought the unit off-the-plan. They bet on the developer and the market and were proven right. If the market trend is reversed, the original buyers wishing to cash out would be forced to do so at a discount. This has happened before.

So, we have in the market now the sell-then-build option, the 20:80 variant as well as the build-then-sell homes. Why do we need to further regulate the industry?

Of course, errant developers exist but is further regulation of the industry the answer? The legislation is in place. In the words of Rehda's Ng, the amended Housing Development Act is "very strict and punitive" against errant developers.

For now, the increasingly popular serviced apartments — residences built on commercial land — are not within the purview of the Act, but probably by next year, when the necessary amendments are in place, they will be covered.

What is required is for more effective and transparent enforcement against errant developers. Act without fear or favour. For instance, don't just stop at not giving developer's licences to errant companies — go deeper and penalise those behind these companies. After all, it is no big deal to close a company and register a new one using nominees.

The Housing Tribunal is another recourse for aggrieved house buyers. Publicise the action and penalties taken against errant developers. Sometimes, it is not enough to act against the guilty; one has to be seen to act. Focus on the bad hats and how to deal with them effectively. Do it without taking away the option from the public whether to buy a house off-the-plan or one that's been completed.

Rehda has described the proposed build-then-sell option as "using a sledgehammer to kill an ant". That's worth some thought. Let's not corner ourselves only to realise too late that the damage is irreversible.