Build-and-sell proposal poses too many hazards to succeed
28/09/2005 The Star

IF the proposed build-and-sell housing concept is adopted, it will have serious repercussions on the building industry.

I would categorically say that the build-and-sell concept, based on the Australian model of 10/90, would be a failure if introduced here.

The Australian model is regulated by the Sale of Land Act 1962 of the State of Victoria. Such a model would favour house buyers but not necessarily provide any advantage in terms of the cost of the house.

For the developer this model would only further compound his problem, notwithstanding the fact that he would still have to comply with existing housing laws and state government policies on bumiputra ownership, mandatory laws on low-cost housing and infrastructure requirements enforced by local councils.

Such a concept would not be a workable model in the context of the Malaysian environment where procedural and government policies differ extensively from Australia.

The Australian model is successful because of the absence of bureaucracy and the efficient mechanism in place for submission and approval for building plans. The normal time required for such approval is about three to six months in Australia compared to the two to three years in Malaysia.

In addition, conditions such as the mandatory 30% low-cost and bumiputra allocation play a significant part in adding to the cost of the total expenditure for the developer. These extraneous conditions are absent in the Australian model.

Under the 10/90 model, purchasers pay a downpayment of 10% of the contract price upon signing of the sale and purchase agreement and the deposit is placed in an escrow trust account (lawyers as stakeholders). The remaining 90% of the purchase price becomes payable only upon delivery of the completed house.

Obviously the house buyer has zero risk and the bulk if not the total risk factor is borne by the developer. From the very beginning the developer will have to use his own or borrowed funds to finance the project. He does not even have the luxury of using the buyer’s 10% deposit.

From the time of submission of the property for approval until the completion of the project, the gestation period is almost five years (assuming building takes two years).

Is it practical and fair for the developer to bear the risk for five years before seeing a return on his initial investment? And what would happen if during the interim period there is a downturn in the property market and the buyer decides to cancel his purchase? The buyer may choose to forfeit his 10% deposit but the developer would now be left without the 90% purchase price.

The likely scenario would be abandoned projects and bankrupt housing developers who are left in the lurch by house buyers in the event of a property crash.

The Housing Ministry must ask itself whether it can dismantle the onerous government and state policies of low-cost housing and the mandatory bumiputra allocation and promote an efficient mechanism to reduce bureaucracy in the submission and approval of building plans.

If the answer is no, then the 10/90 model is not a workable option for our building industry.

RICHARD TEO, Kota Baru.