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Pushing for change
27/05/2006 Published in NST-PROP A Buyer Watch Article by National House Buyers Association

Related article: More laws doesn't mean less abandoned projects

A look at Housing Minister Ong Ka Ting's concerns about whether the Build-Then-Sell system is good for the country

The latest news on whether the Build-Then-Sell (BTS) method of housing delivery will be adopted in the country is that Housing and Local Government Minister Datuk Seri Ong Ka Ting's working paper on it has been finalised for presentation to the Cabinet. However, no mention has been made on when this will be.

At a recent press conference, Ong said, "There are many things to consider, including the present and past systems. But what is important is to ensure that buyers' interests are protected, and that the development of affordable houses is not curtailed."

The Cabinet, he said, has to consider three key factors before giving BTS the green light:

1. That the availability of affordable houses would not be disrupted;

2. That it would provide better protection for house buyers; and

3. That it would not hamper the growth of the housing industry through a lack of capital and financing difficulties.

In arriving at its conclusion, Ong said the Cabinet would take note of the views of all interested parties, especially developers that have been critical of the concept due to capital and house pricing issues.

We at the National House Buyers Association (HBA) understand that the ministry has to balance the interests of buyers with that of developers in a manner that would not jeopardise the growth of the housing industry.

However, to give perspective to this and the other concerns raised by Ong, we would like to give our views on the following:

Affordability and availability

The argument that house prices would escalate because of BTS is based on the premise that:

The full system is adopted - in other words, developers can only make sales after their houses are completed; It would lead to a reduction in the number of houses being built because srnaller developers with weak financial capabilities would be put out of business. And, in the face of lower supply, strong demand would push prices up; and Developers need to carry the cost of financing a project throughout the construction period and subsequently pass this off to buyers.

The HBA contends that this argument is flawed. As a lead-in towards the adoption of the full BTS system, we have recommended the employment of a 10:90 system where buyers need to pay 10 per cent of the purchase price upon signing their Sale and Purchase Agreements with the balance 90 per cent due upon completion, of their properties.

This is a practical variant to the progressive payment schedule currently in force under the Sell-Then­Build (STB) method as buyers would be insulated from the risk of project failure or abandonment.

For developers, they can continue to obtain bridging finance for their projects from banks, which would be able to operate in a safer environment as the project sites would remain under their lien until the houses there are completed.

It is preposterous to suggest that smaller developers would go out of business with the 10:90 mode of BTS. For starters, bridging finance is an integral aspect of housing development and even cash-rich companies would not use their own funds to wholly support the projects they undertake. Secondly, no bank would hesitate to finance any project that is viable.

Guaranteed housing growth

Housing developers are not petty traders, and cannot simply rely on buyers' deposits and progressive payments to fund a project. If such was the case, a scheme without sufficient buyers would be doomed right from the start.

Part of the development cost (between 30 to 40 per cent) should come from a developer's own fund, which would be converted to investment capital, while the balance of 60 to 70 per cent would be from the bridging financier.

Why should the business of housing development be different from any other industry? Car manufacturers do not seek progressive payments-they sell only finished products. Has Proton ever sought progressive payments from those who book its cars?

The development business cannot be a "no risk" venture. Developers cannot take the profit and leave buyers and the Government to absorb the losses! Neither should they be allowed to operate using "other people's money" - in this case, the hard earned cash belonging to prospective house buyers.

But as the current STB system allows them to do so, developers would naturally oppose any attempt that would deny them access to virtually free money.

A reputed developer once remarked: "Why risk our money when we can use theirs (the buyers')?"

Thus, apprehension that the housing industry may be disrupted by a lack of capital is totally unfounded.

Continued availability of development loans

During discussions the HBA had with representatives of Bank Negara and the Association of Banks in sessions convened by the Housing Ministry, financiers have repeatedly stated that bridging loans are generally granted when the following criteria are met:

  • The margin of sales is acceptable or based on a pre-established minimum number of units secured;

  • The collateral offered is of market value potential;

  • The proposed project is feasible and viable and the developer has undertaken the prerequisite verification and market research;

  • The developer has sufficient working capital to reflect its seriousness in the venture;

  • The proper legal documentation are in place, with provision made by shareholders for any cost over­run;

  • The developer, its directors and those having control of the management have good financial standing and have not been blacklisted by Bank Negara's Central Credit Reference Information System (CCRIS); and

  • The developer has a clean track record and has the professionals required to carry out the development.

This bridging loan is very much less than the total selling price of the units in a completed projects because the cost of the land and a developer's profit is not included.

Furthermore, with the 10:90 mode of BTS, the financier would be able to operate in a more secure environment because it would have absolute control over the loan disbursement and full control of the collateral.

In a situation of abandonment, it would be easier for the bridging financier to crystalise the debenture and to invoke the Power of Attorney clause by appointing receivers and managers to take over the project.

Any fixture or structure built on the property would only enhance the value of the collateral and revival would certainly be easier when house buyers are left out of the legal muddle.

For end financiers, they would also be more secure in that they would only be financing completed properties.

Safeguarding buyers with new laws

The HBA urges the Government not to enact more laws or make amendments that would further shackle the housing industry and hamper development growth.

More legislative and regulatory impositions may not necessarily improve efficiency or enhance quality, but it would almost certainly add to cost. And developers would almost certainly pass off the added cost to buyers.

Instead, we urge more effective enforcement so that errant developers can be brought to book. However, since policing and enforcement remain a perennial problem, self-regulation should be encouraged. This would promote professional and ethical conduct within the fraternity of developers - and inspire confidence among buyers.

The National House Buyer's Association (HBA) is a non-profit, non-governmental, non-political organisation manned by volunteers. For more information, check out its website at or e­mail


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