Pushing for change
27/05/2006 Published in NST-PROP
A Buyer Watch Article by National House Buyers
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
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
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
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
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 www.hba.org.my or email email@example.com