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Pros and cons of build then sell
The Malay Mail 26/12/2000

Under the "sell then build" (STB) concept, a businessman can become a developer almost overnight, by acquiring land.

There are basically four ways in which developers can acquire their land: they could have owned it for a long time (such as the case with plantation companies); they can enter into a joint-venture with a company that owns the land; they can have the land alienated to them by the government (which is usually cheaper than buying from the market); or, they can simply acquire the land from the market.

Out of these four possibilities, it is the last type of developer who is most likely to price his units highest, thereby risking low sales especially in times of economic downturn.

A typical scenario would be this: during a boom property cycle, a property developer decides to embark on real estate development before it passes its peak. He purchases the land, paying peak prices, and launches his development soon after.

It is the norm for developers to price such properties slightly above the last transacted price of a similar new property in a similar location.

Such cases have posed numerous problems, say property analysts.

It caused a glut of high-end condominiums, which was worsened by the recent economic problems.
As a result, developers who had pledged shares for such loans were faced with the banks demanding more collateral when share prices tumbled.

"A project is feasible at one price but not at another and the market is changing all the time," explains a property analyst.

"If the developer misses the time when prices are high, he will then end up with the wrong units at the wrong time, which is the predicament that some developers are in now. This is a disadvantage of the STB concept," he said.

Developers who have not acquired their land at high prices are in a better position, as their lower holding cost will enable them to receive a reasonable rate of return on their investment even if their units are not exorbitantly priced.

This type of developers will not really suffer from the implementation of the "build then sell" (BTS) system.

Nevertheless, an immediate effect of the BTS is that some developers will be forced out of the market – those who cannot afford to build first. The general consensus is that the BTS will weed out fly-by-night operators. But it could pose other problems, too.

Another property source also noted that a reduced number of developers would mean fewer houses. The economics of supply and demand dictates that a decrease in supply in turn would push property prices up. But this may only be a temporary glitch because a smaller number of developers would mean less demand for land banks.

But developers are unlikely to take the proposal of a fight. They claim that BTS would hurt them financially. Changing from STB to BTS, a developer would not be generating any revenue for the two-year period of construction. "This can cause a huge strain on cash flow," says a property analyst.
Besides, not many developers are willing to be adventurous. A large township with the land, infrastructure and building costs are very expensive to build. It would be placing a huge burden of risk on such a developer under the BTS.

Another property analyst noted that BTS works well in countries like Australia where the local authority or government undertakes the infrastructure. The developer just builds the houses.

"This way the costs are not high and will not impose any burden on the developer. In Malaysia, if the local government or authority is willing to undertake the infrastructure works, then the developer is more than happy to adopt the BTS system. The infrastructure costs can be crippling to a developer," said the analyst.

Under the current STB system, developers have to worry only about paying for the land and infrastructure as they start generating revenues the moment their properties are launched.

BTS is a good marketing strategy as it provides "comfort" to buyers in the sense that the product is there to be seen, according to another property analyst. The one drawback, he says, is whether the developer has the financial capability to see through the whole project.

BTS will result in satisfied customers as it will invariably reduce the number of complaints of defects later on. Naturally, under this system developers need to have greater financial resources and that will, in effect, weed out the weak companies. The problem of over-building will not arise and hence there are less chances of abandoned projects.

 

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