Housing Ministry on the ball
NST 13/05/2006

EVERY step prescribed under the Housing Development (Control and Licensing) Act (the Act) is being taken by the Ministry of Housing and Local Government (MHLG) to minimise the number of abandoned housing projects in the country.

However, there are unforeseen circumstances beyond the control of the ministry, such as the Asian financial crisis of 1997-98 and increases in the cost of building materials, that have hurt many small housing developers and caused project abandonment (see sidebar for more reasons).

In response to the "Viewpoint" expressed by the National House Buyers Association (HBA) in NSTProperty (April 15, 2006), we would like to put on record some salient facts.

One is that between 1990 and December 2005, MHLG approved a total of 13,286 housing development licences.

As at December 2005, MHLG has ensured that 8,554 of these projects were completed and delivered with Certificates of Fitness for Occupation (CFs) issued.

Of the balance, 4,234 are smooth on-going projects, 166 deemed sick, 164 delayed and 168 abandoned.

The ministry's Monitoring and Enforcement Division (MED) is overseeing all these projects.

MHLG also wishes to clarify here that the 168 abandoned projects are licensed housing schemes that were approved before the amendments to the Act came into force on Dec 1, 2002.

A total of 2,265 licences were issued in 2001 and 2002. As construction takes 24 to 36 months, a project for which the licence was issued in 2001 or 2002 can only be declared abandoned in 2005. In 2005, only 28 of the projects were newly identified as "abandoned".

Another fact to put on record is that reporting by way of Section 7f of the Act is not the only monitoring tool used by MED to ensure developers fulfill their responsibilities and obligations.

Since a developer has to apply for and renew its advertising and sales permits on a regular basis, it is at this point too that complaints arising from other projects the developer, its subsidiaries or associate companies are undertaking is addressed. Compounds imposed and other offences committed are also examined before consent is given.

As the number of projects being monitored is large, MED's workload is indeed heavy as it also involves other important duties, including updating of project information, complaints management, project development consultation, customer inquiries, monitoring of a developer's financial position and measures for the revival of an abandoned project.

The 544 abandoned projects identified in 2002 are those abandoned between 1983 and 2002. Of these, 359 projects or 66 per cent have been revived and completed.

In 2003, MHLG divided these 544 projects into one group for projects abandoned between 1983 and 1990 and another for those abandoned between 1990 and 2003.

The first group totalled 345 housing projects and of these, 300 were revived and completed while 45 were handed over to Syarikat Perumahan Negara Bhd (SPNB) to conduct viability studies.

In the second group, in which 199 projects were listed, 77 projects were revived and completed.

As at December 2004, 28 newly abandoned projects were added to the total, making it 227 abandoned projects. Of these, 86 were revived and completed, 70 were handed over to SPNB for viability studies and 11 were taken over by white knights. The remaining 60 are being continuously monitored by MED.

As at December last year, Selangor held 63 abandoned projects, of which 16 were revived and completed and three taken over by new developers. SPNB and other interested parties are conducting viability studies on the remaining 44 projects.

Implications of abandoned projects

Abandoned housing projects have certain implications on the affected parties.

Losses and difficulties faced by house buyers in servicing the interest on housing loans they have taken while paying house rental as well is one.

The revival of an abandoned project involves high capital injection, either by the developer or by other parties interested in reviving the project. This is due to vandalism at the project site, price increases of raw materials and changes in building requirements.

Developers also face non-performing loans and landowners risk their land being foreclosed. Also, there is the possibility that a project may no longer be viable for revival or that no company is interested in reviving it. All these mean a loss to the economy.

Measures to prevent abandonment

These are some of the measures MHLG has taken to prevent housing projects from becoming abandoned:

Tightening procedures for issuance of housing development licences and focusing on a developer's financial capacity;

• Continuous project monitoring through Form 7f;

• Regular visits to the project site and developer's premises to counter-check information provided in Form 7f;

• Exercising greater control over the Housing Development Account to ensure compliance with the Housing Development Regulations;

• Counter-checking all claims made on the Housing Development Account;

• Ensuring developers submit their annual audited financial reports;

• Taking legal action against developers for offences under the Act and its Regulations; and

• Allowing licensed developers to apply for the minister's permission to revoke SPAs should they be unable to fulfill their obligations to purchasers.

Efforts to revive abandoned projects

Since housing projects are abandoned at various stages of construction for a variety of reasons, MHLG has adopted several approaches in the revival process. However, its main role is to:

• Act as mediator/facilitator to house buyer committees, financiers and developers to determine the direction of the revival scheme;

• Act as adviser to project revivers (white knights) and other affected parties to ensure their full co-operation and commitment to revive the scheme;

• Request SPNB to conduct viability studies to revive and complete a project should no other party want to;

• Allow for winding up of a developer and placing of a project under an official receiver or applying for a court order to appoint receivers and managers, or a white knight to revive it with the consent of the majority of the buyers;

• Allow a project financier, as debenture holder, to use its powers to appoint receivers to take control, revive and complete a project;

• Direct a company to assume, control and carry on the business of a developer vide the minister's powers under Section 11(1)© or to use Section 11(1)(d) to direct a developer to petition the High Court to wind up its business.

Stages in reviving an abandoned project

Basically, all abandoned housing projects are first classified as having the "potential for revival". Subsequently, this classification is further streamlined into four categories.

The first category is for abandoned projects newly identified in a particular year.

At this stage, MHLG will focus on information gathering and allow for the appointment of a receiver or private liquidator for the developer, with the winding-up petition being served.

Thereafter, a feasibility study will be conducted on the project. This is normally done one year or more after the project is declared abandoned. It is at this stage that white knights may surface with project revival proposals. The MHLG will act as facilitator, giving advice and guidance to all affected parties.

The third stage in project revival is the selection of a white knight and ensuring all affected parties have reached a consensus on the project revival proposals.

At this point, MHLG will act as a coordinator between the white knight and other technical agencies in order to speed up the approval of plans for the project to take off.

The fourth stage is when the contractor is appointed and construction is under way.

Problems reviving abandoned projects

Managing and reviving an abandoned project is a complicated affair involving the developer, purchasers, bridging financier, landowner and other parties. It will take time for all parties to reach a consensus, since each wants to protect its interest.

Some of the hurdles MHLG faces in reviving abandoned projects include:

1. The involvement of the developer in other business activities or in a company with a diversified business portfolio. Though a Housing Development Account has been opened for the project, the receivers will take stock of all the developer's financial accounts when it goes into receivership. While project revival and debt settlement remain a priority, at times there would be very little left in the account to complete the project and settle liabilities.

2. When a developer is wound-up, the master chargee gets the first priority for debt repayment - and it usually wants the project foreclosed.

3. Developers also impose conditions in their consent for project revival in order to get returns for the effort they have put in from the parties reviving the projects.

4. Some developers don't own the land they are developing, so the rights of the landowners cannot be denied, especially if they have imposed conditions to protect their rights.

5. Consultants of developers who are in possession of detailed or amended building plans often refuse to cooperate with receivers or liquidators until their dues are paid.

6. Purchasers often insist that the late delivery clause in a SPA be honoured, or that no additional payment be imposed on them to revive the scheme.

7. Drawn-out court battles against developers by squatters, landowners, bridging financiers or contractors over contractual matters may further delay the revival of a project.

In addition to these hinderences, the development plans or orders as well as approved layout and building plans could have expired and technical requirements changed. All these would require amendments to be made before fresh approval can be obtained and construction recommenced.

Over and above these, MHLG also has to negotiate with all the relevant authorities for waiver of assessments and quit rents or for special priority to be given in order to speed up the approval of the amended plans.

Dr G. Parameswaran is Director of the Monitoring and Enforcement Division, Ministry of Housing and Local Government. He can be contacted at 03-2099 8325 or e-mailed at param@kpkt.gov.my.