More work needed on build-then-sell
04/07/2006 www. theedge.daily By Au Foong Yee

The government’s offer of incentives to developers who embrace the 10:90 build-then-sell scheme is to be lauded. For all intents and purposes, the decision serves to cool a heated topic that has reared its head time and again in the last two decades or so.

Both the merits and demerits of the build-then-sell scheme have been debated at length and the 10:90 formula spelt out by the government can be taken as a compromise. At least until such time that the Malaysian property market is mature enough to tolerate an overhaul of the current sell-then-build concept.

The House Buyers’ Association has pushed for the build-then-sell policy to safeguard house buyers, quoting numerous incidences of abandoned projects and shoddy construction. Developers, on the other hand, argue that one does not need a sledgehammer to kill an ant. The solution, they say, is more effective and transparent enforcement. The implications of forcing developers to sell only homes that are completed will be painful and far-reaching, they warn.

The government’s decision not to compel developers to embrace the build-then-sell concept is wise and not totally unexpected. It would be foolhardy to assume that the sell-then-build concept can be replaced overnight without some adverse effects. Like it or not, if developers are no longer allowed to sell houses off the plan, supply will plunge and, inevitably, prices will rise. The thousands of workers dependent on the 140 or more support industries will lose their jobs. Listed property companies will no longer be able to chalk up the kind of revenue their shareholders desire, which could trigger a selldown of their shares.

We should note here that we already have in place a parallel system where investors have the option to buy homes that are ready-built or off the plan, although the latter is prevalent. A free market, you can call it.

Let us examine how far the 10:90 variant will take us, the issues involved and technicalities that will have to be addressed before it can become reality.

Basically, a house buyer needs to put down only 10% of the cost of the investment, with the remaining 90% to be settled in full once the property is completed and the certificate of fitness issued. For adopting such a scheme, the developer gets to enjoy incentives, the details of which the government has yet to reveal.

Do buyers sign the regular sales and purchase (S&P) agreement? No, because the schedule of progress payments prescribed by the Housing Developers’ Act will have to be amended accordingly, as housing development comes under the ambit of the Act.

This means a revised role for financial institutions in the provision of both bridging and end financing for a housing project. So then, who will shoulder the cost and risk between the time the S&P is signed and the completion of the property? If it is the developer, why bother to lock in just 10% of the cost of the sale and then be subjected to uncertainties that may crop up in the following 24 months or so?

A “free-for-all” scenario could ensue. There is no stopping a buyer from changing his mind when a project is in midstream for various reasons — valid or otherwise. Perhaps he found a better buy, market values had reversed, or he woke up one morning and decided he didn’t want to own a house after all. To escape his obligations, why not blame it on something subjective, like dissatisfaction with the quality?

Developers, too, can get up to no good. Say the market has galloped since the S&P was signed. What is there to stop developers from trying to get out of the sale on which they had merely collected 10%?

It would be a different case if it were purely build-then-sell — the developer is free to sell the finished product as and when he wants to. He need not worry about, for example, being saddled with liquidated damage payments should there be a delay in the project for whatever reason.

But then again, only developers with financial muscle will be able to practise the build-then-sell concept, which, for obvious reasons, will involve a modest number of units each time. Of late, though, more and more developers have been going this route with boutique developments.

Still, the 10:90 concept is an attractive alternative for developers. But for it to work, banks will have to play a key role. Given that bankers will be forced to take on added risk, it is reasonable to assume that they will opt to fund only financially strong developers. Indeed, these institutions have never been known to be sympathetic, as developers who were brought to their knees during the 1997-98 Asian financial crisis will tell you.

Clearly, numerous technical issues have to be ironed out before the 10:90 concept can become a reality. Legislation will need to be amended to ensure that all parties all protected. And that process, by and large, will take time. In the meantime, it looks like Malaysians will just have to be patient.