Small developers need help
08/07/2006 NST

A recent letter to the New Straits Times by a certain Anthony Cho and the chairmen of several branches of the Real Estate and Housing Developers’ Association (Rehda) headlined “We’ll need help from banks” caught my attention.

That group of small- and medium-scale developers are unhappy about being left out of five special funds set up by Bank Negara Malaysia for small- and medium-scale entrepreneurs (SMEs) in various sectors and tried to justify the setting up of a sixth fund to provide bridging finance assistance with preferential terms for small developers.

The group then went on to express its concern over the proposed shift from the timetested Sell-Then-Build (STB) system of the last 40 years to the Build-Then-Sell or BTS formula, arguing that this system is unproven in Malaysia.

The much-touted BTS mode will, they argued, phase out smaller developers as sure as night will follow day and consequently, the future demand for affordable houses will have to be met by the State.

However, now that Deputy Prime Minister Datuk Seri Najib Razak has announced that STB and BTS will coexist for two years, they can breathe a sigh of relief. If it was just the BTS mode, prudent developers would probably have to scale down their projects, which would negatively affect the creation of the desired number houses as specified in the Ninth Malaysia Plan (2006-2010).

It must be noted that under the BTS variant being adopted, the 10:90 system (where buyers only need to pay 10 per cent as downpayment and the balance upon completion of their units) if it is modelled along the lines of its Australian origin, infrastructure such as internal roads, service drains, culverts, sewerage treatment plants and other housing amenities, including the electrical and telephone poles and water pipes that serve the housing project, must be constructed or paid for by the State.

In Malaysia, these costs are met by developers and passed down to consumers.

When a project has been successfully completed, the local authorities and utility companies simply take over the infrastructure and collect assessment rates and utility charges from the purchasers, without refunding a single sen to the developers.

It is interesting to note that the proponents of the 10:90 model have missed some pertinent points. Firstly, the population growth of Victoria, the state in Australia practising it, is hardly one per cent per annum and the housing requirement is even lower.

Secondly, housing projects there are relatively small in terms of number of units built, unlike in Malaysia.

Consequently, holding costs are lower and the sales factor is not insurmountable.

The sales factor is crucial as it forms the fundamental catalyst of the housing industry.

This brings me to the third point, that is, the equitable doctrine of specific performance.

Allow me to illustrate my point: Say a certain number of buyers pay the 10 per cent purchase price for a housing project under the 10:90 system and the money is subsequently put into an escrow account.

What would happen to the developer if these buyers renege and walk away from their deals, making allegations of poor workmanship and inferior building materials once the units have been completed (when the real reason for their doing so is the recent availability of cheaper houses in a neighbouring development)? In such a situation, only financially sound developers would be able to withstand the onslaught of the financial trauma. Small developers can ill-afford any protracted litigation against recalcitrant purchasers.

No sane developer would dabble in a sales situation that does not provide for specific performance and in the 10:90 mode, the risk factor is too high to bear.

In any event, a developer may, under 10:90, build first without making any sale and upon completion, sell the units at the price prevailing at that time.

All arguments in favour of 10:90 that I have come across also have not touched on low- and low-medium cost housing. How does a developer sell such completed units when the authorities strictly control their prices? Close supervision The lack of close supervision at a construction site is the main factor leading to shoddy workmanship and the use of inferior building materials.

Perhaps building inspectors from the appropriate authorities should conduct site inspections on a regular basis to arrest such problems on the spot.

And what are the professional bodies representing architects and engineers doing about this problem? Do licensed land surveyors have a role to play? I remember in the old days, there were no such complaints in projects financed by the then Malaya-Borneo Building Society, which would not release progress payments until its own licensed land surveyors verified the reported stage of completion and issued certification to that effect.

Abandoned projects I dislike rhetoric that isn’t based on facts and figures.

Abandonment of on-going housing projects is a bane of the industry and stressful to 58,685 aggrieved purchasers (a figure provided by the Ministry of Housing and Local Government in the May 13, 2006 issue of NST-Property). However, I take comfort in the fact that there are 2.9 million satisfied purchasers.

If the number of failed projects (the figure provided was 168) is compared with the thousands of successful ones, a failure rate of two or three per cent can be a tolerable figure in any industry. In any event, the Government is doing a fine job by reviving some of the abandoned schemes via Syarikat Perumahan Negara Bhd.

However, when there is a downturn in the economy, our caring Government should discharge its responsibility to the citizens by using some of the billions of ringgit that developers have paid in taxes to revive stalled projects.

After all, it is the housing developer - and the buyers - that collectively contribute to the construction of housing infrastructures in good times by paying for sewerage treatment plants, service roads, drains and culverts, electricity sub-stations, water supply pipes, open spaces and other communal amenities.

Thus, it is only appropriate that the Government come up with the financial assistance to alleviate the sufferings of purchasers of ailed projects during an economic slowdown.

Other incentives such as stamp duty waivers and exemptions on legal fees will also directly stimulate an ailing economy.

S.Y. Kok is the author of the book, “Law Governing the Housing Industry”. He declares he attempts to project impartial views on housing in this Viewpoint column and does not wish to be branded as favouring either developer or purchaser.