Putting housing on firmer foundation

Prevailing weaknesses in the sell-then-build system requires changes in the property delivery system to protect buyers

LINGERING problems caused by abandoned housing projects have given rise to calls for developers to adopt a more equitable property delivery system that has built-in features to protect the interest of buyers, particularly from falling victims to abandoned projects.

Abandoned projects result in much grief for the affected buyers and their families as they have to continue servicing their bank loans despite not getting delivery of the property they have bought.

The dissatisfaction over the current sell-then-build system (STB) has led consumer groups such as the National House Buyers Association (HBA) to propose a hybrid version of the build-then-sell system (BTS), or the 10:90 BTS.

There are also calls for a trust fund, similar to the practice in Australia, to safeguard buyers' interest.


Chang Kim Loong says the root of the problem lies with the current STB system

Under the Australian trust fund system, 10% is paid into a trust fund or a lawyer who holds it in trust for the purchaser.

Upon completion of the property, the buyer will apply for a bank loan for the balance amount (the banks generally provide up to 70% financing).

Industry observers say this system ties up a lot of cashflow and could be a reason that property development projects in Australia are generally carried out on a smaller scale.

The push for more sweeping changes in the local property delivery system to better protect buyers is due to prevailing weaknesses in the STB which include higher risks to buyers when they fall victim to abandoned projects.

The scourge of abandoned projects

It is debatable as to what would entail a more equitable system, but at the end of the day it has to promote a stronger foundation for the local property industry and one that benefits all stakeholders.

Real Estate and Housing Developers' Association (Rehda) president Datuk Seri Michael Yam says the STB has proven to be the best system for a developing market like Malaysia and it is unfair to blame the system as the root cause of project failures and poor housing quality.

Yam believes stringent monitoring of ongoing projects and enforcement of the existing Housing Development (Control and Licensing) Act against errant developers would be a more effective method to curtail the incidences of abandoned projects as well as addressing the issue of low quality products.

He says Rehda has always strongly supported heavy penalties to be imposed on irresponsible developers.

“In fact some of the causes of abandonment were by unlicensed developers and fraudulent businessmen who should not be in this industry in the first place. Those who are venturing into the housing development business should be equipped with proper knowledge and trainings undertaken either by the Housing Ministry or Rehda so that they are better informed of their role as a responsible developer,” he points out.

The HBA had for years advocated phasing out STB on the basis that it is unfair to use housebuyers' money to fund project construction costs. It had proposed the 10:90 BTS where house buyers make a 10% downpayment when the sales and purchase (S&P) agreement is signed, and the remaining 90% will only be paid upon delivery of the property.

The BTS, which is supposed to replace the STB system, is said to be a fool-proof system to protect the rights of property buyers from project abandonment.

HBA secretary-general Chang Kim Loong says that as of last December, data from the Housing Ministry shows that 9% of housing projects are classified as either delayed, problematic or abandoned.

He concedes that the root of the problem lies with the current STB system.

Under STB, buyers pay a 10% deposit of the property price upon signing of the S&P agreement and take up a bank loan to pay for the balance sum.

Developers will be allowed to draw down the loan progressively based on the progress of construction work of the property in question.


“With the STB, the cost of financing the property's construction is largely borne by the buyers. On top of that, they have to face the risks of project delays or abandonment,” Chang says.

Developing discipline

He says that by making developers assume the role of a borrower to finance their projects (under the 10:90 BTS), they will be more vigilant and responsible to build good quality products and ensure timely (if not earlier) delivery of projects to save on interest costs.

“Instead of making the buyer take up the responsibility as the loan borrower to finance the project construction, the developer should be responsible for it,” he points out.

Only upon completion and delivery of the property with certificate of fitness to the buyer will the developer be able to collect the balance 90%.

Chang says this will weed out unethical individuals so only the responsible and good ones will remain as developers.

“Without having house buyers' money to fall back on, the 10:90 BTS will encourage industry players to manage their cashflow more effectively, and banks will be more cautious and undertake the due diligence on ascertaining project completion before disbursement of buyer's loan to developers,” he says.

It will ensure only credible developers with their own financing capability will remain in business.

It has been five years since the Government put on trial the BTS and offered a host of incentives to developers to adopt the scheme.

Financing risk

Despite that, the BTS has not taken off the ground and property projects are still mostly sold off the plan today.

Although there have been a few successful BTS projects, developers are generally lukewarm to the scheme because they say banks are not lending their support to developers who adopt the scheme. (See story on developers' views)

They are also worried that buyers who only have to put down 10% for the purchase may decide to walk out of the contract and leave the developer with unsold units.

The much higher financial exposure by developers will inevitably lead to higher cost of the completed project and this will have to be transferred to the buyers.

Yam says financing from banks is the major hindrance for developers to undertake BTS as banks would lay down the conditions of achieving a pre-sale of at least 65%, lock in the construction contract and a director's guarantee before lending.

“It normally takes between six months to three years to achieve a 65% pre-sale. In addition, developers undertaking BTS who get a bank loan will have to borrow at a commercial rate of about 7% to 7.5% per annum.”

Lending curbs need to be raised

Moreover, Bank Negara has set a cap of only a certain percentage of a bank's lending to property development.

“Therefore, Bank Negara's lending guidelines would need to be amended not only to increase the lending percentage, but Bank Negara must also ensure that all banks and financial institutions must commit to finance projects to completion (availability of project financing) along with all the supporting frameworks in place,” Yam adds.

He says BTS is a raw deal for developers as they are obliged to honour the sale from the locked-in price of the initial 10% deposit. Buyers, on the other hand, might just forfeit the 10%, leaving developers in the lurch.

“It would be difficult for developers to undertake a development without certainty that the sold and completed homes will be taken up,” he says.

As for the proposed trust fund, Yam says money in trust fund or held back in any way will starve developers of much-needed cash flow.

“There is no point putting in a trust fund which presumably the developer will use it as security against loan for construction wherein the interest rate payable is around 7%-8% while the amount in trust fund, even if its interest can be allowed to offset, is only earning 2.6%,” he says.

By The Star