Build-Then-sell not viable Option

Housing Developers were caught by surprise
recently when the Housing and Local government
Ministry through its Minister , Datuk Ong Ka Ting,
announced that it was finalising a proposal for the
build-and-sell (BTS) concept to be adopted by the
Housing Ministry.Such a concept if adopted would have
serious repercussions on the building industry.The
nonchalant manner in which the proposal was to be
hastily tabled for a cabinet decision does not augur
well for the housing industry.
I cannot recall any discussion or debate being
held by the Housing Ministry with the Housing
Developers on the build-and -sell concept.The speed
and haste for the implementation (if indeed it is
implemented) of such a concept will certaintly spell
the end for medium and lower housing developers
From the onset I would categorically say that
the build-and-sell concept based on the Australian
model of 10/90 would be a failure if not a disaster if
introduced in the Malaysian building industry.The
10/90 system based on the Australian model is
regulated under S9AA of the Sale of Land Act 1962 of
the State of Victoria.Such a model from its appearance
would favour the house buyers but not necesssary
providing any advantage in terms of the cost of the
house.From the perspective of the Developer this model
would only further compound its problem
nothwithstanding the fact that it still have to comply
with existing housing laws and state governments
policies on Bumiputra ownership, mandatory laws on low
cost housing and infrastuctural requirements enforced
by local councils.In short, such a concept would not
be a workable model in the context of the Malaysian
environment where procedural and government policies
differ extensively with the Australian model.
The 10/90 variant model as practice in Australia
is successful because of the absence of bureacracy and
the efficient mechanism in place for submission and
approval for building plans.The normal time required
for such approval is about 3-6 months in Australia as
compared to 2-3 years over here in malaysia.In
addition, conditions such as mandatory 30% low cost
and bumiputra allocation housing all play a
significant part in adding cost to the total
expenditure of the developer.It must be noted that all
these extraneous conditions are absent in the
Australian model and this ensure a smooth
implementation of the 10/90 model.
Let us examine the 10/90 concept in more
detail in order to expose the frailities of such a
model.Under the 10/90 model, purchasers pay a
downpayment of 10% of the contract price upon signing
of the sale and purchase agreement and the deposit is
placed in an escrow trust account(lawyers as
stakeholder).The remaining 90% of the purchase price
becomes payable only on delivery of vacant possession
of the completed house.Obviously the house buyer has
zero risk and the bulk if not the total risk factor
is borne by the developer.From the very beginning the
developer would have to use its own or borrowed funds
to finance the project.They do not even have the
luxury of using the buyer's 10% deposit since it is
escrowed in an account until the handover of the
houses.From the time of submission of the property for
approval until the completion of the houses, the
gestation period is almost 5 years.(assuming building
take 2 years).Is it practical and fair for the
developer to bear the risk for 5 years before seeing a
return on its initial investment?And what would happen
if during the interim period there is a downturn in
the property market and the buyer decides to cancel
its obligation to buy the house?The buyer may choose
to forfeit its 10% deposit but the developer would now
be left without the 90%purchase price.It is little
comfort that the legal remedy for specific performance
is available but how many developer can afford the
lengthy litigation to recover the money.?
In short the likely scenario would be abandon
projects and bankrupt housing developers who are left
in the lurch by house buyers in the event of a
property crash.
The Housing Ministry must first ask itself
the question whether it can dismantle the onerous
government and state policies of low cost housing and
mandatory bumiputra allocation. Whether it can promote
an efficient mechanism to reduce bureacracy in the
submission and approval of building plans.If the
answer is no, then the 10/90 model is not a workable
option for our building industry.If there is an
attempt to introduce the Australian 10/90 model it is
imperative that all other conditions must be in place
before we seek to introduce the model in toto.