WE refer to the report “The young find it difficult to afford a home” (Sunday Star, Sept 28).
The price of property is rising because of rising material, labour cost, inflation and speculation.
Speculation occurs when there a developer develops property on a “sell and build” (SAB) basis.
Properties are constructed and delivered over 36 months. Mega developers would launch their product by phases. Every new phase is launched with minor cosmetic appearance with the price increased by 15% to 25%.
This encourages people to rush and buy houses before the next phase is launched, as they would want to make quick capital gains.
The developer interest-bearing scheme (DIBS) encourages developers to act as an unlicensed financial institution when they say they subsidise the interest during construction period.
The developer actually transfers the interest cost into their product cost and force the buyers to pay for it via bank loans.
In other words, banks gains interest during the construction period. This contributes to higher property prices and household debt.
Malaysian household debt has risen to a worrying level. The large proportion of this debt is due to anxiety of potential buyers afraid that they cannot afford to buy properties in the future.
It is a vicious cycle that damages individual economies. The combination of developers marketing strategy that focuses on people’s anxiety is an important factor.
Many people own more than one house and use the extra houses as an investment. It is quite a possible to earn 100% gain within three to four years after a house is completed.
The solution to this problem is clear. Developers must not be allowed to practice the SAB concept.
They should only build and then sell (BTS). It is morally wrong for anyone to sell something that does not exist.
In Malaysia Islamic loans by the banks are being allowed to finance something that is not syariah compliant. The SAB concept also contributes towards the rising number of abandoned projects.
Despite all control measures imposed by the Housing and Local Government Ministry, between 2009 till Sept 2014, the numbers of abandoned project increased from 68 to 212 projects.
This in turn increases the burden on the ministry in trying to help the house buyers.
It appears that developers are only interested in making a profit but when there are problems, they walk away.
It is time that Bank Negara orders banks to stop providing loans to support the SAB concept. This will deter property speculation, prevent abandoned housing and address oversupply.
The Housing Development (Control and Licensing) Act 1966 (Act 118) has the legal provision to support the BTS concept and it is Syariah compliant.
DR MOHAMED RAFICK KHAN
President
Victims of Abandon Property Owners Malaysia
ABANDONED housing projects in the country continue to be a dampener to the hopes of many house buyers and their families from realising their dream of being owners of their own homes.
Its continued presence remains a thorn in the housing industry that does not bode well for the wellbeing of the affected house buyers nor the reputation of the errant developers.
Although the majority of developers have fulfilled their delivery promises to house buyers, there are still some “bad apples” that have reneged on their end of the bargain when they abandoned projects.
Chang:'The BTS 10:90 is a far safer mode of home delivery system'.
Besides causing dilapidated environment, abandoned projects also cause unnecessary hardships to many people as they need to continue with their monthly bank instalments for their housing loans, and in many cases unless the projects are successfully revived, there will be no end in sight as to how long they have to bear their ordeal.
Championing the plight of the affected buyers is the National House Buyers Association (HBA) which has urged the Government to make good the implementation of the build-then-sell (BTS) 10:90 system as the industry’s housing delivery model from 2015.
HBA secretary-general Chang Kim Loong urges the Government not to deviate from the original road map to implement the BTS 10:90 system put in place under the Housing Development (Control and Licensing) Act and Regulations.
“The Government had in 2012 reiterated the BTS 10:90 system will be made mandatory by 2015, and hopefully it will hold true to its word of making this housing delivery system mandatory come next year,” Chang tells StarBizWeek.
Under the BTS 10:90 system, house buyers only need to fork out the initial downpayment of 10% when booking a house and do not need to make any further payment until the vacant possession of the property is delivered to them.
As such, the servicing of the end-financing loans do not kick in until the houses are completed with all the certifications obtained and keys with vacant possession are presented to the buyers.
Chang says the Government’s abandoned project revival efforts do not seem to be able to match or counter balance the fresh problematic projects that have been labelled as “sick” or “delayed” that continue to come on line.
“The BTS 10:90 is a far safer mode of home delivery system and the Government should without further delay, compel the housing industry to adopt the system as we believe it will drastically if not totally eliminate cases of housing projects being abandoned.”
He says this is precisely why the Government is encouraging it and offering incentives to developers who opt to adopt this mode of selling their products.
“But it fell short of compelling the industry to adopt this BTS 10:90 concept concurrently,” Chang notes.
But is the BTS 10:90 system the answer to the menace of abandoned projects in the country? Khong & Jaafar Sdn Bhd managing director Elvin Fernandez thinks not.
Voicing his reservation about the efficacy of the BTS 10:90 system, Fernandez says if the BTS 10:90 becomes the sole mode of housing delivery for the country in replace of the sell-of-the-plan mode of housing delivery, it will be highly negative for the market.
“The market will slide downwards into an oligopolic market. If the BTS is legislatively imposed on the developer, he will transfer the cost to the buyer or cease developing which means the number of players will be substantially reduced.”
Fernandez says if the new rules allow both the BTS and the sell-then-build (STB) systems to co-exist it will be a better system.
“One has to understand the role of the developer in the market. He is but a middle man, assembling a site, taking risks to bring the product to market.” While admitting there may still be abandoned projects in the present system, Fernandez says they should be dealt with appropriately such as by way of adopting a better project financing system and better monitoring of developers.
A better alternative
Speaking up for the BTS 10:90 system, HBA vice-president Brig-Gen (R) Datuk Goh Seng Toh says basically the BTS 10:90 creates a more orderly system of financing in that banks give project financing to developers and buyers are not subjected to this early stage financing.
“House buyers pay only 10% upon entry. Project financing covers only the construction and the incidental/accessory costs. Developers’ profits are not factored in. Rightly so, as developers should collect their profits only upon completion of their projects. This will also have a stabilising effect on house prices because banks would want developers to show proof of committed sales (percentages) before they would approve or release the project financing. Hence house prices would be placed at realistic and current values in order to secure sales. Over-priced houses will not sell and this would be a big problem with regard to getting bank approval for project financing,” he explains.
Goh: 'The housing industry and financing go hand in glove'.
Goh says with this safer system created by the BTS 10:90, banks may even consider lowering interests as cases of abandonment will be largely diminished and correspondingly bad loans within the housing industry will reduce.
He says currently the large number of abandoned projects in the country is tying up large amount of dormant funds. When this is reduced, financing costs can also reduce and the industry will benefit.
On the argument that house prices will go up, Goh says the claim that house prices will jump many folds is “based on the wrong premise that the industry will shrink”.
Goh says this point had long been one of “the frighteners” or “fear tactics” touted by interested parties.
“It is at best a conjecture without any solid justification. It is a wrong premise intentionally adopted by the opponents of the BTS10:90. This wrong premise is that in the current system of sell-then-build (STB), the buyers are the ones financing the housing industry. Hence the argument is that if you take away this financing by the buyers, the industry will collapse. This is not true.
“It is the financial institutions that are financing the housing industry. The housing industry and financing go hand in glove. Even big and cash rich developers conduct their businesses using financing and not entirely from their in-house funds. This has to do with leveraging, risk spreading and taxation,” he points out.
Currently, under the STB, banks lend money to house buyers and these funds are then channeled to pay developers. The risks to banks is that if the houses are not completed (ie the project fails) for whatever reason, buyers become defaulters.
“When one project fails, there are perhaps hundreds of defaulters. Revival of any abandoned project becomes very problematic within a legal quagmire. This is due primarily to the situation that within any failed project, there are multiple banks that have given end financing loans to the buyers. The collateral is held by multiple banks with each holding multiple liens to the various lots. “Hence the banks also suffer losses. Buyers may become bankrupt, developers hide behind the corporate veil and often escape using crafty corporate maneouvres. Banks are left holding collaterals that have little or no cashable value unless revival effort is successful,” he says.
He says whereas in a BTS 10:90 system, the bank deals only with the developer and the parcel of land remains wholly within the control of the project financing bank, unlike the present situation where no particular bank has control over the multiple lots under development. “In fact with banks operating within a less risky environment, it will encourage more willing financing from them. The Association of Bankers have consistently stated that they do not discriminate between big or small developers or whether the sell-then-build or BTS 10:90 is adopted. Their main criteria is viability of any project. Herein lies another advantage of the BTS 10:90 in that there is another audit put in by the project financing banks before a project is launched. Chances of project abandonment is further trimmed.”
Goh says HBA believes that with a more orderly system, the housing industry will be more stable and stronger. Banks will be operating in a safer and lower risk environment due to the more logical structure of financing the industry.
He gave HBA’s two observations on the matter. Firstly, developers now have to factor in the interests into the costs of their product but these interests should cover only the construction costs and it is also not a one-time outright payoff. “Project financing is released in stages in accordance to the developers’ stages of construction. Herein lies another unseen advantage. The onus is now on developers to complete their projects as early as possible in order to minimise their finance costs. Hence cases of delays will be reduced.”
Secondly, buyers are already paying the unseen costs by way of progressive payment interests even before the houses are completed. Thus, any price increase brought about by developers having to carry their finance costs will be offset by the savings on progressive interests.
“Within this safer system of financing, banks should be more willing to support the industry with cheaper financing costs. This will certainly have a positive effect on supply and pricing,” he says.
