25 August 2014

Build-then-sell in 2015?

  25 August 2014

Build-then-sell, build then sell, Malaysia property

WE are close enough to 2015 that the market is already speculating on Budget 2015. April 1, 2015 will see the introduction of the consumption-based goods and services tax (GST).

While we are hopeful of a reduction of the corporate and personal income tax rate and even more hopefully for the adjustment to the real property gain tax in light of the imposition of the 6% GST, there are something else looming in the backdrop of all real estate investors and home buyers alike.

Guided by the then minister’s speech in the parliament, 2015 is suppose to be the year where the build-then-sell (BTS) model shall be made mandatory for all housing developers to replace the ever-popular sell-then-build (STB) model that has certainly played a significant role in the rapid nation building in the last two decades.

In fact, the STB model of housing development is so significant to the extent that real estate investment has captured the imagination of the nation and abroad as the preferred tool in gaining wealth, hedging against inflation and shielding against any potential economic downturns.

Even with the allegedly less secured STB, a lot of liquidity has flown into real estate that drives up the house prices and effectively drive out the BTS to the back burner with affordability becomes a more pressing issue of our young population.

The newsworthiness of PR1MA and the various efforts by the State Governments in constructing affordable housing seems to suggest that Malaysians can no longer own the roof over their heads without governmental interventions. It seems like a natural progression in joining the rank of developed nations where public housing is common.

Many would argue that there is still merits in implementing BTS as it will stamp out completely the risk of incompletion and abandonment by incapable housing developers to offer the ultimate protection for genuine homebuyers. The question remains whether such risk that BTS aim to address is one that is manageable.

Granted that the frequencies of such news were high in the late 1980s, late 1990s as well as some isolated cases of mismanagements, it seems no surprise that the frequencies coincide with the global recession in the 1980s and the Asian financial crisis in the 1990s. On top of that, house purchase and development can never be separated from the financing regime at the material time.

Learning from these painful but valuable experiences, Malaysia seems to “survive” the global financial crisis in 2008 where real estate remains the most resilient sector in comparison with its pale relatives worldwide.

Credit must be given to the well-regulated regime of housing development that include the tight control on the disbursement of the progressive claims under the specially opened Housing Development Account as well as the responsible lending guided by the one of the world best central bankers proudly Malaysian.

BTS as a model is nothing new and has always been there, driven by the market forces. Under the Housing Development Act, there are two instances where you do not require a developer licence to build and an advertising permit to sell. It is either the negligible development of four units of houses and below or when no payment is to be collected during construction of which sales will only take place when the houses are completed and ready for occupation.

The latter has been practiced by a handful of cash-rich developers that are committed in delivering brand new products to gain clear advantage and compete with the secondary market. Most often, there is a beeline for these new houses for its obvious scarcity in the market.

The buyer can buy the real house that they have inspected on an “as is where is” basis instead of making decision based on scaled model and pimped-up show unit that requires lots more imagination to fill up the gaps.

In 2007, the statutory regulated BTS has been introduced under the new prescribed sale and purchase agreements in the form of Schedule I and Schedule J under the Housing Development Regulations 1989. The essence is simply for the buyer to pay 10% deposit and sign the agreement, and only pay the balance purchase price when the unit is ready to be delivered.

The basis of regulation is still the fact that money is collected during construction and the rationale is to limit the exposure to just 10%. In the admission of the same minister, such statutory BTS has been unpopular for the housing developers and it is not hard to comprehend the reasons behind.

If liquidity is not a concern to the developers during construction, it is immaterial to collect the 10% deposit and then subject themselves to a stringent regulatory regime under the Act. Such regulated BTS model requires strong buy in from the financial institutions in their commitment and willing adjustments for the bridging financing during construction as well as the end financing for the purchase.

Without the security of the constant cashflow driven by the construction progress under the STB model, developers will not fancy paying higher interest for the bridging loan due to a longer repayment period until the completion of construction.

Given also that the end financing is drawing closer to the completion date, a noble valuation of the property by the banks is required and the same will be benchmarking closely to the transacted market price at the material time.

This will lead to a potential difference in the price and market values not mentioning its potential effect on the margin of financing offered to the buyers.

A mandatory BTS is a step backward and against the basis of the free market. To embrace it would be a vote of no confidence to current regulatory regime from the Housing Ministry, local authorities, building professionals to even Bank Negara. It drives out smaller developers with weak cashflows thus limiting choices in the market.

The capital costs during construction will show up in the pricing that certainly goes against affordability being the flavour of the day. This could also indirectly encourages speculation with the 10% deposit be taken as a “bet” against an unexpected market crash.

Complying with the capitalist fundamentals, we should embrace choices. Just as the water will find its level, our free market is certainly big enough to accommodate the current STB, the statutory BTS and the traditionally non-regulated BTS to the benefits of its respective admirers.



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