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Thursday, May 21, 2009

‘Sell then build’ has worked well

IN London last week I found the weather to be similar to the residential property market – mostly cloudy, with some bright patches.

Values of central London property have dropped 25% in a year.

When coupled with a drop in the value of the pound against the ringgit, this reduction in cost, to a Malaysian, is about 40%.

Of course, values are still high by our standards, ranging between £1,000 and £2,000 per sq ft.

A million pounds wouldn’t buy you much, but many Londoners had become quite blasé about the big numbers.

I met one “small time” operator who had accumulated about seven apartments to renovate and sell.

He was personally indebted to his bank for over £45mil and there was some doubt about whether his assets could cover that amount.

It was, he explained, so easy to borrow money until the crunch came.

He showed me one of his apartments currently let at £33,000 per week.

When I left England in the late sixties, that was the amount a blue-collar worker might expect to earn in his entire lifetime.

An interesting feature of the London market is that there is not much stock available.

Sellers, including the banks, are holding off until prices perk up, and there are already some early signs of recovery.

A prolonged upturn might persuade more owners or people with mortgages to liquidate, confirming my belief that a recession always has a sting in its tail.

While I was winging back to KL, a gentleman in Australia was penning a letter to the press accusing me, in one of my articles, of “obfuscation, irrelevance and mumbo jumbo.”

The less confused bits of his letter appear to deal with the issue of “sell then build.”

I am grateful to him for bringing this up and would like to clarify what I believe is confusion over terminology.

The traditional delivery system for developers in Malaysia – and in many other parts of the world including Singapore, Spain and occasionally in England – is to buy “off the plan” and pay progressively during the development period.

This is known as “sell then build.” My antipodean correspondent is of the view that this is grossly “unfair.”

I’d like to be present when he takes possession of a new apartment in Shanghai.

Customarily developers over there deliver a bare shell and all “extras” such as doors and sanitary fittings are added by the purchaser.

My friend from down under went on to add that my act of buying a Proton Exora by signing an order, paying a deposit and taking delivery when it was built, was somehow not “sell then build.”

My view is that we have a locally accepted housing delivery system that has worked phenomenally well and has put a roof over the heads of millions of Malaysians post independence at a rate that the Government alone could never emulate.

It has taken care of the needs of the low-income sector and stands as a shining tribute to private endeavour.

However, in response to potential interest from the market, a second delivery system has been introduced, popularly known as “build then sell” or, “BTS 10:90.”

I believe this is seen as offering the consumer better protection against default by the developer.

As the name implies, the system provides for the buyer to pay a 10% deposit and the balance upon issuance of the Certificate of Completion and Compliance.

In an ideal world, the buyer only risks 10% and he can withhold the balance if there are substantial defects, or if the developer absconds.

In reality, a developer is unlikely to offer this delivery system unless the buyer has lined up a bank loan for payment of the balance 90%.

This seems sensible to me because it discourages speculation.

The developer will normally draw down this 90% during development and bear the interest costs, so in most cases, the arrangement is still essentially a “sell then build” system.

Nothing has changed very much, including the right of the bank to seek redress from the buyer if, for any reason, the developer fails.

In Britain, house buyers have the protection of the much-vaunted National House Building Council 10-year Buildmark warranty and insurance cover for new home buyers.

Despite this self-important title, its effectiveness has been called into question.

The British press recently carried a story of a disgruntled buyer’s letters of complaint to the developer being returned with the endorsement “moved to Iraq.” One wonders who deserves the most sympathy.

In response to the problem, the Council assured the buyer that it is “committed to resolving the problems as soon as possible.”

Critics call the Council a toothless tiger and blame the local authority for signing off on the property in the first place.

All this has some resonance in Malaysia and it is so reassuring to see that delivery problems will persist no matter where.

Finally a little perspective. Last year, 216,702 houses changed hands in Malaysia. 80% were sold in the secondary market.

That means they were mostly completed and available for inspection.

Only 20% of transactions were sales from developers.

By a large margin the majority of purchasers get to see, smell and feel their property before purchase.

Amongst those who do not, there is undeniably a small percentage who suffer from the default of the developer.

The Ministry of Housing and the Bar Council are working on enhancing the current legislation.

Enhancement is always desirable; fundamental change would be a mistake.

As the saying goes, “if it ain’t broke, don’t fix it.”

Chris Boyd is executive chairman of Regroup Associates Sdn Bhd property consultants.

By The Star (by Christopher Boyd)

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