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Saturday, June 30, 2012

Housing fund poser

Is the 3% deposit imposed enough to revive abandoned projects?

Recently, it was reported that an amendment to the housing Development Act 2012 will require developers to set aside 3% of the gross development cost to be placed in a fund that will be managed by the Housing and Local Government Ministry. The proceeds from the fund will be used to revive abandoned projects.

The Housing Developers Authority (HDA) will only issue licensed permit once the 3% is paid (to be enforced end of this year). It is a good move but the quantum may be insufficient to rectify the problem.

The reason being, it all depends at what stage of construction the projects were abandoned. If they wereat 20% completion, then 3% allocation may be insufficient, unless we assume the balance 80% can be sourced from the fund.

It remains unclear how the fund works. A check with the Housing Ministry indicates that the 3% allocation can be refunded to the developer concerned if the project is completed. From what I understand, the 3% allocation is then not considered as a contribution to the fund since the deposit is refundable.

Fund or not?

I fail to understand how 3% can be sufficient unless the completion-to-date reaches 97% development cost (assume also 97% physical completion) and the amount to complete requires the balance 3%. The fund looks and sounds like a fund but in reality, it is not truly a “fund”.

Assuming all the developers completed their projects and there is no abandonment, what does it mean? It means all the deposits will be refunded and there will be no money in the fund, so I don’t see how the fund will help other abandoned projects.

I used to have a friend in Rehda institute who told me that it had in the past actually kick-started an “insurance” concept where all members could contribute some money into the pool. This money was to be used to help members in the event a project was abandoned.

Somehow, it did not take off.

There are many causes of abandonment but invariably the developers who cause problems are the ones that are inadequately capitalised to carry out development projects. In other words, they are not financially strong, they rely too heavily on bank financing and buyers to fund their projects.

The development risk is skewed towards the consumers, meaning they take bigger risk in the event of a failure.

Saving projects

Everybody thinks property development is very profitable and they want to jump onto the bandwagon to make a fast buck. Many do not have the necessary experience and don’t bother to do market studies. The result is that they have a wrong product in a location where there is no demand.

Others get into trouble because they are too ambitious and have financially over-stretched themselves. Some of these projects were designed-driven rather than market driven.

When a project is abandoned, it leads to legal and technical problems. Reviving abandoned projects is no easy task.

In a private free market, white knights (except the Government) will only come in if they can make money upon reviving a project.

I have seen cases where liquidators act as developers. But they do not use their own money. They use the fund accumulated from the additional top up from buyers, money in the developer’s account, buyers’ past payments and sale of remaining units. In these cases, buyers waive their late delivery claims.

When the Government comes in to help, the objective is different. The motive is not profit but a sense of social responsibility. However, they only focus on low/medium cost projects.

I have also seen bridging financiers acting as temporary “developers” who use their own internal fund to complete the projects. They take calculated risk while the white knights will only proceed if the projected result shows viability.

Their injection of fund varies, depending on the stages of completion to date. Some are abandoned at 50% completion, some at 90%. There are times when internal funding is inadequate and external funding is required. There is, therefore, no pre-determined amount required to complete an abandoned project.

Coming back to the 3% allocation, smaller developers complain of high opportunity cost involved when their money is locked up in the HDA account. Bigger developers are well capitalised and have no problem with the 3% ruling.

Buyers at risk

All developers make provisions of between 3% and 5% for contingency or cost variance. The bigger developers will use the provision to meet the requirement. Smaller developers argue that it is a burden and barrier to entry into the industry.

My question is: “A property development often runs into hundreds of millions of ringgit. If they cannot pay the 3% development cost, what does that tell you?”

They want to have their cake and eat it too. The problem is, most developers want to fund their projects almost entirely by purchasers’ cashflow. I can understand if they are unable to come up with 100% equity but how about 30% to 40% own capital and the rest from financiers or buyers’ progressive payments?

Lastly, what is the level of enforcement by the authorities? What is the point of having all the rules and regulations if they are not enforced?

We have cases where developers do not even apply for a developer’s license. Hence, they do not have to pay the RM200,000 deposit for the developer’s licence and open a HDA account. Buyers’ interest are therefore not protected.

What guarantee is there that they will play by the rules and pay the 3%?

People will circumvent the system if malpractices are allowed to go unpunished.

I hope the authority will take a tougher stance to safeguard buyers as well as the industry from the few rogue developers who give the industry a bad reputation.

·Chris Yong is the principal of Rochester Properties.

By The Star (by Chris Yong)

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