Malaysia Property News is a free resource website sharing Daily Property News & information about Property in Malaysia, which related to, Property Market, Property Investment, Commercial Property , Hot Properties Malaysia, Real Estate, Retail Shop, Business Park, Condominium Malaysia, Terraces & Apartment Malaysia, Houses, Residence, Resort and many more.

Saturday, September 8, 2012

An alternative to build-then-sell

There’s a solution that will solve the problem of abandoned housing once and for all.

AT a time when the Government is looking closely at the property markets to see if a bubble is forming, and examining the question of building more affordable housing, it is only natural that the attention becomes focused on the property sector, especially with the budget just around the corner.

The situation calls for good sense to prevail in a rather fluid property market. A good rule of thumb is that when there is talk of a property bubble, whether arguing that there is one or against, there may well be one forming.

Under such circumstances, it is advisable to take a good hard look at practices in the property market to see if any may be inadvertently contributing to an artificial increase in demand not supported by genuine needs of those who want to occupy the space.

We can argue till the cows come home about many things, but if there is not enough demand to occupy the space, property prices will come down. If the supply outruns demand too much, property prices will eventually collapse. The converse is also true, of course.

Rational owners, developers, financiers and even buyers don’t want that and are prepared to accept measures which deflate the balloon without exploding it. The only people who want volatility rather than stability in house prices are speculators, for then they can trade.

So it is in the interest of everyone to rein in excessive speculation in the property market to ensure that supply about matches demand. And if Malaysians are to benefit from Malaysian property, there’s nothing wrong with restricting foreign purchases or even disallowing it – countries around the world do that and they are none the worse off.

A key factor that could affect supply is the build-then-sell (BTS) concept, which housing developers claim could result in contraction of supply by as much as 80% and result in soaring prices.

Whether that claim is true or not is a moot point but really, there is an alternative to BTS. You can still have BTS but implement a system whereby money does not go to the developer until the certificate of fitness (CF) is issued.

Such a system already operates in countries such as Australia and will effectively solve the problem of abandoned housing schemes once and for all. That we have not solved this problem after all these years is a shame when the solution is so, so simple. It speaks volumes for the strong influence of developers and the poor efficacy of government.

Here’s how it works. Developers, as it is now, can come up with their plans and sell based on their plans and specifications. Buyers, if they are convinced, will pay their deposits and pay according to a schedule of completion.

But here’s the difference. None of the money the buyer pays will go to the developer. Instead it will go into an interest-bearing trust account. The developer, based on his project viability and the money in the trust account, will get commercial funding to bridge the gap.

Professional architects will be required to be independent and to certify the stage of completion. Banks will then deposit the money into the trust account based on stage of completion. At the end of it all, when CFs are issued and everything is properly certified, the trust account releases the money to the developer.

The Government can facilitate the setting up of such a scheme. Bank Negara can administer it and put the trust money in interest bearing instruments such as government securities and treasury bills.

Banks can give concessional bridging financing to the developers because there is or will be an equal amount in the trust fund upon which the loan is secured. The trust fund could easily pay an interest rate of say 2% a year, which is still below that of fixed deposits, while it is not inconceivable that at current rates, developers can get concessional financing at 4%.

Yes, the financing costs will increase but not by very much. Let’s assume the house costs RM300,000. We assume that land costs are half and building costs the other half – it will vary but let’s use this for simplicity.

Typically developers will make a profit on land costs too, especially if they had obtained agricultural land and then converted it for residential use. So financing would be for construction purposes, or in this case RM150,000.

However, this amount will not be needed immediately but according to the stage of building. We assume it is drawn down uniformly over the period. Thus, if RM150,000 is used over two years, then the full interest on it will apply for about just one year.

If the developer can get financing at a concessional rate of say 4%, and he gets interest on the trust account at 2%, then his final cost will be 2% for one year on RM150,000 or RM3,000. That’s a small price (1% of the house price) to pay for total security and even that can be easily recovered by a tiny increase in the profit margin of the developer.

Not only that, if such a scheme is implemented, you don’t have to be a giant developer with deep pockets. So long as your scheme and your business practice are sound, you are quite likely to get bridging financing from the banks because of the security of the money in the trust account.

As I said, similar schemes are in place in Australia and it is a mystery why such a scheme has not been implemented here. It will very easily and immediately solve the problem of abandoned houses, which arise because developers have absconded with the money and left unfinished houses behind.

Thousands of buyers not only do not have houses to stay in but have to service a bank loan on top of that – a severe double whammy to their lives and the lives of their dependents. They are at their wits end to find a way of making a living.

It is time that all involved get a heart, put their hands together and put to rest this easily solvable problem of abandoned housing once and for all.

P. Gunasegaram has personal experience of an abandoned housing scheme. The shareholders of this liquidated developer are still doing fine.

By The Star

No comments: