Taking a closer look at the build-then-sell concept

AFTER my last article on the beauty of having both build-then-sell (BTS) and sell-then-build (STB) concepts, I received some feedback regarding the topic during the Chinese New Year break. It is surprising to observe the interest people have towards this issue, especially on the implications of making BTS the only system in our housing development industry.

Many house buyers realised that they can also enjoy the benefits of BTS when they buy from the secondary market. As mentioned in my previous article, 84% of transactions in 2010 were on a BTS basis as purchasing a completed house from secondary market is synonymous with BTS concept. However, some may wonder why it is difficult for developers to adopt the same approach for new projects when it seems to attract more house buyers with BTS?

BTS concept allows purchasers to pay the initial 10% deposit and not pay a single cent until the project is completed. The absence of progressive payments from the house buyers means that the developers would most likely require a higher bridge-financing from the banks to develop the project. At the same time, there is lack of assurance that the purchasers will take ownership of the property upon project completion.

For example, house purchasers who have paid the deposit may later terminate their agreements by just forgo the 10% deposit if the economy turns down or stock market falls since they are not required to obtain loan in the initial stage under BTS concept. This will leave developers in a “tricky” financial condition when they need to deal with unsold units and repay their borrowings at the same time. This concept may also encourage rampant speculation during the good times.

In any business, there should be a binding agreement between buyer and seller to ensure the deal is fair for both parties, and neither party should take advantage of the other. As there is lack of commitment from the purchasers under BTS concept, it is too risky for any developer to undertake massive development and borrowing.

Under our existing Housing Development (Control and Licensing) Act 1966 for STB concept, purchaser has an option to terminate an agreement regardless the construction and billing status. However, under BTS concept, developer can only forfeit 10% of the selling price regardless of the progress of project.

In Australia, both developer and purchaser are obligated to comply with the sale and purchase (S&P) agreement under BTS concept. Purchaser must take ownership of the house and pay the remaining amount when developer complete the project, otherwise there are clauses that allow developer to take legal action if buyers decide to pull out after signing of the S&P agreement.

Therefore, unless it becomes a requirement in our country that the house buyers have to secure the remaining 90% of the property value with a mortgage loan (interest free during construction period) or other form of secured deposits until the project is completed, the banks are obviously subjected to a higher level of risk, and would most likely fund reputable developers with good financial status. And, even if the loan is approved, developers are likely to be charged with higher interests due to higher financing risks.

A chain reaction will come to play when it becomes difficult to obtain a bridging loan. Existing small and/or new property developers will gradually be pushed out of the property industry and the bar for new entries will be raised. The vacuum of property developers will then lead to limited supply of new projects and less competition in the property market.

With increasing demand due to population growth coupled with reducing supply of housing projects, the average price of properties will eventually spiral upwards making it difficult for both aspiring first time house buyers and investors to acquire a property or for the matter, a selection of properties to choose from. This will ultimately defeat and destroy the government's effort of building affordable and choice homes.

Furthermore, a supply reduction in the housing sector would greatly impact the economy as the property industry contributes significantly to other business activities. According to National Property Information Centre, property industry recorded RM107.44bil worth of transaction in 2010. Residential property dominated the overall market, contributing 47.1% of the value of transactions, which is equalled to RM50.6bil in value. More than 140 other industries and trades such as construction, consultancy, engineering, banking industries, etc, would also be affected if the property industry was to slow down.

As we approach Vision 2020, we must remain steadfast on our goal to achieve a developed country status. Each industry will play a significant role in realising this goal. It is therefore crucial that there be no impediments that would either delay the growth and development of industries or, for the matter, send them a step backwards.

With sufficient rules and regulations in place, allowing the free market to dictate how the industry should be shaped will not only benefit all parties, it will equally help to steer the growth and development of the industry. Perhaps, there is more room for consideration before BTS is made mandatory by 2015. And those who want to have an assurance of their home should buy from reputable developers or in the secondary market, as what 84% have done in 2010.

*Datuk Alan Tong is the group chairman of Bukit Kiara Properties. He was the FIABCI world president in 2005-2006 and was named Property Man of The Year 2010 by FIABCI Malaysia.