Getting developers’ houses in order

RECENTLY, we were consulted about some property developers and asked what we thought about their business models and, more importantly perhaps, how to value them accurately.

The key things that most investors look at are:-

● Where they are located?

● How high they price their developments for sale?

● When they choose to market their developments?

When we began scrutinising these developers, we drilled deeper into some of the key features that they chose to highlight how they worked, which were as follows:

● First, they claimed that they were able to complete a four-tower residential development within two years;

● Second, they had a license to increase the density of their built-up area, also known as gross plot ratio, from nine persons per site to 3,000 persons on the same site; and

● Third, they had special construction skills, which would ensure that the building would stand firm despite landslides or earthquakes.

Each of the above claims is a tall order, so you might well ask whether we are stretching the truth with these statements. Ludicrous as they may seem, we assure you that the developers claimed all these in their marketing documents. We went through each statement carefully, evaluating if each of their claims can indeed be substantiated.

Their first assertion, that they can complete a four-tower development within 24 months, can be dealt with simply enough. A back-of-the-envelope calculation would tell you that for such a development to be built so quickly, construction would have to take place 24 hours a day, seven days a week.

Our first question was to the authorities. Aren't there laws against building after 7pm daily, and which allow only six days of construction a week, to spare the public the noise, dust and other such disturbances? And according to our research findings, as the development in question is a private property, these building rules do apply.

As to their claim that they are able to increase their gross plot ratio so significantly, we queried them on:

● How do you actually increase plot ratio by so much?

● Surely you would need a detailed procedure and transparent process to do so?

● How would you ensure that everything needed to support such intensive building would run smoothly?

● How would you manage traffic to smoothen operations?

● We also asked an off the wall question; how would you arrange basic sanitation facilities so the builders could cope with the increased need for water as well as the efficient disposal of waste from the site?

Last but certainly not least, we wondered how the developer could guarantee that the development would be landslide and earthquake-proof?

The developer's representative said happily that their buildings could even withstand a tsunami. So we prodded them as to whether or not they used some super form of steel or concrete. His response? They were not sure “what kind of cement is used for their buildings and the buyers would have to trust them”.

We then enquired further as to how they would ensure that the building materials would always be as hardy as claimed. Did they, for example, have audit checks on the quality of cement used? In reply, the representative said, “Of course not - all that we do is based on trust. After all, we are property developers.”

Anyone could see from such responses that one cannot take their words at face value. So we concluded that developers such as these:

● Would probably have no interest in ensuring proper road and other infrastructural support, or arranging proper drainage to cope with the increased waste flow;

● Would probably not adhere to existing laws and regulations;

● Might not have in place proper audit procedures on the amount and quality of building materials being used; and

● Might also not have proper audit procedures on their statements and promises to buyers.

As investors, we can of course avoid companies that flout the law like this.

As homebuyers, we can set a standard by boycotting companies that are not willing to improve the levels of transparency at which they operate.

For example, there is no point looking at where they locate their developments, because if such irresponsible developers can increase the plot ratio of their developments arbitrarily, then one can assume that the developers next door can do the same. This means that the sea view you enjoy today will probably wind up as a view of the pantry of the apartment across from you in the not very distant future.

And while the price of a property is a foremost consideration, we would urge you to focus too on a property's sustainability. If developers are clogging up drains and causing traffic jams due to their crunched construction schedule, their developments are not going to stay well maintained for long. Sooner or later, barely sustainable living conditions will have the tenants of the apartments moving out and their landlords will be forced to sell their units at lower prices just to get rid of their properties.

As for the time developers choose to sell such developments, one thing is for sure, any developer that claims to be able to put up four towers of 20-storey apartments within two years has got to be cutting corners. Prospective investors should, at the very least, demand that a safety review be done on the development in case of any structural cracks. This concern would be augmented if the development is near limestone caverns and hillsides.

If Malaysia is to become a much sought-after destination for property investors, its developers will have to get their houses in order first by adhering to all laws, monitoring quality strictly and making promises they can keep and, in general, have the highest standards of transparency and accountability.

Let us not allow a few bad apples rot the basket.

Datuk Shireen Muhiudeen is managing director of Corston-Smith Asset Management in Malaysia, a fund management company that makes investment decisions based on corporate governance. - The Star