The Concept Of Sell Then Build

The Concept Of Sell Then Build Housing market play an important role in economy of Malaysia. The demand on housing market increasing year by year since the population of Malaysia is increasing. Undoubtedly, buyers nowadays buy a house is not only for living use, but also for investment use. This criterion causes the housing market become larger than before. In addition, home-buyers who have ability nowadays also require a quality house for their living place. To support the large market, the developers act as a key role to supply the large number of housing needed and high quality houses. Therefore, housing delivery system plays an important role to supply the houses to home-buyers. Currently, there are two important housing delivery system adopted in Malaysia that is STB system and BTS system. The developers in Malaysia had implemented the conventional STB system for many decades, and with this system, developers successful to meet the housing market needed. However, there is no system can be implemented perfectly without any flaws. According to the housing provision performance in five years of Malaysian plan, it shows that the public and private sectors have over-supplying the houses needed by using STB system. Furthermore, the badly performance of supplying the housing have risen during the economic downturn and the abandoned projects occurred in 1980s and early 1990s had make the home-buyers disappointed with this situation. Thus, government had first time introduced build-then-sell (BTS) system to be implemented in 1990 to solve the abandoned housing problem. However, some of the developers claim that BTS system still not feasible to implement in Malaysia housing sector. From developers viewpoint, many considerations need to be considered such as the approval of planning process, financial supports, firm characteristic and others in implementation of a suitable housing delivery system. The Concept of Sell-Then-Build (STB) System In Malaysia, most of the developers prefer to adopt STB system as the housing delivery system in their development. With STB system, the developer is allowed to collect money from potential home-buyers before the houses being constructed. The money collected from home-buyers can use as part of the finances for the development. Therefore, the developers can reduce the bridging finance borrowed from bank or financial institution. Under STB system, house-buyers considered as one of the financiers to a development project since they part-finance the construction cost of the project via individual end-financing obtained from a financial institution (end-financier). On the other hand, the developer may obtain a bridging finance from financial institution (bridge-financier) to bridge-finance the construction costs paid out pending receipt of progressive payment from the end-financiers. There are two main purposes for a pre-sale condition. First, a pre-sale demonstrates a certain level of saleability for the development. With the STB concept, the developers can sell the houses first before they construct the housing projects. Therefore, the developers can estimates the number of houses needed to construct in a housing project. Second, with the pre-sale, it can minimise the bridging finance required to fund the cost of completion in case the developers fails to achieve further sales after the disbursement of the bridging finance(The Association of Banks in Malaysia, 2009). With the STB concept, the developer can minimise the possibility to sustain loss. The Problems Faced by Conventional Sell-Then-Build System STB system had been implemented for four decades in Malaysia and had met the target needed in housing market. However, the implementation of STB system has bring some housing problems which caused by human-being. These problems have caused many home-buyers disappointed with the housing market. Under STB system, the home-buyers face with numerous problems such as defect problems, late delivery, difficulties in getting Certificate Fitness for Occupation (CFO) and land titles approval, and abandoned projects. The latest few years, many home-buyers have complained that the poor quality of houses built by developers. There are many houses built under STB system faced with the bad defects such as walls and floors cracking, foundation sinking, roof leaking, retaining walls collapsing, septic tank not working and pipes blocking (Property Times, 2005). This situation may occur since the money had been collected from home-buyers by developers during construction period. The unethical developers will try to jerry-build the houses to gain more profit. Their irresponsibility behaviour make the bad defects occurred and they escape from the responsibility after they have collect all money. As we know that, under STB system, the un-built houses are sold to potential home-buyers by showing with a model house. However, there is a risk raised since the workmanship and design of actual house unit built by developers may be different with the model house. Additionally, the problem of late delivery of houses is always happened under STB system. Although the developers had promised to complete the houses on the specific date stated in Sales and Purchase (SP) Agreement, but the completion of the houses is always delayed from the date promised (Ng, 2007). This problem is keep occurred and make the home-buyers puzzled. Again, the difficulty to get CFO and land titles approval have make the home-buyers disappointed with the insufficient supply of housing units. The worse housing problem under STB system is the abandoned project. Since the developers can legally sold the un-built houses to home-buyers and collect money from them before construction finish, there is a risk that the developers run away with the money before the houses were completed. National Housing Buyers Association Malaysia (2006) revealed that, the developers abandon their projects when they have sold almost all the houses. The table below had been shown the abandoned project occurred from 1990 until 31st May 2009. From the table 2.1, we can know that, there are 5,484 home-buyers became the victims of abandoned projects. From developers viewpoint, the abandoned projects are only a small number from total housing development projects and not a serious problem. However, the home-buyers as victims need to bear a heavy of money loss and disappointed with the housing market in Malaysia. Over the years, there is insufficient supply of housing units which have affected most home-buyers. Therefore, the government is trying to find a solution to solve these problems. As a result, government had proposed to implement BTS system in Malaysia to avoid these problems raised again and again. The Concept of Build-Then-Sell System The concept of BTS system is definitely different with the concept of STB system. STB system allows the developers to sell the house units before they built and obtain the money from home-buyers to fund construction or secure bridge financing through joint venture arrangements with banks (Nor Aini Yusof, 2009). This may give chance to some developers managed to get away from completing their projects with few financial consequences at the expense of unsuspecting home-buyers. Under STB system, many home-buyers complaints about shoddy workmanship, late delivery of houses and abandoned projects, therefore, the government introduced four initiatives, which include the establishment of a new One Stop Centre (OSC) at local authorities, the Issuance of Certificate of Completion and Compliance (CCC) by professionals is introduced to replace the CFO and BTS system (INTAN, 2007). The concept of BTS system is the developers must complete a housing project before they can sell it to the home-buyers (The Star, 2007). Therefore, the developers cannot collect the money from home-buyers before they complete the housing project under BTS system. The risks of housing development are shared between developers and their lending banks only. Therefore, fewer developers adopt BTS system compared to STB system since only developers with strong financial support are able to implement it. The housing projects that are built and marketed by using BTS system need not comply with the statutory standard SP agreements. As difference with STB system, the BTS system allows the developer does not receive progressive payment from end-financiers as STB system. In order for the development project to work successful, the developer need borrow higher financing from the bridge-financier to finance the project. Hence, the bank has to play an important role by providing bridging finance for the construction costs and this will increase the risk exposure of the financial institution. Generally, the banks prefer to lend loan to individual purchasers in many smaller parcels instead of lending it all to the developer in one parcel. Therefore, it is difficult for the new started companies which do not have necessary track record to convince the bank to provide them with the financing to do it in the new BTS system. It is believed that the new concept will give some impacts on the current financing practices involving the type of financial resources such as end finance and bridge finance, and the parties involved in development project are developers and bankers. It is also believed that the BTS system will leave a great impact on the developers and the whole property industry since there is only the bridging finance to fund the construction activities. In Malaysia, BTS system is not a totally alien system since a few financially strong developers with developments in prime locations have implement the complement BTS system. There are two main types of BTS system, which include complete BTS and partial BTS. The complete BTS is the developer builds the house and sells when completed CCC or CFO, there is no prior agreement as STB system, therefore, the developer entitle to sell at market price at the time of completion. On the other hand, the partial BTS is a housing delivery system which combined both BTS and STB. For partial BTS, the SP agreement is signed before the construction start and developer can collects a certain percentage as initial payment during the SP agreement being signed. The balance of the houses price will be paid after completion with CCC or CFO. The partial BTS can be 10:90, 20:80 or 30:70, the percentage of partial BTS is depend on the developer. The government is more concern to 10:90 BTS compare to other partial BTS. In fact, 10:90 system is still a Sell first then Build model since the houses are still not yet to be build at the time signing of SP agreement. However, if the developer fails to complete the project and cause the abandoned project for whatever reasons, the buyers are protected from any disastrous fallout. This option is introduced by Ministry of Housing and Local Government (MHLG) in which the 10% deposit is paid to the lawyers as down payment upon signing the SP agreement and the sale is locked-in while the balance is payable after the completion of CCC or CFO. The Stakeholders in Build-Then Sell System The word of Stakeholder means that the individuals or groups who are involved or affected either directly or indirectly by a system or program (Atkinson et al, 1997). Hence, the stakeholders of BTS system include individuals or groups whose interests or quality of life affected by the decision to apply BTS. This impacts received by those people either positively or negatively. The stakeholders in BTS system include housing developers, home-buyers, financial institutions, government, professional bodies and social activists. The details of those stakeholders are shown as Table 2.2. Stakeholders Descriptions Developer Developer is an entrepreneur. They can identify the need for a particular property product and is willing to take risk to produce it for a profit. Background of developer may be in building, estate agency, engineering, finance, law, architecture or business management. They are involved in the real process of development. Some of the developers have total responsibility for the management of every stage of a development. Whereas others are given a large amount of responsibility to a project manager, retaining a more strategic policy role. Financial institutions Developers seek a number of funds to secure the full measure of equity return from development projects. Therefore, the financial institution plays an important role to finance the projects. Such financial institutions become active developers in their own right are largely a function of the prevailing general investment climate and the particular performance of the property market. According to Datuk Seri Ong Ka Ting, under BTS system, banks need to make some commitment towards providing suitable funding to projects. Professional bodies Architect The architect plays a role to critical to the development process. Architect will translate the concept or idea of developer into a workable and attractive solution. Several major elements in the development process such as the acquisition of planning approval, the design of the building and the control of the building contract are fully concerned by the architect. To conform the developers do not run away with the bridge finance, architect need to prepare a report of development stage by stage to bank for bank to release money. Engineers There are several engineer involve in the construction process of the development project. They working closely with the architect and combine to ensure that the plans are structurally and that the mechanical systems will service the building effectively. The engineers involved in a development projects include structural engineer, geotechnical engineer, mechanical and electrical engineer or building services engineer and environmental engineer. Quantity surveyor The quantity surveyor is in charge with the task of cost analysis and cost control. Quantity surveyor included in the initial design deliberations and financial appraisal. Solicitor The services of a solicitor in the property development process include acquisition through the various stages of planning approval, contracts for construction, to eventual sale or leasing Table 2.2 Stakeholders in Build-Then-Sell System The Issues of Build-Then-Sell System in Malaysia Since there are a large number of abandoned projects caused by the economic downturn and developers financial inadequacy, the government introduced the implementation of BTS system. BTS system has been studied over past two decades. In early 1981, the implementation of the BTS system proposed by the Federation of Malaysian Consumer Association (Zulkilfli Abdul Ghani, 2004). A decade later, Dr. Ting Chew Peh, the then-Minister of Housing and Local Government, called for implementation of BTS in 1991. There are a lot of benefits to implement BTS system compare to STB system. First, when the developer adopts BTS system, the home-buyers have the chance to see built housing units. The home-buyers also can spot the weaknesses of the houses built and the interest of the home-buyers are protected. Home-buyer prefers to gauge quality of the house rather than simply betting on such issues based on a coloured brochure. Since the home-buyers can see the houses first before they decide to buy it, so the quality of the houses built is guaranteed. The government endorsed BTS in 1996 which reflected in the 7th Malaysian Plan in Dewan Rakyat by previous-Prime Minister Dr. Mahathir Mohamad (New Strait Times, 1999). However, this is only a small portion of developers adopt the BTS system. Hence, the government offered incentives to the developers who apply either BTS or 10:90 system. The incentives include the fast-track approval for BTS projects, a waiver of the RM 200,000 deposit for a housing developers license and an exemption from the low-cost house construction quota. There are some affords have been done by government to support BTS system. First, the government has expanding the role of the current OSC. With the existing of OSC, the development applications process become simultaneously and systematically via a committee headed by council presidents and made up of other technical department officers. In addition, the other impetuses include replacing the CFO with professionally issued CCC, drafting of a Building and Common Property Act 2007 to ensure a better maintenance and management of stratified properties and waiving of the license deposit for developers who opt for the BTS system. The incentives offered to developers include the reduction of up to four months for the processing of development proposals and the option for developers to replace the quota to build low-cost homes with medium-cost homes. According to Previous Prime Minister Tun Abdullah Badawi (2007), the approvals for selected projects such as BTS, high impact projects, government and foreign investors would be shorter than other projects. The time taken to approve projects for those selected projects will be slashed from five years to six months. In addition, CCC will replace CFO to avoid delays. However, under the CCC system, certified professionals like architects and engineers are authorized to approve buildings for vacant possession. Although professional will managed the issuance of CCC, the local authorities will continue to monitor the construction to ensure it is done according to regulations. In 2007, the government announced that the implementation of BTS and STB can be adopted parallel at the same time. Since the developer can choose whether to adopt the new BTS concept or the STB concept, therefore only a few developers have taken the governments offered incentives to implement BTS system. The developer prefer STB system rather than BTS system because developers are more familiar with STB system which has been practiced for over 50 years in Malaysia and developers did not want to take risk on the new system. Additionally, most of the developers are still unclear with the application of incentives offered by government. Under the STB system, some professional misconduct was believed to contribute to the housing industrys problems. For instance, a dishonest architect will approve project progress although the specifications do not achieved by developers. Again, many lawyers prepare their documents during the pre-construction stage and will simply walk away if the project has been abandoned. To avoid these problems occurred, most of the professional bodies believed that the BTS or 10:90 system would minimize the industrys problems and help boost the housing industry. Although the BTS concept can protects home-buyers from being stuck in case a development project is abandoned, but it cannot avoid a development project from being abandoned in the first place. The risks of property development would still exist with or without the BTS system. This is because the risks associated with property development may cause by other factors such as increases in project costs, main contractors capacity and regulatory issues which can affect whether the project can be completed or not. According to Datuk Eddy Chen (2007), the immediate past president of REHDA, there is no need to change the BTS system or its 10:90 variant since the abandoned projects are only a small portion of the millions of housing units which successfully built. However, the abandoned houses are no small matter for those home-buyers who need to pay off loans for units they will not see. From a home-buyers viewpoint, they are willing to pay a slightly price for a house as long as they are assured a high-quality house. Many people will be satisfied if they are given the chance to see and examine the completed house before deciding to buy it. Therefore, the home-buyers can accept either the BTS or 10:90 system which can reduce their risk when buying a house. According to Datuk seri Kong Cho Ha (2009), the Housing and Local Government Minister, the full BTS system would not be feasible adopted in Malaysia unless the projects are held in a hot area such as Bandar Utama. In our country, only a small amount of developers have the financial capacity to take the high risk of adopting the BTS system and the few financial institutions willing to finance a BTS project because it is risky. Therefore, it is quite hard to let all stakeholders accept the full BTS system since nobody can promise the sales of the completed houses and the return of projects. Most of the developers and financial institutions are not dare to take the risk especially in this economy downturn period. The Comparison of Planning Approval Process of Build-Then-Sell System and Sell-Then-Build System Nowadays, the approval for application of planning is preceded through OSC which will be more effective and efficient than before. To encourage the developers to implement BTS system, the approval of application of planning will be approve through the fast lane within 4 months. The planning approval will be prior given to the developer who adopts BTS system. If the development located within the location that has local planning, the approval of planning will be obtained within 67 days (2 months and 7 days). Besides, the developer who adopts STB system will obtain the approval of application of planning within 6 months. The time used in the planning approval is differs for BTS and STB system. The flowchart of application for proposal development for BTS system and STB system are shown in Figure 2.1 and Figure 2.2. Figure 2.1 Flowchart of Concurrent Application for Proposal Development within 4 Months (Source: Guidebook Improving the Delivery System Procedure and Process of Development Proposal and Implementation of One-Stop Centre (Second Edition), MHLG) Figure 2.2 Flowchart of Concurrent Application for Proposal Development within 6 Months (Source: Guidebook Improving the Delivery System Procedure and Process of Development Proposal and Implementation of One-Stop Centre (Second Edition), MHLG) A new set of Standard SP Agreements needs to be set up for the 10:90 system. In fact, 10:90 system is a combination of STB system and BTS system. There are no much different from STB system in the development process and the SP Agreements. To a better understanding of the various existing sale transaction and the payment systems for the different types of purchase, Table 2.3 is shown the comparison on the delivery systems. Details Completed Properties Sell-Then-Build System Build-Then-Sell System 10:90 Payment System On the signing of Sale Purchase Agreement Pay 10% of purchase price Pay 10% of Purchase Price None Pay 10% of Purchase Price Waiting period for Completion of Construction Notice of Delivery of Vacant Possession None Within 24 or 36 months or more upon Architects Certification of Completion Within 24 or 36 months or more upon Architects Certification of Completion *Within 24 or 36 months or more upon Architects Certification of Completion Buyer to complete payments 3 months from SPA Date (in normal situation) Progressive payment system in percentage (3rd Schedule) (from first 10% payment or SPA Date) while waiting for completion of construction Full payment of Purchase Price at 24 or 36 months from SPA Date depending on the regulated contract of sale 90% of Purchase Price at 24 or 36 months from SPA Date depending on the regulated contract of sale Waiting period for actual occupation with Certificate of Fitness for Occupation (CFO) None Within 14 days from Vacant Possession or longer depending on Developers architect to procure the issuance of CFO Proposed Vacant Possession with CFO *Proposed Vacant Possession with CFO Waiting period for transfer of individual/strata titles Varies on whether titles have been issued at the time of signing of SPA Varies from developer to developer Proposed Vacant Possession with issuance of titles *Proposed Vacant Possession with issuance of titles Table 2.3 Comparison on the housing delivery system (Source: National Housing Buyers Association) The Advantages of Adoption of Build-Then Sell System To encourage developers adopt BTS system as their housing delivery system, government has offered many incentives for the developers who adopt BTS system. Hence, the developers can enjoy the advantages while adopt the BTS system. In the process of planning approval, the departments involved will give priority to the developers who adopt BTS system. Therefore, the developers that implement BTS system will obtain approval of development faster than the developers who adopt STB system. They can obtain the approval through fast track of four months while the other will obtain the approval in six months. The other incentives offered include option to build medium-low cost or medium cost houses to replace the low cost houses, exemption from RM200,000 of license fee and SPA enable developer to obtain financing. In housing development, the developers are required to build low cost houses which the requirements are differ from state to state. However, the developers who adopt BTS system can replace the low cost houses by medium-low cost houses or medium cost houses. This offer allow the developer earn more money compare with the development which need to build low cost houses. Additionally, the developers are exempted from RM200,000 for license fee if they implement BTS system. Therefore, the developers save RM200,000 and use it to finance the housing project. Most of the developers claim that they are unable to support BTS system because it is hard to borrow money from bank. Therefore, the government introduces 10:90 system which the SP Agreement can be signed before construction stage. With the SP Agreement, the developer can obtain 10% deposits from home-buyers for their development. In fact, the BTS system has bring a lot of advantages to home-buyers. With the implementation of BTS system, the home-buyers can view the complete houses first before they paid the entire payment. Therefore, home-buyers no need to worry the developers run away with the money before complete the houses. Again, the home-buyers are allow to pay the houses price after the houses completed, it is less financial burden to the home-buyers during the construction stage. In BTS development, the SP Agreement gives the legal protection to the home-buyers on price guarantee. Since the developers need to complete the houses before sell to home-buyers, the quality and workmanship of the development will be enhanced. If the quality of houses is bad, the complete houses cannot sell out and the developers will sustain the loss of bad quality houses. In the past, the developers adopt STB system as their housing delivery system and there are many houses had a lot of defects and poor workmanship. Some of the developers are dishonest and use low quality materials to build the houses to earn more money. Under BTS system, if a developer builds a low quality house, the home-buyer can decide do not buy it without sustain any loss. Therefore, the quality of houses will be enhanced under BTS system. In addition, developers are required to be more professional and responsible. Under the implementation of BTS system, only the genuine developers will involve in the development field. Since the developers need to sustain most of the development cost during construction stage under BTS system, therefore incapable developers not dare to adopt BTS system. Hence, only developers who has ability and strong in financial will adopt BTS system to build quality houses for home-buyers. This can make the home-buyers increase their confidence in development sector and the market of property can be increased. The implementation of BTS system can reduce the abandoned projects in Malaysia. The main reason that BTS system can reduce abandoned house is unable developers will not involve in development which adopt BTS system as housing delivery system. In the past, some of the developers are unable to continue the development during construction stage. This situation cause the abandoned houses exist especially during economic downturn period. Moreover, the developers who have no intention of completing their housing projects will be ridded from the housing development which adopt BTS system. The developers only can obtain financial support from financial institution during the construction stage, they have no chance to run away with the payment made by home-buyers. If the developers have no intention to complete the projects, they will lose capital spent in the housing project. The home-buyers no need to worry when they buy a house under BTS system. This is because the developers will build good quality houses and build according to the specifications in the brochure. Additionally, the certificate of fitness is obtained before home-buyers make the payment for the house, therefore they no need to worry about being cheated by developer when they buy the houses under BTS system. Therefore, the BTS system should be implemented without any further delay to protect home-buyers interests and active property market. The Problems Faced in The Implementation of Build-Then-Sell System The BTS system is a new concept in housing delivery system for stakeholders in Malaysia, so there are less implement mechanisms and policies in Malaysia to expedite the implementation of BTS system (Nor Aini Yusof, 2009). Majority of the developers feel that the government is also not very clear with the concept of BTS system because the government has simply introduce the idea of BTS system without prepare a proper mechanisms for implementation of BTS system. For an example, MLHG prepared the guidelines for 10:90 model only, but did not prepare the guidelines for other model. The stakeholders have argued that the government should prepare proper procedures and guidelines for all BTS variants but not only for 10:90 system. Again, the policy makers include the central government, state government and local authorities should cooperate to promote BTS implementation and address administrative and procedural issues to smooth the functioning of BTS system. Moreover, the government offer the incentives for developers who implement full BTS system or 10:90 system only. These incentives will not help to encourage developers to adopt other BTS model and the developers will prefer to adopt STB system under this scenario. Although the government offer the incentives to motivate developers to implement BTS system, however there is negative response to the incentives. The incentives are not attractive enough to influence developers in adopting BTS because the unclear procedures and uncertainty of application process make the developers feel that the incentives were not worth for them to apply. Therefore, the government should address the procedures and application process clearly and offer the incentives to those developers who implement other BTS variant. Another problem faced by developers who adopt BTS system is a proper monitoring system does not exist in Malaysia. Many parties claim th