An Alternative Financing Method?

Chua Tee yong, the youngest MP in Malaysia has proposed a hybrid scheme for the payment of housing development by both developers and buyers.

To prevent abandoned housing schemes of private developers, Tee Yong wrote his piece in the Malaysia Insider.

This is his proposal:

"JULY 7 — Most housing developments in Malaysia are undertaken by private developers who use the concept of sell then build (STB). Even though most of the projects are ultimately completed, there are a number of abandoned projects — leaving the home-buyers in the lurch.

Most developers go scot-free while the home-buyers are burdened with installment payment for incomplete homes. Imagine the burden of having to pay rental for a place to stay and then pay installments for a home that you cannot occupy. The problem with the current STB is that developers start collecting payments as soon as buyers sign on the dotted line.

Problems associated with STB are constantly reported in the media and in Selangor alone it is estimated that there is nearly 45,000 units abandoned and it is estimated that it would required RM3 billion to RM5 billion just to revive the projects.

Due to STB-related problems, in April 2007, the government introduced the build then sell scheme (BTS) — to protect home-buyers. There are two types of BTS, the first one the complete BTS whereby home-buyers do not pay any deposit and type two whereby the buyers pay a 10 per cent deposit and only begin paying the remaining 90 per cent when the house is ready.

Unfortunately, the BTS approach is solely voluntary. With developers not being paid on a progressive basis, hardly any of them adopt this approach. The previous STB approach enables developers to source funds on a progressive basis.

Therefore the BTS is not feasible and it is only good in paper as developers shun it.

As such a new approach is necessary, to balance the interest of both developers and home-buyers.

From the buyers’ perspective, they want completed projects and not liable if they are abandoned.

Developers are concerned that without steady financing during construction, they would lack the cash flow to complete the project.

In addition, the funding cost to complete the project would have factored into the selling price of the home resulting in higher selling price. In between the developer and the homeowners, financial institutions provide the funds and recover the disbursement through the installment payment received from the homeowners.

Taking into account the perspective of the home-buyers, developers and financial institutions, my hybrid of the BTS and STB is as follows;

Role of the Home-buyer

The home-buyer would pay a 10 per cent deposit for the projects and no more until project completion.

If the project is delayed there will not be any installment payment.

Upon project completion, the installment scheme starts immediately and the buyers is not allowed to withdraw from the sale and purchase agreement.

Role of the Developer

During the stage of construction, the developer is able to claim progress payment from the financial institutions for the projects.

Any interest cost for the draw-down to pay the progress of the home is borne by the developers instead of the home-buyers.

If there are delays, the developer will continue to pay the interest cost. This will ensure speedy completions of the units.

Role of the financial institutions

Financial institutions predominantly only assess the ability of home-buyers to service their loans.

Under this approach the financial institutions evaluate developers’ ability to complete the project.

Financial institutions will forward progressive disbursements to the developers based on percentage completion.

However, if the project is abandoned, the financial institution would have to take the necessary action against the developer and NOT the home-buyers.

Once the project is completed the installment will be serviced by the home-buyers.

No doubt, the above proposed scheme is not full proof and a lot of small developers may find this approach unattractive but the government can probably set aside some fund to ensure this approach is a success. I am glad to note that some developers have actually undertaken a similar approach on a voluntary basis to attract home-buyers during this period.

The financial institutions may not agree due to higher risk as they would have to assess both the home-buyer and developer. Under the current scheme, financial institutions are relatively risk free as loans are tied to the home-buyers.

There is also a possibility that the cost of homes would be slightly higher. This is because developers would factor in the interest expense incurred during the construction period.

For a home costing RM350,000 taking three years to complete, it is estimated that the interest cost would amount to +/- RM30,000. Even though the selling price is higher, the home-buyer is at least assured that if the project is abandoned they will not be burden with installments.

Ultimately the Government has to weigh the benefits of this proposal compared to the risk of having more abandoned projects.

Financial institutions cannot be ignorant and hope to rely on the home-buyers to judge if a project can complete. Developers with good track record have nothing to worry about.

In summary, any new approach would require buy-in from the home-buyers, financial institutions and developers.

As usual, dialogues, fora and discussions are necessary to get feedback and to formulate a detailed revised approach from time to time.