Monopoly of Non Bumiputra housing developers

Sime Darby's prized development Ara Damansara Seri Pilmoor: A property giant's turf

Minister of Housing and Local Government (KPKT) Dato’ Seri Chor Chee Heung introduced an amendment to the Housing Developers Act yesterday. It was designed to do away with errant developers and reduce number of abandon housing projects.

Thursday November 17, 2011

Bill to penalise errant builders tabled

By MARTIN CARVALHO
mart3@thestar.com.my

KUALA LUMPUR: A Bill to make it a criminal offence for developers who fail to complete their projects has been tabled in Parliament for first reading.

Under Clause 9 of the Housing Development (Control and Licensing) (Amendment) Bill, errant housing developers can be fined up to RM500,000, jailed up to three years or both.

The Bill was introduced by Housing and Local Government Minister Datuk Seri Chor Chee Heung here yesterday.

Among others, it is a crime if a developer “abandons or causes to be abandoned a housing development”.

They are deemed to have abandoned projects if they refuse to carry out, delay, suspend or cease work continuously for six months or beyond a period stipulated under the Sales and Purchase Agreement.

The Bill also introduces harsher penalties against errant developers such as increasing the fines from RM20,000 to RM50,000.

They will be entitled to terminate the Sales and Purchase Agreement if the housing project is abandoned, and the developer is required to refund any money paid within 30 days.

Developers who fail to comply with this will face a fine of up to RM250,000 and a penalty of RM5,000 for every day during which the offence continues.

The Bill will also insert Clause 3 into the Act the deposit to obtain a housing development licence will be increased from RM200,000 to 3% of the project’s estimated cost.

This is to ensure that only developers who have sufficient financial ability will be allowed to begin building houses.

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The Bill is considerably good to protect the interest of the home buyers now that property developers who abandon their projects would be deemed as white collar criminals. However, the 3% deposit of the gross development cost (GDC) as license is a bit stiff.

This is because in general, property developers no longer have the luxury to make what they used to make then, which margin is in the neighborhood of 30% of the gorse development value (GDC). If the average margin for property developers now hovers around 20%, it means that the deposit for the housing developers license would be in the neighborhood of 2.5% of the GDV. They are already subjected to 5% retention for which half of that will only be returned to the property developers 24 months from the date of deliver to the buyers.

That is a good 7.5% retention cost against the GDV, which translate to 37.5% of the average returns for the property developer.

Consider this scenario; A property developer buys a parcel of land with subdivided titles and development order, would at best take 30 months from the point of the acquisition to deliver a development of houses to the home buyers. At the point of delivery of vacant possession, the returns for capital investment is only at best calculated at 12.7% of the GDV. That is only pro-rated 5.08% of GDV per annum.

This is on top of the existing ruling of property developers are subjected to the housing developer’s account that is maintained and managed by the bank. Tight controlled cash flow coupled with heavy upfront deposits would throw the burden on the shoulders of the directors even more.

Considering that the property developer would take the heavy brunt of multi pronged risks on their side, this would translate that only companies with very strong capital and cash position would dwell into property development. Medium-sized property developers would find it uneconomical to take the risk. Property development game would now be for the ‘Big Boys’.

In the case of Bumiputra property developers, many would no longer take the risk to dwell into the business even though they have good parcels of land to develop. They would be more driven to either outright sell their parcels of land or do joint ventures. Joint ventures with companies with more solid capital and cash position means that these Bumiputra entrepreneurs would take a back seat and their Non Bumiputra joint venture partners take the lead.

Worse still, for property development projects in very upmarket areas, where GDC is very high.

The solution is for Government agencies such as MARA, Bank Negara, MITI or NGOs such as DPMM create a special fund for capital injection into medium sized bona fide Bumiputra housing developers. We don’t see many state governments able to come in with the special capital ventures at state level Bumiputra housing developers. For the Bumiputra entrepreneurs, these injections of capital would act as angel ventures and they should be given the first right of refusal to buy back the amount of capital with some degree of guaranteed profit scheme.

A high rise upmarket development near KLCC

Imagine a Malay family owns a plot of land 1km radius from KLCC or Bukit Bandaraya/Damansara Heights/Jalan Duta/Jalan Ampang affluent neighborhoods. If the proposed development for the land is luxury apartments, then the GDC would be in the neighborhood of RM 45 million for 60 units or so. 3% of licensing fee would means that the family must fork out RM 1.35 million in cash to be deposited to KPKT even before they could obtain the advertising and sales license. The consultants’ fee for the project would cost them at least RM 4.5 million through out the 42 months from start till delivery of vacant possession.

That’s over RM 100,000 a month, pro-rated.

If there are borrowings for the land and working capital for the project, let say RM 40 million, then the burden to repay the commitment is in the neighborhood of RM 450,000 per month, even before sales started. If the process takes a year before the project is launched, then the property developer would have accumulated over RM 5.4 million on top of the RM 1.2 million consultants’ fees.

Otherwise, only solid Bumiputra property developers would dwell into the game and it would be barrier for the entrance new entrepreneurs. Imagine, what would happen to the majority of Malay Reserve lands now left undeveloped all over the country and waiting for some Bumiputra entrepreneurs to amass enough money to take the risk. Otherwise, all of these Malay Reserve lands would remain as what they are at the moment, largely for agriculture purposes.

We doubt it that this is what Prime Minister Dato’ Seri Mohd. Najib Tun Razak has installed for the Bumiputra commercial and industrial community for strategic wealth creation, especially for asset backed businesses.

- bigdogdotcom