The HBA discusses implications of the mandatory BTS 10:90 “from 2015 onwards”
HBA lauds the Housing Minister’s announcement that the Housing Laws will be further amended to make it a crime for housing developers to abandon their housing projects without valid reasons.
The Housing Laws have been amended several times since its introduction scores of years ago but yet we are still unable to resolve a lot of the problems faced. If at all, the problems seemed to have increased, particularly, of project abandonment. In fact, it is so serious that the government had to establish a Special Task Force headed by non other than the Chief Secretary to the Government, YBhg Tan Sri Sidek Hassan. Yes, due to his dynamic leadership and his management of the Special Task Force (STF), scores of stalled projects had been/ or are being revived. However, the efforts of the STF have, to an extent, been negated when fresh projects get into trouble and may eventually get abandoned. Those housing projects previously categorized as ‘Sick’ and ‘Delayed’ have since matured into abandoned ones and continue to haunt the housing industry.
We have repeatedly stated that Laws are only as effective as the degree of enforcement. This had been the bane of the whole situation. Wayward developers well know that the chances of their getting away with their wayward deeds are extremely good ! Thus, our question is whether further amendments to the existing Laws would improve the situation.
Having said that, we feel encouraged by the announcement that the Build-Then-Sell (BTS) system will be introduced and made mandatory effectively by the year 2015. However, we believe that the system referred to is not the absolute build-then-sell whereby developers sell only completed houses. It is, we believe, a variant of the present sell-then-build (STB) in which developers are free to lock in buyers upon launch but buyers pay only 10% deposit and the remaining 90% is payable only upon completion. This is the BTS 10-90 referred to. It is actually a restructuring of the financing structure.
In the present system, banks lend money to house buyers (housing loans) who in turn pay the developers progressively during the construction period. Thus, when collection from sales does not match their construction cash flow, the project gets into trouble. (There are cases where projects achieved good sales and yet they get abandoned!)
Advantages of 10-90
In the BTS 10-90 system, banks lend to developers to build the houses. Buyers do not make progressive payments. When the houses are completed, the buyers’ housing loan kicks in and the developers are paid the remaining 90%. The sale is then completed with the buyers having physical possession of the house/ apartment with Certificate of Fitness/ Certificate of Compliance and Completion and keys.
This system has a number of major advantages as follows:
• House buyers are not exposed to the risk of project abandonment where they have no recourse.
• Project financing banks (bridging financiers) operate within a lesser risk environment in that they have full control over the collaterals unlike presently when the lots within the master title (the collateral) are progressively fragmented (charge transferred to end financing banks) as and when house buyers’ end-financing banks start to draw down on the housing loans to pay the developers.
• End financing banks will be in a far lesser risk situation because they are now financing completed houses.
• There will be better quality houses because developers will not risk dispute with buyers on quality come full payment time.
• The system will be largely self-regulating without the myriad of suffocating rules and regulations.
• Government authorities need not spend so much time and effort in monitoring and enforcing the Act.
Issues around 10-90
We support the Minister’s call for financial institutions to offer loans with new concepts and to make bridging loans more readily available to developers. We, however, do not agree that the BTS 10-90 will slow down property development. Why should financial institutions (both project financiers and end-financiers) pull back when the system actually favours them more than the present STB. Our bet is that the property industry will take a bigger leap with the BTS 10-90.
We also do not agree with the statement that small developers will be adversely affected. Few, if any, developers mobilise their in-house funds to develop housing projects.
Big developers take bigger financing whilst smaller developers take smaller financing. This has to do with considerations of taxation, leveraging, risk spreading, etc. The Association of Bankers has repeatedly stated that the financing of project is based on viability, not the size of the projects or the developers. Hence small developers will not in any way, be disadvantaged by the shift to the BTS 10-90.
Form Special Committee
The Minister’s statement that the BTS is expected to be implemented and made mandatory, “after 2015,” is a very vague statement. How long after 2015? Perhaps, there is some reporting error here. In our dialogue with the Minister recently, he reiterated that it will be made mandatory 100% participation by the year 2015.
HBA would like to propose that a road map be drawn so that the shift to BTS 10-90 is fully completed come year 2015. HBA proposes that there should be a gradual ‘phase-in’ of the concept by promoting BTS 10:90 participation starting with 10% participation by developers and increasing that until it becomes 100% participation by 2015.
This way the developers will not suddenly suffer total paradigm shift come 2015. HBA proposes that to make the BTS 10:90 system effective , a Special Committee should be initiated immediately, under the auspices of the Ministry of Housing & Local Government with all the relevant players and stakeholders. The committee is to plan and chart the ‘ROAD MAP – Making BTS 10:90 work and the Way Forward’ in order to move towards an orderly housing industry.
NATIONAL HOUSE BUYERS ASSOCIATION [HBA]
No. 31, Level 3, Jalan Barat, Off Jalan Imbi, 55100, Kuala Lumpur
Tel: 03-2142 2225 | 012- 334 5676 | Fax: 03-22601803