Should Malaysia switch to build-then-sell model to prevent housing woes?

Experts call for stricter regulations, developer accountability for sick projects

10 Mar 2024 02:02pm
Photo for illustration purpose only. - FILE PIX by Bernama
Photo for illustration purpose only. - FILE PIX by Bernama

KUALA LUMPUR - More than five years ago, they purchased residential units in a proposed housing development project in Selangor. Today, the 2,400 buyers concerned are still waiting for their homes to be completed so that they can move in.

But they are in a dilemma as the project, Residensi Hektar Gombak - developed under the Federal Territories Affordable Housing Programme, a government initiative to help the M40 and B40 groups living in the federal territories purchase their own homes - was declared "sick” in April last year by the National Housing Department, Ministry of Housing and Local Government.

A project is deemed sick if construction work is delayed by over 30 per cent compared to its scheduled progress or if its sale and purchase agreement (SPA) has lapsed.

The Residensi Hektar Gombak house buyers are now shouldering a substantial financial burden as they not only have to repay the loans they took to buy their "dream” homes but also have to pay the rentals of the houses they are occupying now.

Work on Residensi Hektar Gombak, which has a gross development value (GDV) of RM700 million, started in 2017. Consisting of five apartment blocks with a total of 2,400 units (all sold), the project is located on Malay reserve land. The 800-sq-foot units are priced at RM266,000 each and 850,000-sq-foot units at RM299,900 each.


One of the homebuyers Mohd Sharrel Fahmi Baharum, 42, a government employee, said some buyers in the affected project have ceased making monthly loan instalments as they could no longer sustain the payments for two homes simultaneously. They have also received "reminders” from the bank regarding their overdue payments.

The father-of-two said since 2020, about RM1,600 has been deducted from his salary every month by the Public Sector Home Financing Board as repayment for the government loan he took to buy the house at Residensi Hektar Gombak.

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"Just imagine many buyers have to pay monthly loan instalments of between RM1,000 and RM1,500 on top of rentals of RM800 to RM1,000 for the houses they are staying in now. It’s really painful for them to pay the rent as well as the loan instalment,” he told Bernama.

In his case, he does not have to pay any rent for the house he is currently residing in here as it is his family’s ancestral home.

Mohd Sharrel Fahmi said Residensi Hektar Gombak was scheduled to be completed in 2021 but was delayed after the developer ran into financial problems due to the increase in construction costs.

"Initially, we were supposed to get our house keys in 2023. Recently, I was told the project will be completed early this year but we’ve yet to hear the happy news.”

He said the affected house buyers have, in the meantime, established a committee and appointed a lawyer to represent them in legal matters involving the developer and the government.

He said the house buyers have appealed to the Ministry of Housing and Local Government to authorise funding from the Special Guarantee Fund to facilitate the completion of their housing project.

"Most of us are from the B40 and M40 groups who are buying homes for the first time. We also hope to get some compensation after we move into our houses,” he added.

On Dec 1 last year, the Task Force on Sick and Abandoned Private Housing Projects, set up by the Ministry of Housing and Local Government in January 2023, suggested that sick and delayed projects under government or state local authority housing programmes be given benefits from the RM1 billion Special Guarantee Fund allocated in the 2024 Budget.

Mohd Sharrel Fahmi said the government should review legislation pertaining to the sale and purchase of houses, especially residential units that are yet to be built, to ensure developers have sufficient capital to execute their projects.

"In the present circumstances, we buyers who secure loans from banks or LPPSA (Public Sector Home Financing Board) are compelled to pay the loan instalments (even though the project remains incomplete).

"If we fail (to pay), legal action can be taken against us or we can be declared bankrupt,” he said, adding there is a pressing need for developers to assume greater responsibility for shouldering the associated risks.


On Oct 27 last year, Bernama reported that the Ministry of Housing and Local Government was planning to implement a build-then-sell housing delivery system, in place of the sell-then-build delivery system, to reduce the number of "sick” projects.

Minister Nga Kor Ming said the ministry will work together with the Real Estate and Housing Developers Association and discuss the new business model incentives so that developers can build the houses first and then sell them.

Commenting on the build-then-sell concept, real estate analyst Prof Dr Noor Rosly Hanif said the matter is not something new as it was discussed in Parliament in 2012 for mandatory implementation in 2015.

However, in 2014 the government decided against making it mandatory, citing concerns it could impact housing supply in the market and cause house prices to go up.

There were also concerns among small-scale housing developers that they may not be financially capable of constructing houses due to having to bear all the costs. The timing was also considered unsuitable for the implementation of the build-then-sell concept due to the introduction of the Goods and Services Tax (GST) and the rather sharp increase in house prices during that period.

Noor Rosly, who is a professor for the Real Estate Management and Auction Programme at the International University of Malaya-Wales Kuala Lumpur, said most advanced countries apply the build-then-sell concept to protect homebuyers.

"Houses are like other commodities that need to go through the manufacturing process before they are completed and sold in the market. Take the automotive industry, for instance. The industrialists concerned have to make significant investments, and in marketing their vehicles, they have to bear the profit or loss risks, not the car buyers.

"So, it is highly unreasonable why in the housing industry, buyers are compelled to bear the risk throughout the construction process until completion, while the profits from the project are entirely enjoyed by the developers,” he said.

A firm advocate of the build-then-sell policy, Noor Rosly said the government must take a firmer stance by mandating developers to adopt this concept, pointing out that the argument that house prices will increase if the build-then-sell policy is implemented holds true only when there is a shortage of housing units in the market.

"However, today, there is an oversupply of unsold housing units in the market,” he added.

According to Noor Rosly, new houses built in line with the build-then-sell concept will follow the current market price trend. And, if they are sold at a higher price, they usually come with certain advantages in terms of their design, quality of construction materials used and facilities provided.


Convinced that the Task Force on Sick and Abandoned Private Housing Projects (TFST) will be able to address the sick and abandoned housing project issue more effectively, Noor Rosly said while the completion of a housing project remains the responsibility of the developer, TFST will act solely as facilitators in handling matters related to the ministry and relevant agencies to expedite the process of completing the houses and obtaining the certificate of completion and compliance (CCC).

As of October 2023, TFST has recorded 55 delayed projects, 497 sick projects and 117 confirmed private housing projects with a total GDV of RM74.92 billion.

It was reported that 50 sick and abandoned private housing projects with 4,986 housing units were revived in October 2023, a record high in the 10 months since TFST was established.

Noor Rosly said most sick projects stem from ineffective governance, which affects cash flow and subsequently impacts the progress of a project.

"For example, the selling price of the houses is set in advance before the project commences, taking into account all construction costs involved including statutory payments to the relevant agencies and statutory bodies involved in the construction process.

"The selling price also incorporates contingencies, profit margins and risks for the developer. The main risk for the developer is unexpected hikes in construction costs due to external factors beyond their control such as the Covid-19 pandemic, the Russia-Ukraine crisis, global economic restrictions and so forth. These unforeseen events lead to the proliferation of sick projects,” he said.

He said TFST needs to assess the current status of sick projects to determine the amount of cash flow that can still be claimed from the bank based on their progress and the costs required until obtaining the CCC as well as ascertain if there is any surplus remaining.

"If there’s none, will any bank be willing to provide a loan to complete the project, perhaps in the form of a second mortgage or the like?”

He said sick projects need to be carefully examined to find out if their GDV is higher than the gross development cost and if the analysis yields a positive outcome, the projects concerned can be salvaged.

"But if the outcome is negative, then alternative methods may be needed such as subsidies or assistance from the government. Nevertheless, the government cannot set a precedent for rescuing a sick project as it would seem like bailing out the developers even though the real victims are the buyers,” he said, adding developers should bear the consequences of losses due to their failure to fulfil their contracts with their house buyers.

Noor Rosly said buyers can take legal action by taking their case to court to demand that the developer’s assets be auctioned off to raise funds to complete the sick project.

He said buyers can also come to an agreement to sell the project to another interested and financially secure developer who can complete it and sell the residential units to new buyers. The selling price of the project should be sufficient to settle the housing loans taken by the previous buyers.


According to Noor Rosly, for housing schemes implemented under federal or state government initiatives, the government plays a role in facilitating the development process and ensuring the developers carry out the projects in accordance with the required specifications and planning standards.

The government, however, is not involved in the cash flow process and project management because these are the sole responsibility of the developer, which is not an agency or subsidiary of the government.

"In the past, housing developments in Selangor and Kuala Lumpur were mostly carried out by government subsidiaries such as the Selangor State Development Corporation (PKNS), so the government had a say (specific conditions or demands) and a share in those companies,” he said.

But in the case of projects implemented under the Federal Territories Affordable Housing Programme, the home purchase contract is between the buyer and the developer, with the government not being involved in the business transactions. Therefore, any legal issues arising from contractual matters only involve the buyer and the developer.

To improve the system, Noor Rosly suggested that the government adopt the approach practiced in Singapore, where 80 percent of housing developments for citizens are constructed by the government through government-owned agencies such as the Housing & Development Board while the remaining 20 percent is handled by developers of high-cost housing projects.

He also said Vietnam’s housing development approach is similar to Malaysia’s but it is based on the build-then-sell concept to safeguard the interests of homebuyers.

Considering the increasing negative impact of the sell-then-build concept especially amid uncertain global economic conditions, Noor Rosly warned if this approach continues, it will lead to more sick and abandoned projects.

"Homebuyers are not investors. They are consumers of residential units available in the market and should not be burdened with risks that should entirely be borne by developers.

"If developers conduct market studies accurately, addressing the actual needs of the market rather than pursuing their own desires, the problem of unsold units or losses will not arise," he said.

He said currently, developers are taking more risks by constructing units in excess of demand, with their selling prices beyond the reach of ordinary people.

"They are doing this in the hope of attracting investors from outside the country to purchase their units. When there is an oversupply of unsold units, they often blame the government and seek government intervention to address their issues,” he said.

Meanwhile, Muslim Real Estate Consultants Association advisor Ishak Ismail said to address issues concerning sick and abandoned projects, the government should have a policy that mandates developers to conduct feasibility and market studies before approving the housing sale permits.

He said the government should also consider blacklisting or temporarily suspending the licenses of developers that provide unreasonable justifications for their sick or abandoned projects.

"This will be a lesson to the developers concerned to be more responsible, especially in terms of financial management, and ensure their projects are not adversely affected, and not to wash their hands off when problems arise,” he said.

Ishak, who is also the Malaysian Institute of Property and Facility Managers president, said the government can make improvements to the Housing Development (Control and Licensing) Act 1966 and its regulations, particularly in the aspect of expanding the powers of the Housing Controller to monitor and take decisive actions including banning defiant developers from continuing their operations.

"There is also a need to provide incentives or establish a special fund to revive sick projects to assist affected buyers and alleviate their financial burden,” he added. - BERNAMA