Greater oversight on developers needed

Perhaps it is time to look at the other spectrum of the property market – sick, delayed, and abandoned (SDA) housing projects.

THE property sector is a key pillar of the Malaysian economy, as the growth of the sector itself has a positive spillover impact on many industries, including banking, building materials and construction, as well as service providers like interior designers, landscapers, property managers, valuers and other professionals like lawyers, quantity surveyors and architects.

Given the far-reaching consequences of the health of the property industry, the regulatory oversight on how approvals are granted, addressing grouses by property buyers, and the industry-related issues are important to ensure healthy growth for the industry.

Over the years, this column has explored and analysed issues related to the housing overhang and oversupply, and now that we are seeing the numbers more manageable, perhaps it is time to look at the other spectrum of the property market – sick, delayed, and abandoned (SDA) housing projects.

Sick projects

According to the Housing and Local Government Minister last week, since the establishment of a task force on SDA, 663 troubled private housing projects have been resolved over the past 17 months.

This helped some 78,554 homebuyers with a salvaged gross development value of more than RM57bil.

Sadly, the minister did not provide a further breakdown of these projects in terms of the percentage uncompleted at the time they were classified as SDA, types of units, location, reasons as to why the developers could not fulfil their end of the bargain, and price band of these units.

All we could conclude from the above statement is that, on average, the value of these SDAs stood at almost RM730,000 each, which suggests in general, SDA is more skewed towards the high-end market.

However, in a parliamentary reply in March this year, the ministry informed Parliament that it has recorded 117 abandoned projects with a total of 30,840 houses as at Jan 31, 2024, with 81 projects involving units priced RM300,000 and below, involving 23,031 homes and 12,565 buyers.

Thirteen projects were priced between RM301,000 and RM500,000, five between RM500,001 and RM750,000, two between RM750,001 and RM1mil, and 16 projects were for properties priced RM1mil and above.

In a recent check with the ministry’s published sick projects, there are presently some 362 projects that are defined as sick up to the end of June 2024, including some prominent and major developments.

Reasons for SDA

There are many reasons for SDA and these include economic factors such as the Covid-19 impact as well as those related to the developer itself, which include a lack of experience in developing a housing project, mismanagement and poor financial condition of the developer.

Other factors include a mismatch between market demand and supply, either due to price or location, or a combination of both.

There is also a difference between landed properties and high-rise development.

In the case of landed properties, a developer could still carry out a project based on market demand but in the case of a high rise, a developer would be hard-pressed if sales are poor as they would have to fund the development with either further bank borrowings or internally generated funds from its shareholders.

A high-rise project, typically has a 20% to 30% profit margin and hence, if a developer fails to achieve at least 60% to 70% sales, it would lead to challenges in completion due to lack of funds.

In Malaysia, as we have adopted the sell-then-build concept, development is typically funded by buyers themselves with the developer and financial institutions providing initial funding for land and development.

Poor market sales will leave a developer in a quandary as it is either pouring more funds into the project (via shareholders or borrowing from financial institutions) or a delay in developing the project, which could subsequently lead to abandonment due to the lack of financial resources to support the continuous development of the project.

Legal recourse

Property development is rather unique in Malaysia as every development project is undertaken by a newly established and incorporated subsidiary, and hence, although 100% owned by a holding company or individual shareholders, legal recourse is seen as limited to the development company itself.

There are cases whereby developers flout the law by not only absconding with monies paid for the development, but in cases where they were able to finish the project and deliver to buyers vacant possession, the finished product is far from satisfactory.

Key complaints have been related to leaking issues, poor quality of workmanship and latent defects, as well as developer’s unfulfilled promises when it comes to rectification, resulting in buyers or the joint management body (JMB) or management corp (MC) taking legal recourse against the developer.

Rosy marketing materials used during sales are usually only good for browsing but in most instances, far from reality. In some cases, we have also seen how the developer’s plan for a township can alter given the passage of time, leaving home buyers perplexed with the developer.

Most of these are related to the post-two-year defect liability period, as most problems tend to occur after this window.

Other issues are also related to facilities for residents like a clubhouse, garden or playground, in which the developer, for one reason or another, decides to stop running the key asset and worse, has intentions of selling the asset to third parties for a quick monetary gain.

Taking on a developer via legal challenge is never easy as it is akin to David versus Goliath.

Whether homeowners, the JMB, the MC, or even a Resident Association, initiating the challenge will be time-consuming and cost a bomb, while the developer has all the resources to take on not only these legal challenges but it is also able to delay proceedings to frustrate homebuyers.

Worse, in some cases, the developer will either wind-up the development company or dispose of the company to a third party, leaving the homebuyers with no recourse.

While listed property companies have been doing well in the past year or so with massive gains seen in almost all property-related stocks, in reality, there are also pains out there where buyers have been suffering due to SDA housing projects.

The authorities, while taking steps to revive them, should also take legal action against these developers, especially the individual directors and shareholders of the SDA-related projects to ensure buyer’s rights are protected while wrongdoers do not get away scot-free.

Buyers biggest victims

The buyers of SDA are the biggest victims, especially those who have taken financing facilities as they are left servicing a housing loan but without a home.

Even contractors, whether the main contractor or sub-contractors suffer when a project is abandoned, as it is likely they too are left high and dry with non-payment for construction work carried out, leading to a protracted legal battle between the developer and the main contractor or other service providers.

As for the future, the government should insist on detailed and independent market and feasibility studies before the granting of planning permission by the local authority and project financing by the banks.

Over time, the increased flow of quality information will ensure a more efficient housing market and SDA projects can be minimised, if not eliminated.

At the same time, greater oversight on developers too is needed to ensure that they are financially sound, and have the necessary resources, be it in the form of experience or financial, to carry out a development project.

Action on errand developers is a must to show that the government means business when projects are abandoned.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.