LETTER | Alternative strategy in preventing problematic housing projects

LETTER | We refer to the National HBA write-up in iProperty dated Aug 22, 2022, under the heading “Rising number of "sick" or delayed housing developments in Malaysia: Why is this  happening?” where House Buyers Association (HBA) highlighted the statistics on problematic housing property business in Malaysia. 

Victims Malaysia estimates about 52,000 house buyers are currently affected as of July 2022 with estimated illiquidity valued at RM13 billion (estimated RM250,000 commitment per house buyer). 

As another NGO alongside HBA, Victims Malaysia has been actively helping victims of problematic housing projects since 2008. We have to agree with HBA that the problem is growing despite many measures and changes made in the law.

Regrettably, the article failed to capture the root cause of the problem from a macro perspective. Despite many fixes in amending the Housing Development Act since the year 2000, the situation has worsened. 

HDA118 is a piece of law that looks good on paper but has proven to fail in preventing problematic housing which led to economic issues. The statistics presented in the article are a testament that the law has failed consumers despite the many revisions done over the years. The problems got bigger and it proves that consumers' protection in the law remains void.  

Do we need to retain and continue the amendment of such laws? National Housing Department (JPN), the custodian of the law faces the brunt and yet they continue to soldier on and “business as usual” (BAU)  and endure the burden of being a regulator. 

Some may argue that the presence of HDA118 prevented many problems. Statistically, this is not a  proven statement. Developers are complaining about the tedious requirements. With or without the law, the products would have been delivered as promised if the developer chose to be responsible, and professional and maintain a strong sense of accountability.

Law is supposed the create a healthy marketplace for everyone's benefit. In the current situation, it doesn’t. The law is weak and despite many changes has not brought the desired result but more work for JPN staff. The industry image is affected and scares potential buyers. 

Another contributing factor that is often overlooked is the “debt enslavement” propagated by banks under the stewardship of Bank Negara. Banks despite being an equity partner to the purchases; profited from the transaction without sharing the risk.

It makes money irrespective of whether purchasers got their houses. They enjoy the upside but abstain from any downside risk. It is time that all stakeholders approached the issue differently. Victims Malaysia proposed the following: 

1. Regulatory Changes: The HDA118 need to licence developers that build projects on Build Then  Sell (BTS) scheme. A licence is not for everyone but for developers who show they have the skills and financial strength to complete projects. This is different from HBA's own BTS10/90. In the  BTS10/90 contract purchasers still bears the financial risk. It involves an upfront payment (10 percent)  with the balance (90 percent) deferred upon project completion. The banks despite being equity partners still do not bear any risk under BTS10/90. 

2. Banks to be equity and risk partner: BTS need to be supported by banks based on an arrangement practiced in the UK. Under this scheme, banks purchase a property under construction and lease it to a consumer once completed. The modus operandi is described as follows: 

i. Step 1: Potential Home Owner (PHO) identified a property that he/she is interested to own. 

ii. Step 2: PHO approaches the bank with the intent to go into a leasing agreement with the option to buy. Banks will do the necessary underwriting to ensure the consumer can afford the lease commitments and impose some advance lease charges.  The bank may impose a reasonable processing fee and advance lease payment while waiting for the property to be completed. 

iii. Step 3: The bank engages the developer that the PHO has identified and buys the property from the developer on mutually agreed terms. The property is registered in the name of the bank. Upon property completion, the bank lease it out to the PHO under a contract structure “Lease with option to buy” (LWOB). The contract shall specify the terms of the agreement which include the monthly commitment and options to purchase at the end of the lease with pre-agreed terms where the final lease amount is defined as the selling price. 

Under this arrangement, banks being strong organisation has the power to vet developers'  financial and technical capacity before it decides to buy the property. The lessee who chose not to stay on the lease and buy the property after paying the “deposit & monthly lease”, can walk away and lose their option to own the property.

Banks can sell the property to others on an outright sale of a completed product. In this way, the bank earns its earnings on a fair equity/risk ratio with the house buyer. 

The foreseeable challenges from various stakeholders are: 

Housing regulator: There is a need to revise the HDA118. The regulator should not allow the sale of any uncompleted properties to the public except for direct deals between licensed developers and banks or its SPVs. Stiff penalties must be imposed for both licensed and unlicenced developer who sells uncompleted houses to individuals. The various schedules SPA to be revoked. There is no restriction to selling a completed house with CCC.  

Stamp duty: There is a need to discuss with IRB and MOF to exempt the house buyers from any stamp duty faced by the bank. The Inland Revenue Board (IRB) can impose an appropriate tax rate on the lease arrangements. 

Developers (Rehda): They are unlikely to object to the deal but may not be happy because they no longer get the protection and benefits under the existing HDA118 SPA. The banks may insist  on having more protective terms with the developer including the appointment of professionals  to supervise the contract 

Banks: Banks in Malaysia who have enjoyed high profits and low-risk earnings may object and are now required to do more to justify their earnings. Since it has been done in the UK and many other Islamic countries, there is no reason why it cannot be done here. Bank Negara must convince the banks. The LWOB contract needs to be regulated and standardised by Bank Negara to protect consumer interest.  

The success of the proposed structure involves political willpower from the government (Bank Negara,  Housing and Local Government Ministry, IRB and Finance Ministry). The first bank that does this will enjoy the first mover advantage. It would almost secure a  100 percent lessee contract that would enhance its profitability.

This will ensure the developer sells the right product at the right location with certain standards. If developers want banks to support them, they have to ensure the product creates value for the market.  

It has been 14 years since Victims Malaysia participated as a stakeholder in the housing industry. Previously we listened to HBA and other stakeholders and accepted the need for frequent changes in the housing laws and we have seen the failures. It is time to do something revolutionary.  

The BTS with LWOB structure will create a healthy marketplace and protect weak consumers.

We urge all parties to give our proposal due consideration. Look at it with an open heart and mind. 

The writer is the chairperson of Victims Malaysia.

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.