Revival of abandoned housing projects

FEASIBLE: Dr Ernest argues that reviving abandoned projects is feasible for projects over 10 years old located in the Klang Valley

In my previous articles (NST RED 21st and 28th September 2012), I studied the events that led to the proliferation of abandoned housing projects throughout Malaysia and the effects of the abandonment.
In the last paragraph of my article published in NST RED on 28th September, I asked,“Is it financially feasible to revive abandoned housing projects in Malaysia?”

Budget 2013
Budget 2013 proposed the following: In 2013, the Government will allocate RM100 million to the Ministry of Housing and Local Government to revive 30 abandoned housing projects. In addition, to encourage the involvement of the private sector, the Government will provide tax incentives as follows:
i) Banking institutions to be given tax exemption on interest income received from the rescuing contractor/developer;
ii) Rescuing developer be given a double deduction on interest paid and all direct costs incurred in obtaining loans;
iii) Rescuing contractor be given stamp duty exemption on all instruments executed for the purpose of transfer of land or houses and loan agreements to finance the cost of revival; and
iv) Original house buyer in the abandoned project be given stamp duty exemption on all instruments executed for the purpose of obtaining additional finance and the transfer of the house.



Reaction to the Budget proposal: My reactions to the Prime Minister’s Budget Announcement are confined to the issue of the Revival of Abandoned Housing Projects in Malaysia and they are:
1. I am disappointed. The provisions in Budget 2013 for the revival of abandoned housing projects represents a “feeble” attempt by the Government at solving the problems posed by the 2,199 abandoned housing projects (as at 2005) to the financial health and security of nearly two million Malaysians (as at 2005).
2. The Government has the power, capacity and resources to provide the leadership that will serve as a catalyst to motivate all Malaysians to work together to revive these thousands of abandoned housing projects.
3. These abandoned housing projects can be revived without or with minimum funding from the Federal Government.
4. What Malaysians require and expect from the Federal Government for the revival of the abandoned housing projects is not Federal Government money.
5. What Malaysians require and expect from our Federal Government for the revival of the thousands of abandoned housing projects is political leadership and political will to formulate a national policy and framework that brings to bear the entire force and power of the Federal Government to persuade, coax and compel all parties involved to negotiate, compromise and solve all outstanding legal, financial and bureaucratic issues to enable these abandoned housing projects to be expeditiously revived.

Feasibility of revival? Is it financially feasible to revive the estimated 2,199 abandoned housing projects in Malaysia (as at December 2005) that have already affected approximately 386,592 families (households) and caused an estimated 1,932,960 Malaysians to suffer financial, emotional and often physical hardships?

The answer would have to depend on the answers to two additional questions:
(i) Where is the abandoned housing project located?
(ii) How long has the housing project been abandoned?
If a housing project is located in the Klang Valley and it has been abandoned for more than 10 years, it is likely that it would be financially feasible to revive the abandoned housing project.
Consider the case of a hypothetical abandoned housing project in Puchong, Kuala Lumpur (see Table 1).
Is it worth it for the 100 purchasers of Taman Puchong Elok to pay an additional RM100,000.00 each to revive and to complete the development of Taman Puchong Elok? The answer is yes. For a total cost (price) of RM350,000, each of the 100 purchasers of Taman Puchong Elok will get to own a two-storey terrace house in Puchong, Kuala Lumpur that at 2012 price is worth RM600,000 or more. This represents approximately 50 per cent of the price he would have to pay if he were to purchase a similar two storey terrace house in the vicinity of Taman Puchong Elok in 2012 and at 2012 property prices.

The situation will vary from project to project. The general scenario applies if the housing project has been abandoned for more than 10 years.

Obstacles to revival: From an economics and financial perspective, it would be financially feasible to revive abandoned housing projects located in the Klang Valley that has been abandoned for more than 10 years. The obstacles to efforts to revive these abandoned housing projects are legal, bureaucratic and political.

Players in the property development industry: Generally, players involved in the property development industry include property owners, property developers, state authorities (for land use conversion), federal and local authority planning departments, local authority architectural and building plan departments, bankers, land surveyors, property valuers, town planners, architects, quantity surveyors, structural engineers, civil engineers and real estate agents.

The property development process: There are 14 major stages in the property development process (see Table 2):

How housing projects became abandoned: In many parts of the world, property developers are required to first complete their housing projects including construction of the houses using their own money or funds borrowed from banks or venture capitalists, prior to payments by purchasers for the houses purchased.
In Malaysia, the 3rd Schedule of the Housing Development (Control and Licensing) Act 1966 and Housing Development (Control and Licensing) Regulations 1989 provides for house buyers to progressively pay developers at rates ranging from 5 to 15 per cent of the purchase price based on the architects’ certificates on the stages of progress of the construction of the purchased houses.
Regulation 11(1) of the Housing Development (Control and Licensing) Regulations authorises housing developers to collect progressive payments from purchasers when work has been completed up to the stages as specified in either Schedule G or Schedule H. Payments to housing developers are made by the purchasers or their end-finance banks based on the project architect’s “progress payment certificate”.
Effectively, housing developers are financed by purchasers either with their own money or with loans granted by the end-finance bank. The integrity of the system depends upon the integrity and honesty of the certifying architect.

Effects of abandonment: Since 1983 when the first abandoned housing project was recorded by the Ministry of Housing and Local Government, many housing developers and their project architects continued to abuse the provisions of the 3rd Schedule of the Housing Development (Control and Licensing) Act.
These developers instructed and/or persuaded their architects to issue Progress Claim Certificates that falsely reflected higher levels in the progress of the construction of the affected projects thereby causing these developers to be paid more money than they would have been paid if their architects had not over-certified such progressive payments. Many of these developers, after having received these over-certified payments did not use the money for developing the housing projects. They used the money for other purposes not related to the housing projects.
Because of these over-certification and over-payments, many housing projects were faced with funding inadequacies with many contractors and building material suppliers not getting paid resulting in stoppages of construction activities vis-a-vis these housing projects.

Failure of the Sell-then-Build system : In my next article, I will examine how the existing Sell-then-Build housing delivery system has failed Malaysians and how we can overcome the legal and bureaucratic obstacles to revive the thousands of abandoned housing projects in Malaysia.

Read more: Revival of abandoned housing projects - RED - New Straits Times http://www.nst.com.my/red/revival-of-abandoned-housing-projects-1.152637#ixzz2d3Q2z7ob