‘Sick’ housing projects bane of house buyers, can affect the nation's economy
09 Aug 2023 10:28am
The Local Government Development Ministry has identified 481 sick and 112 abandoned projects nationwide.
This is the situation faced by many homebuyers who have purchased units in housing projects categorised as "sick”.
A project is considered sick if construction work has been delayed by more than 30 per cent compared to its scheduled progress or if its sale and purchase agreement (SPA) has lapsed.
On June 11, Deputy Local Government Development Minister Akmal Nasrullah Mohd Nasir said his ministry has identified 481 sick and 112 abandoned projects nationwide.
He said besides having a task force to oversee the matter, the ministry is in talks with the relevant agencies and is in direct negotiations with the National Water Services Commission and Public Works Department in efforts to revive the projects concerned.
According to a recent Bernama report dated July 10, a total of 31 sick private housing schemes involving 3,299 units were revived in May this year.
Twenty-eight of these projects have received the certificate of completion and compliance while construction work in the remaining three projects has resumed and proceeding in accordance with the building schedule.
Real estate analyst Professor Dr Noor Rosly Hanif said while various factors can be attributed to projects encountering delays in their completion, the developers concerned should have taken the project management risks into consideration before embarking on their projects.
The factors include changes in loan policy such as bank interest rates; foreign worker and imported labour policy; hike in contributions to statutory bodies or related government agencies; domestic and global political and economic conditions that influence the demand for and supply of raw materials like iron, cement and other construction materials; minimum wage policy; and climate and weather changes.
IMPACT OF PANDEMIC
Noor Rosly, who is also a professor in Real Estate Management and Auction Programme at the Faculty of Business, University Malaya-Wales, said the above can be categorised as external and internal factors, some of which can be controlled while others can only be mitigated.
"Developers should, by right, identify the factors concerned in advance and take mitigatory measures to overcome them from the start or minimise the impact of delays in their projects,” he told Bernama.
Acknowledging that the COVID-19 pandemic was primarily responsible for the rise in projects categorised as sick, Noor Rosly said housing developments usually take some time to complete and that developers would plan to complete them as per the SPA.
"However, when an unprecedented crisis like the COVID-19 pandemic struck the country as well as the world, the nation and the world’s entire government and business machinery were impacted and, in fact, came to a standstill.
"Housing projects that were still under construction and had their units sold before the pandemic were badly affected. The construction workers (mostly foreigners) returned to their respective homelands in the early stages of the pandemic. Only recently were they allowed to re-enter our country but with tighter conditions.
"As of now, our country still does not have enough construction workers, forcing developers to extend the completion date of their projects,” he said.
HIGH DEMAND
Meanwhile, building costs have spiralled following the full reopening of the nation’s international borders and business sectors. (Most industries halted their operations at the height of the pandemic in 2020 and 2021.)
When the construction industry resumed operations, the demand for iron and other building materials increased as expected, causing their prices to shoot up.
"The high demand has caused iron prices to rise from RM2,417 a tonne in October 2020 to RM3,590 in June 2021 - a 48 per cent hike. The hike in domestic iron and steel prices is in line with the global price trends,” said Noor Rosly.
He said local steel producers do not have any control over the price of this raw material which is subject to the global supply and demand pattern, adding that a market survey in 2022 found that construction costs had risen by 18 per cent compared to the previous year with prices of aluminium rising by 55 per cent, wood (52 per cent), steel (38 per cent), and cement, sand and stones (19 per cent).
Market shortages have also forced developers to compete for supplies and wait longer to procure them, he said, adding that building material supplies are expected to recover in the next three to five years.
This, coupled with the labour supply which has yet to return to the pre-pandemic level, has had a negative impact on ongoing housing projects particularly those in the construction phase.
"The delays in their projects are unavoidable as the circumstances are beyond the control of the industry players that face the risk of going bankrupt,” he said, adding that sick projects are set to rise in number until the demand for building materials is met.
He also said nearly every state has its share of sick and abandoned housing projects.
IMPACTED PARTIES
According to Noor Rosly, sick projects in general have a comprehensive impact on the 3Ps, namely pembeli (buyers), pemaju (developers) and pihak berkuasa tempatan (local authorities).
He said buyers, especially those purchasing houses to move into them and not for investment purposes, are burdened as they have to pay their rentals as well as meet their loan commitments.
"Developers too face problems when their operational and building costs go up. Some of them may try to review their projects and cut their construction costs as much as they can so that their projects remain viable. The cash flow from their projects will also stop when construction work comes to a halt due to the shortage of labour and building materials.
"Aside from that, developers that have taken bank loans also have to make repayments or face court action,” he said, adding that when a project is declared sick, the developer will hope for the Ministry of Local Government Development to intervene because this way, the buyers will not resort to legal action.
Meanwhile, local councils beset with sick projects are forced to monitor the project sites and their surroundings as they usually serve as ideal breeding grounds for dengue-causing mosquitos and hiding places for drug users and the homeless.
Sick and abandoned housing projects also translate into losses for the local councils as they cannot collect assessment fees and quit rent from the buyers.
"But, undeniably, the buyers are the ones who are most impacted as they are tied to a house in a sick project and can’t get rid of the liability,” Noor Rosly said, advising potential house buyers to choose developers that have a good track record in the industry.
"Such developers have the financial capacity, manage their projects professionally and maintain reserves of building materials until their projects are completed.”
He said a reputable developer that cares about the company’s image will try to complete their project even if it takes more time to do so.
"As for buyers who are affected by the delay in the completion of a housing project, I think the developer should consider helping them by paying their monthly rentals (at a reasonable rate) for them until the project is completed.
"The developer can also consider absorbing the interest charged on their (buyers’) housing loans released to the developer by the bank in accordance with the construction phase,” he said, adding that even though construction work is still going on in a project, the housing units can be sold to others with the permission of the developer.
TRIBUNAL
Touching on the Tribunal for Homebuyers’ Claims established under the Housing Development (Control and Licensing) Act 1966 (Act 118), Noor Rosli said its jurisdiction is limited to claims arising from the SPA between the house buyer and developer.
The tribunal is only empowered to hear cases in Peninsular Malaysia and the federal territory of Labuan. Only claims pertaining to places of residence (such as terrace, semi-detached and bungalow units; apartment and condominium units; and townhouses and small office, home office or SoHo units), and not units in commercial buildings, can be brought to the attention of this tribunal.
The main aim of the tribunal is to listen to and decide on claims filed by home buyers seeking compensation from developers for violating conditions or construction specifications that were mutually agreed upon in the SPA.
Explained Noor Rosli: "Two types of claims can be filed, technical and non-technical. Technical claims are related to poor workmanship and quality of building materials as well as houses built not in accordance with the plan and specifications outlined in the SPA... this includes the formation of cracks in the building and poor paintwork.
"Non-technical claims involve issues such as liquidated ascertained damages for the delay in handing over vacant possession of their house, deposit refunds for projects that are cancelled or postponed by the developer, interest payments, and so on.”
Asked if house buyers can defer the payment of the monthly instalments on their housing loans until their units are completed, Noor Rosly said it would depend on the agreements signed by the buyer to facilitate the purchase of a house.
He said every buyer is subject to the terms of the SPA signed with the developer and the terms of the loan agreement signed with a financial institution or Public Sector Home Financing Board in the case of government employees.
"If there is a clause allowing it (deferring payment of loan instalments), then it can be implemented. Otherwise, it cannot be implemented unless the government intervenes like what happened during the movement control order period when it imposed a moratorium on the repayment of all types of bank loans.
"Such a moratorium allows borrowers to defer their monthly repayments even though this provision is not stated in the financial agreements involved,” he added.
HUGE DECISION
Pointing out that buying a house is a huge decision that needs to be made with care and expert advice, Noor Rosly said buyers affected by sick projects can appeal to the Ministry of Local Government Development to appoint new contractors to salvage and complete the projects concerned.
"A sick project is first assessed to see if it is still viable, then a new contractor with an excellent track record and sound capital is appointed to take over the sick housing project. This programme has been implemented successfully in several places throughout the country with the ministry directing the new contractors to complete the projects concerned within a specified time period,” he said.
He added to address the woes of house buyers, the ministry established an Action Committee on Private Sick and Abandoned Housing Projects on Dec 30, 2022, to seek a more focused and strategic approach to resolving the issue of sick and abandoned projects.
Noor Rosly also opined the government can consider buying housing units in sick projects to free the buyers from the shackles of their loan repayments on their uncompleted houses.
This way, he said, the buyers can settle their bank loans and use the balance sum from the sale of their houses to buy a unit in another project.
He also said the system of selling houses needs to be completely revolutionised to save buyers from becoming victims of sick or abandoned projects.
"Only financially-strong developers must be given approval to go into housing development and they should only be allowed to make sales after completing their projects and the houses are ready for vacant possession.
"The old system, which we are still practising now, of selling a product (house) that does not exist has a negative impact on people and the economy. The government must put an end to this and shift to a system where houses have to be completed first before they can be sold.
"Cases have proven that the number of sick and abandoned projects is on the rise and many buyers have become victims,” he said.
TURN INTO ABANDONED PROJECTS
Meanwhile, Muslim Real Estate Consultants Association president Ishak Ismail said sick projects that are not "treated” and "rehabilitated” fast risk turning into abandoned projects.
A project is categorised as abandoned if it is not completed within or later than the delivery date as stated in the SPA and no significant activity is noticed at the construction site for six continuous months, or a petition for winding up has been registered in the High Court under Section 218 of the Companies Act 1966, or the developer has notified in writing to the Housing Controller that they are unable to continue further with the development of the project; and if it is certified as an abandoned project by the Local Government Development Minister under Section 11 (1) (c) of the Housing Development (Control and Licensing) Act 1966.
Ishak said he is concerned over the increase in the number of housing projects categorised as sick, adding that developers cannot use factors such as the pandemic, shortage of workers and hike in building material prices as excuses to abandon their projects.
"By right, such factors should be anticipated by any business, not just housing but in other sectors as well,” he said, adding that developers must have sufficient funds, as well as the support of banks before they embark on a development project.
He said only financially sound developers should be allowed to operate in the housing development industry to prevent house buyers from being caught up in a sick or abandoned project.
"Looking at KPKT’s (Ministry of Local Government Development) list of sick projects, weak financial management on the part of the developer is among the factors contributing to this problem (sick and abandoned projects). In some cases, the money allocated for a project is used to purchase land and assets that are not directly linked to the project... this will surely cause cash flow problems for the developer,” he said.
Ishak also said when a housing project is declared sick, the government should examine the causes and blacklist the company immediately if mismanagement is found to be one of the contributing factors.
"The government must find a comprehensive solution to this problem to protect the interests of all parties,” he said, adding that the rise in sick and abandoned projects will affect the country’s economic growth in the long term. - BERNAMA
