Property Sector - Boost From Government

Mervin Chow of OSK Research

The Government announced on the 13th April 2007 that it would shorten
development approval time from the current 1-2 years to 6 months.

To encourage housing developers to adopt the 10:90 Build-then-Sell
(BTS) strategy, the Government will offer the following incentives:
(i) exemption from payment of the RM200,000 deposit for a housing
developer’s license;
(ii) removal of the 30% low-cost quota for housing development; and
(iii) priority of all official matters including shortening development
approval time to 4 months (vs 6 months for others).

Even in the absence of the incentives, the adoption of the strategy
in itself is appealing in the following ways:

(i) Premium pricing.
Home buyers will feel more assured of timely delivery and quality,
as the properties are near completion when the properties are open
for bookings. Henceforth, the low abandonment risk allows the
developers to command premium prices on its property developments;

(ii) Ability to accommodate pricing to economic cycles.
At times of downturns, the properties can be priced lower albeit
some margin sacrifice to sustain demand and vice versa during an
upswing;

(iii) Manageable construction and development costs, thus
limiting the probability of costs overruns; and

(iv) Limiting project insolvency, since funding of development
projects is not dependent on sales.

Incentives are attractive too but not all property developers
have the sufficient capacity or the capability to immediately
adopt the strategy yet. The BTS strategy, if successfully
implemented will imply:

(i) that the developer must first have a strong cash flow and
financial position.
Developers are not able to change their capital structure or financial
policies overnight to accommodate to the adoption of the BTS strategy.
In addition, the banking institutions may find it difficult to finance
property development projects that have yet to lock-in any sales; and

(ii) lumpy performance.
Due to the fact that housing developments must now be completed
first before the properties can be launched and sold should the
developers adopt the BTS strategy, earnings performance going
forward could be rather lumpy. Despite so, the strategy enables
such developers to create an even richer shareholders’ value in
the longer term and unlock the best value from their
development landbanks.

A boost in efficiency. The shortening of the approval time will
enable developers to unlock the value of its landbank faster,
which is one of the best suits for those that have the strategy
of a quick turnaround on its landbank.

Adapted from OSK Research

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