‘ Cash flow and not licensing issues cause abandonment’

SOURED DEALS: Chris Yong examines some of the causes of abandonment and concludes that unscrupulous developers will always try to circumvent the system

Recently, it was reported that 195 abandoned projects were carried out by unlicensed developers. For those who suggest that the said abandonments were attributed to unlicensed developers are not seeing the forest for the trees. For the record, licensed developers abandoned projects too, therefore the issue is not about licensing.

In my opinion, the intention of a developer is dubious if he does not get a license. In the first place, a typical property development goes into millions of ringgit, if not hundreds of millions of ringgit in terms of development cost. So, to avoid
paying RM200,000 for the license is beyond comprehension.

The question is why don’t they apply for the license? My guess is that by not applying for the license, they would not be bound to open the HDA (Housing Development Authority) account with the result that their buyers’ money do not need to be parked in the HDA account. Thus, the consumers’ interest is not protected.

By the way, I have not heard of any projects so far that have been completed by unlicensed developers. What does this tell you about unlicensed developers? Your guess is as good as mine.

During the course of my profession, I have done some research on the causes of abandonment. There are some developers who unfortunately made the mistake of funding projects with long gestation periods with short–term loans. I have also witnessed how some developers got into trouble when bank financiers abruptly withdrew their support (this often happened during the 1998 financial crisis).

Others cite disputes between the developer and landowner in some joint-venture endeavours while some blame their failures on cost overruns as a result of material price hike. There were even some developers who attributed their abandoned projects to poor sales as they required the market to finance their projects.

As you can see, almost all the causes are invariably attributed to cash-flow problems. The main reason is ‘not enough money’. With sufficient money, a lot of things can be done and completed.

Of course, if one adopts ‘build first, sell later’ method, there will be no abandoned projects. The reality is, most developers are adopting ‘sell first, build later’ method which means that they require the buyers to part-finance their projects.

There were some odd cases too, for example, I have seen cases where some developers managed to pre-sell more than 90 per cent of the sales target (off-the-plan). The project surprisingly still got abandoned half-way. In my opinion, this is very strange because when the project reached 60-70 per cent sales, most likely it would have hit break-even point in total construction costs (excluding land cost). I don’t see why they could not complete their projects unless the provision for cost variance was way off from the target budget and therefore it became unprofitable to carry on.

To cap it all, the findings show that some projects got abandoned due to unforeseen circumstances like poor market conditions during downturns, some because of lack of market studies, for example, wrong product at the wrong location; while some failed because of poor planning and management. Bottom line is it’s never about licensing alone.

Some projects proved questionable from the start however and lack of licensing is one of the tell-tale signs. As in every fraud investigation, one of the ways to check whether there are elements of mismanagement is to ‘follow the money trail’.

At the end of the day, it boils down to the enforcement issue again. What’s the point of having all the rules and regulations if they are not enforced. Unscrupulous developers will always try to circumvent the system if they can get away with it.

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