Ministry and developers keen on Housing Guarantee Scheme

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KUALA LUMPUR: The Urban WellBeing, Housing and Local Government Ministry and real estate developers are pushing for the proposed Housing Guarantee Scheme (HGS) to become a reality. They say it could  end the issue of abandoned housing projects. However, the National House Buyers Association (NHBA) appears to think differently.

“To us, this is a clear case of misguided concept put [forward] by business groups with vested interests in how to tackle the abandoned projects,” NHBA secretary-general Chang Kim Loong told The Edge Financial Daily in a phone interview last week.

The government and property industry stakeholders had a session last week to gather feedback on the proposed HGS, which aims to resolve the issue of abandonment of housing projects, thus safeguarding the house buyers’ interest.

The scheme is potentially to be based on a model borrowed from the Korea Housing Guarantee Co Ltd (KHGC), whose representatives attended the session.

The related authorities and stakeholders  hope to finalise the HGS “at the earliest next year”, according to Minister of Urban Well-Being, Housing and Local Government Datuk Abdul Rahman Dahlan.

At this stage, Abdul Rahman said the various stakeholders are putting the ideas together. These include reviewing the current housing policy that requires each developer putting a sum of money into a “Housing Development Account”, to be used to complete the housing project if the developer fails.

“There are many suggestions. One is that the statutory contribution by the developer can be lessened or be done away altogether. It (HGS) is still at the infancy stage; we will develop this idea in the months ahead,” said Abdul Rahman when contacted.

As mentioned during the session last week, a new corporation, similar to the KHGC, will be set up to undertake the HGS scheme.

It is said the corporation will have a start-up capital of RM400 million, to which the government will contribute 70%, hence entitling it to an equivalent equity stake in the corporation, with other parties such as the Real Estate and Housing Developers Association (Rehda), the Employees Provident Fund (EPF) or Lembaga Tabung Haji to take up the remaining interests.

The proposed corporation will function like an insurance company, whereby its income will be in the form of a premium of say, 0.5% to 1% of the value of new homes sold, that will be pooled together to rescue any failed projects. It is said that the premium will likely to be borne by the developer.

It is also said that the land of the project will be charged to the corporation during the construction of the project and only transferred to the bank after the project is completed.

Elaborating on the business model, Abdul Rahman said the proposed HGS corporation’s income will be the unclaimed premium. “When people pay premium and there is not much abandoned housing, or claims, then the surplus will be income. It’s like an insurance company,” he said.

A look at the South Korean model, KHGC provides the guarantee not only for completing the houses, but also for security deposits, repairing defects, housing project financing and others.

As at 2013, KHGC’s cumulative guarantee since 1993 amounted to 646.56 trillion won (RM2.11 trillion at the current exchange rate), involving 7.86 million units of properties. Meanwhile, the still outstanding guarantee amounted to 125.61 trillion won, with the guarantee for the completion of the project at 75%.

The South Korean government created KHGC in 1999, after it stepped in to rescue its former entity, then known as the Housing Project Mutual Aid Association (HPMAA), which was badly hit during the 1997/98 Asian financial crisis. The effort has been successful. From HPMAA’s paid-up capital of 101.5 billion won in 1993, KHGC’s paid-up capital has since grown to 3.232 trillion won as of 2013.

As at end-June 2014, KHGC was majority owned by the South Korean government (55.05%), financial institutions (17.8%), housing constructors (11.33%) and others that include government-affiliated organisations as its shareholders.

Under the South Korean model, KHGC hires a rating agency to rate a developer according to 15 categories, ranging from AAA to D, based on the financial capability, history and past track record of the company. The level of premium is determined according to the rating.

Developers with a lower rating are also subject to close scrutiny by the corporation.

If a project is abandoned, the corporation steps in and takes over. The house buyers can then choose whether the houses are to be completed, or they can get their money back if two-thirds of the purchasers in the project agree on it.

Under the South Korean model, the land is charged to the corporation, and the corporation  gives a certificate to the bank for the guarantee. Upon completion of the project, the land title and security will be passed back to the bank and the buyer will pay back the loan to the bank.

When contacted, Rehda patron and past president Tan Sri Eddy Chen said housing projects being implemented in Malaysia annually are worth a total of about RM25 billion to RM30 billion. Hence, based on the premium ranging from 0.5% to 1%, the proposed HGS corporation will obtain an annual premium income of about RM300 million, on top of its start-up capital of RM400 million.

As a typical development takes about three years to complete, the first and second year of the development period is unlikely to have any default. Meanwhile, with the land being charged to the HGS corporation, the latter’s position will be quite secured, Chen told The Edge Financial Daily.

“But then, to further ensure that the guarantee scheme doesn’t go under in the event of a major default, there shall be a reinsurance arrangement with an international reinsurance company,” Chen said.

Chen noted the premium charged is nominal and can easily be neutralised by the proposed reduction in certain costs related to risks associated with housing development in its present form. Plainly speaking, banks will be more willing to lower financing rates on development projects if they are  guaranteed under the proposed HGS corporation.

Interestingly, Chang has spoken against the setting up of HGS, saying that the scheme will not solve the problem of abandoned housing project sbut “will increase it”. “With HGS, developers may recklessly launch projects because the government has a scheme to mop up their problems,” he said.

Without mincing his words, Chang is of the view that under such a scheme, developers will make the profits while the government, through its 70% stake in the proposed HGS corporation, will bear the losses. “This is tantamount to a clear example of profits privatised, losses nationalised, as well as a bailout,” said Chang.

While developers, instead of homebuyers, may be asked to pay the premium, Chang believes the 0.5% to 1% rate will ultimately be borne by the latter, because developers can factor in the extra costs to the pricing of their properties. Moreover, developers may also not pass savings from lower project financing rates to homebuyers.

“What is good in South Korea may not be good in Malaysia, as the Korean style is different,” Chang said, disappointed that Abdul Rahman’s ministry did not engage with the NHBA and other consumer groups on the HGS scheme.

He also said the government had previously promised to make the build-then-sell (BTS) system mandatory this year, but there has been little news thus far.

According to Chang, the BTS system would better protect the interests of the homebuyers. Under the BTS’ 10:90 system, house buyers only need to fork out an initial down payment of 10% when booking a house, and do not need to make any further payments until the vacant possession of the property is delivered to them, upon which the balance of 90% is payable.

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This article first appeared in The Edge Financial Daily, on February 16, 2015.