This article first appeared in The Edge Malaysia Weekly on August 30, 2021 - September 5, 2021

THE prolonged Covid-19 pandemic has forestalled the property industry and continues to beset stakeholders with massive problems that could run to billions of ringgit.

With building contractors unable to operate at full capacity, the pandemic has led to numerous delays in completion and delivery of vacant possession (VP). Yet another problem that may be brewing is a potential increase in abandoned projects.

Property and legal experts caution that Malaysia could potentially see millions, if not billions, of ringgit worth of projects being abandoned once the movement restrictions or bank loan moratorium is over.

An abandoned project specialist who declined to be named says that while the number seems to be low for now, the possibility of a spike in distressed projects post-pandemic cannot be discounted. Things could get even tougher for developers who had already been struggling prior to the pandemic. “Banks can’t foreclose for now until the moratorium is over. But with the prolonged lockdown, I will not be surprised if some property developers experience cash-flow hiccups next year.

“As work progress is slow and sales low, the situation could get worse if they are unable to find an alternative source of funding or even a new investor,” he warns.

He points to the M40 and B40 household groups, which have become more vulnerable with many facing job losses and salary cuts. At the same time, new graduates are finding it tough to secure full-time jobs.

As such, property developers targeting these groups of purchasers may find it challenging to market and sell their products. Prospective purchasers with certain jobs such as event management, which fall under the “negative list” job category, are finding it difficult to get end-financing loans approved. “When this type of buyer applies for a loan, the loan may [likely] be rejected,” he tells The Edge.

Some developers are also growing increasingly concerned as they have yet to obtain approval for an extension of late delivery of VP due to the lockdown this year. The Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (Covid-19) Act 2020 and two subsequent gazettes allow the minister of housing and local government to grant approval for an extension of time to deliver VP.

“Without the mandatory extensions, developers may have to pay huge liquidated ascertained damages (LAD). Some may face issues with the authorities and be left with no choice when they run out of money and funding to continue with the project,” says the expert.

“Abandoned projects are a result of construction cash flow demands overtaking sales or cash inflows for a project, leading to a situation where the developer cannot sustain the development further,” Savills Malaysia deputy managing director Nabeel Hussain tells The Edge.

“What we have seen during the pandemic is developers being very cautious with new launches, so hopefully they won’t be too stretched. That said, a period of severe economic turmoil such as is seen now almost always results in some level of casualties,” he observes.

Even though the Covid-19 Act provides some level of cover for property developers, Nabeel points out that there are other factors weighing against them. “Banks have reduced lending [to them], sales progress is still anaemic and many developers are still highly geared, all of which increase cash-flow pressure, as does high construction, labour and safety compliance costs resulting from Covid-19.”

Meanwhile, valuer and real estate agent Stanley Toh of LaurelCap Sdn Bhd believes there will likely be more abandoned projects involving commercial properties rather than residential properties. “Under The Housing Developers (Control and Licensing) (Amendment) Act 2012 (HDA), a housing developer can be held criminally liable for abandoning the project. And because it is a criminal offence, developers will try their best to complete the projects,” Toh says of the HDA, which governs residential and SoHo (small office/home office) units. Unlike in the 1990s, he observes there are fewer incidences of property developers defaulting on housing projects. As such, he believes that abandoned projects are more likely to involve commercial assets such as SoFo (small office/flexible office), SoVo (small office/versatile office), offices and retail lots.

Lawyer Ranjan N Chandran, a commercial and construction partner at Hakem Arabi & Associates, also anticipates a rise in abandoned projects owing to the economic slowdown and developers being cash-strapped due to the pandemic, which most countries have yet to bring under control.

He likens abandoned development projects to a damsel in distress who believes that there will always be a white knight to rescue them.

He suggests providing a tax waiver to developers as one way to prevent projects being abandoned.

An example is taxes imposed on developers for outgoings and expenses, depending on whether it is a commercial or residential development. A tax waiver can ease the financial strain on developers that may be cash-strapped.

Under the HDA 2012, which came into force in 2015, a housing developer can be criminally liable in the event of a default of a residential project. If convicted, the developer may be liable to a fine which shall not be less than RM250,000 but which shall not exceed RM500,000, or a jail term not exceeding three years or both.

But despite attempts to plug the loopholes and inadequacies of the HDA, enforcement and accountability remain extremely weak, Ranjan tells The Edge. “How many delinquent developers will be prosecuted is the million-dollar question.”

While there has not been a landmark decision on abandoned projects so far, he stresses that it is important to distinguish between “incomplete” and “abandoned” property projects, even though the terms are “used interchangeably and regarded as one and the same thing. It is a misconception”.

Citing the case of Berjaya Times Square Sdn Bhd vs M Concept Sdn Bhd, which went to the Federal Court and has been law since 2010, he explains that the apex court decided that the remedy for incomplete projects attract continuing LAD, and as such, the sale and purchase agreement cannot be rescinded.

However, abandoned projects make LAD recovery virtually impossible, often leaving the buyers in the lurch, he says. “Perhaps the time has come for the Federal Court, when the occasion arises, to clarify the law further to permit rescission (of contract) and sue the office bearers of the developer to recover all monies paid to the developer as well as damages and losses suffered. Innocent purchasers are losing out.”

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