Proposal for higher licence deposits set to test developers

KUALA LUMPUR: The possible raising of the deposit required for a property developer's licence may not reduce the number of abandoned projects, but could instead lead to costlier homes, said the Real Estate and Housing Developers Association (Rehda).

A Rehda spokesman told The Edge Financial Daily that increasing the deposit payment would not solve the problem of abandoned property projects in the country.

The spokesman said developers might still walk away from their projects if economic and market conditions become unfavourable.

"The 5% will not prevent abandonment," he said, adding that raising the deposit will "punish the good guys" which represent 98% of the real estate development industry.

Apparently Rehda has received complaints from smaller developers outside the Klang Valley about the higher deposit hurting their earnings.

According to the spokesman, Rehda, which represents about 1,000 property development companies in Peninsular Malaysia, is deliberating an alternative to the National House Buyers Association's (HBA) proposal. However, he declined to elaborate. Housing and Local Government Minister Datuk Seri Chor Chee Heung on Monday announced that the deposit required to get a real estate developer's licence would be raised from the existing RM200,000.

According to a news report, an amendment to the Housing Development (Control and Lincencing) Act 1966 to be tabled next month would include the raising of the deposit required to obtain a developer's licence.

The minister was quoted by an English daily as saying that, after considering the respective views from HBA and Rehda, the government would try to "reach a middle ground where the deposit will based on a percentage of the property development cost". With the proposed amendment, Chor said only genuine developers with sufficient financial credibility would be allowed to undertake property projects.

Analysts said the implementation of a broad-based requirement would increase the cost structure of property developers.

"This extra cost will eventually be passed on to the house buyers," one analyst told The Edge Financial Daily on Tuesday, Feb 8.

Nonetheless, others reckoned this will at least help to shake out the under-capitalised property developers who usually face projectfi nancing problems when sales are below expectation.

An industry observer said it makes more sense for the deposit to be based on the value of projects rather than a fixed sum at RM200,000 now.

"Currently, property developers only need to get a bridging loan to start off a project by pledging the piece land, the value of which is often less than the total construction costs.

"If the project does not sell well, the property developer who does not have suffi cient working capital will have cash flow problems as the progressive payments are not enough to pay the contractors," he said.

Property developers are required to get one licence for each project they undertake. The deposits will be refunded upon completion of the property projects.

Terence Wong, the head of research at CIMB Investment Bank Bhd, said the amendment to the deposit payment is aimed at curbing small new developers.

"This does not aff ect listed developers that we cover. If anything, it is positive for them as it reduces competition," said Wong, adding that the additional cost of higher deposit payments is insignifi cant for the big boys.

The HBA had contended that the RM200,000 payment was too low an entry barrier, and is not enough to ensure that developers are committed to their projects.

HBA honorary secretary general Chang Kim Loong told The Edge Financial Daily on Tuesday that the association has proposed to the government that the deposit for a developer's licence be calculated based on a 5% quantum of the project's gross development value.

He also pointed out that another move is to have the deposit based on development cost as practised in Sabah and Sarawak.

Chang believes that the deposit should be in proportion to a project's size. "How can one size fit all?" he said.

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