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An Overview of Housing Purchase and Delivery System in Malaysia

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DOI: 10.14419/ijet.v7i3.21.17096

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 International Journal of Engineering & Technology, 7 (3.21) (2018) 57-60

International Journal of Engineering & Technology

Website: www.sciencepubco.com/index.php/IJET

Research paper

An Overview of Housing Purchase and Delivery System in

Malaysia
Nur Arzwin Binti Mohamed Aris1, Mohamed Syazli Fathi2*, Aizul Nahar Harun3,Zainai Mohamed4,
1,2,4
UTM RAZAK School of Engineering and Advanced Technology, Universiti Teknologi Malaysia (UTM), 54100 Kuala Lumpur, Malay-
sia
3
Malaysia-Japan International Institute of Technology, Universiti Teknologi Malaysia (UTM), 54100 Kuala Lumpur, Malaysia
*Corresponding author E-mail: syazli@utm.my

Abstract

Two types of the housing delivery system (HDS) were used in providing houses in the Malaysia market. However concept and differ-
ences between this two systems are not yet discussed in the feature diagram in giving comprehensive understanding the process purchas-
ing a house. Thus, the purpose of this paper is to provide an overview of the process of purchasing a house using two types of HDS
which are Sell then Build (STB) system and Build then Sell (BTS) system in Malaysia. This paper first reviews the timeline of HDS and
housing provision in Malaysia and later reviews the differences between Sell then Build (STB) system and Build then Sell (BTS) system
in the process purchasing a house. The process of purchasing a house in HDS involves a developer, a house buyer, and a financial institu-
tion as depicted in the model diagram. The differences of purchasing a house between the two HDS can obviously seen in the financial
transaction during the construction stage in which the developer crucially needs fund in completing housing development. This review
also highlights the concept, issues, advantages, and disadvantages of both HDS from the perspective of a developer, a house buyer, and
the financial institution.

Keywords: Sell Then Build; Build Then Sell; Housing Delivery System

1. Introduction 2. Timeline of Housing Delivery System and

Housing Provision in Malaysia
Purchasing the desired house that is within with one’s household
income is definitely a priority for any adult with target goals in According toPrins & te Leiden (13) housing delivery system
their lives. The rapid growth of population, economies, and indus- (HDS) can be considered as a social configuration relating to the
tries in Malaysia lead to a high demand of purchasing a house thus production and distribution of housing, with more or less formal-
the chance of owning a home is tougher these days. However, the ized relations between the actors in performing the necessary
prospect shows that house buyers (purchasers) still tend to own a functions in the housing process. Li (14) added that a HDS can be
house eventhough they are aware of several issues within the considered as an organizational and institutional arrangement
housing market supply such as issues of delay, abandonment, within a broad social structure that is related to the production,
price hike and low quality in construction workmanship which are distribution, and consumption of housing. A HDS is characterized
frequently discussed (1-6). The various authors discussed the is- by the unique combination of actors, their goals and the ways in
sues that are plaguing the housing industry which are related with which they fulfill their roles in the housing process.
the drawbacks of conventional housing delivery system (HDS) Generally, HDS which often discussed in Malaysia is using the
which is known as Sell Then Build (STB) (1, 3, 7-12). Recogniz- systems of Sell Then Build (STB) and Build Then Sell (BTS) (1).
ing the issues, the government provides another alternative strate- It can be said that house buyers are able to purchase a house
gy alongside with STB method by urging the Build then Sell through two methods of HDS using STB or BTS from the devel-
(BTS) HDS which is conversely differs with developers’ practice. opers who is responsible to produce a house with the financial
Yet a recent research by Phang (Phang 2016) shows that develop- assistance from a financial institution. For over 50 years, STB
ers hope that STB system will be continuously implemented. The system has been able to meet the backlog of housing needs in
contradicting perspectives from developers, house buyers and Malaysia(12). However after the emergence of abandoned houses
government relating to both HDS in supplying a house are being during 1980s and early 1990s recession period, the STB system
reviewed in giving comprehensive understanding the process pur- has been perceived as susceptible to abuse by the developers who
chasing a house. Hence, this paper aims to provide an overview of choose to take advantage of the system (12). As a result, the pro-
the process purchasing a house from two different HDS which are posal of BTS has been debated as on early 1981 by The Federation
STB and BTS in which both are widely implemented in Malaysia. of Malaysia Consumer Association (FOMCA)(12, 15) in order to
solve the issues occured. After scrutinising for over 20 years, gov-
ernment eventually announced the alternatives of new HDS which
is known as BTS in the year 2007(11, 12).
Copyright © 2018 Authors. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted
use, distribution, and reproduction in any medium, provided the original work is properly cited.
58 International Journal of Engineering & Technology

Besides the new alternative of HDS which has been urged by Ma- be paid through installment plan based on the loan agreement
laysia government, the government is also concerned with the between the house buyers with a financial institution. The finan-
current needs and demands of housing supply. A study conducted cial institution will disburse progressively to the developers with
by Shuid(16) examined the structure of housing provision frame- verification of construction progress work by the architect in
work in order to analyse the changes of housing provision system charge until the housing project finishes.
in Malaysia since the 1970s. The structure trend indicates the Ma- Through this STB system, developers acquire fund for their pro-
laysia government’s intervention in solving the house issues and ject by utilising the 10% deposit and receiving balance progressive
private housing involvement in supplying a house from the year payment by the financial institution while completing the housing
1971 until 2020. In the structure, he (16) divided into four phases project(1, 11). However, although STB shows a successful track
of the evolution of Malaysia’s housing provision system namely record in its ability to supply affordable houses (1, 9) it is prone to
Housing The Poor Period (1971-1985), Market Reform (1986- be affected by the issue of abandoned house which happens when
1997), Slum Clearance (1998-2011) and State Affordable Housing unscrupulous developers decided to take advantage of. More se-
(2012- to-date). verely with the economic downturn scenario, the STB system is
In respect to this study aims, a timeline of HDS and the Malaysia affected by sluggish house sale (12).This thus impacts the reputa-
housing provision is depicted starting from the 1960s till present. tion of STB system as to be not secure to house buyers who are
See figure 1. However, the review on purchasing a house on this continuously paying the installments, while unscrupulous devel-
paper is not limited to the Malaysia housing provision but also opers and irresponsible contractors stop the construction’s pro-
considering an overview of purchasing a house in the free market. gress work due to facing difficulties during the recession period(3,
12). The unstable economy situation and developers’ dishonesty
resulted in abandoned of houses which use STB system.
STB system mainly depends on economic booming. Although the
demand is high, the house buyers still consider some criteria in
buying their homes. For instance, house buyers would also de-
mand a strategic location which is easily accessible to highway,
nearby school and amenities, a secure environment with a quality
workmanship. On some circumstances, the house sale sluggish
will cause a delay in construction progress. Consequently, a dis-
ruption in the developers and contractors’ cash flow will exerts an
effect towards abandoning a housing project. Such case becomes
worse when the remaining number of the proposed units is not
Fig. 1: Timeline of Malaysia Housing Provision and Housing Delivery sold within the expected time. In a study conducted by Tan (10), it
System was reported that the unsold of houses are located at non strategic
areas with less job chances, no enough amenities and facilities
According to Junaidei et.al (17) housing problem in Malaysia is which resulted from oversupply of houses.
mainly on the issue of accessibility by the low income group in- Basically, strong demands by house buyers for strategic location
cluding young people(18). It concerns with the dilemma of low are able to boost greater chances for STB system to succeed. Un-
cost or affordable housing and also the issue of low income level doubtedly with the competence of developers and contractors in
among locals (17, 18). Thus, government’s intervention in supply- completing housing project while being scrutinised by the gov-
ing housing for the nation provides numerous affordable housing ernment will ensure STB to remain helpful to cater house demands.
programmes and schemes to qualified households for purchasing Studies by Ibrahim(20) revealed that STB scheme is more pre-
an affordable house. The federal and state governments respec- ferred by house buyers because of the lower initial purchase price.
tively allocate affordable purchasing schemes and programmes for Notwithstanding advantages of the STB housing delivery system,
low and middle-income groups to purchase a house. Some exam- the dwelling demand in urban area still involves expensive land
ples of housing programmes offered are such as Perumahan values especially in Klang Valley region which makes it difficult
Rakyat 1 Malaysian (PR1MA), Perumahan Penjawat Awam 1 for developers to sell with affordable prices to purchasers. In addi-
Malaysia (PPA1M), Rumah Wilayah Persekutuan (RUMAWIP), tion, the rapid population growth and migration of rural popula-
and My Home Scheme (16). Lean and Smyth(19) stated that a tion for employment to the urban areas are putting further pressure
range of schemes exist to assist new homeowners in getting a for homeownership and house price.
foothold in the housing market and to help existing homeowners
to move up on the property ladder. These schemes have created 4. Build Then Sell
extra demands, put upward pressure on prices(19) and a competi-
tive market arise between the public and private sector(16).
As mentioned earlier, the implementation of a new alternative
HDS in 2007 is concurrent alongside with STB. This gives oppor-
3. Sell Then Build (STB) tunity for house buyers to have choice whether to purchase a
house from a developer who executes STB or BTS. Under BTS
Overall, purchasing house in Malaysia commonly uses STB as in system, there are two variants which are 100% BTS and 10:90
Figure 1. It reflects that housing property businesses in Malaysia BTS [9].
is prevalent with the execution of the conventional STB housing The 100% BTS variant essentially means that the housing projects
delivery system for many decades in an attempt to supply house must be completed (including obtaining the Certificate of Comple-
demands for the nation (6). Developers are more familiar with tion and Compliances (CCC) ) before the housing developers
STB or ‘forward selling’ HDS rather than BTS system which has begin the selling activity(12, 20, 23). This means that the con-
been urged by the government starting in 2007(11, 12). This is due struction costs are borne by the housing developers which require
to the reason that STB system is beneficial for them to fund the sufficient capital to kick start the projects as well as depend on
housing projects. The STB system allows the developers to sell their own creditworthiness to apply loans from the financial insti-
houses through their development proposal to prospective buyers tutions(20). Study by Ibrahim (20) stated that the house buyers
prior building up the houses or simultaneously constructing themb prefer 100% BTS because it is easier for them to secure bank
(20-22). Frequently, 10% deposit from the total house price will loans despite of their realization that the house will be sold at a
be paid by the house buyers to the developers upon signing Sales higher price. House buyers who purchase 100% BTS house (com-
And Purchase (S&P) agreement (1, 12). The balance of 90% will pleted house with CCC) are still required to make a down payment
International Journal of Engineering & Technology 59

(10% of purchase price)(20)while the remaining 90 % usually can financial institution throughout all the construction phase in order
be settled using a bank loan. to complete a housing project.
While using BTS 10:90, house buyers have more tendencies to While during the construction stage, the house buyer start pay
purchase a new house on a new housing development. The con- instalments to the financial institution and the developer will col-
struction development for the house is not yet starting but it re- lect progressive payments from the financial institution after an
quires house buyers to pay the initial 10% deposit upon signing architect approves the progress of work till the developer is done
the S&P agreement (5). The 10% deposit will be temporarily held with the construction phase. The progressive payments will help
by the developers’ lawyer and is placed in an escrow trust account the developer to fund the housing project and gather profit through
or a fidelity fund. Chen (24) indicated that the developers have no these transactions.
access to the fund unless the plan of subdivision is registered and
the vendor gives a clear freehold title for the property(20). The
balance of 90% will payable upon the completion of the housing
project with the issuance of a CCC(11). According to Phang(1) by
implementing this system house buyers will only lose 10% of the
deposit if the project is stalled or abandoned.
To make it clear, the difference between both HDS is that house
buyers do not make any progressive payment to developers on
early or during construction project under BTS as compared to
STB (25). By implementing the BTS system, house buyers will be
able occupy a good quality house with the advantage is given to
the house buyers to inspect the house before making any decision Fig. 3: Model Housing Delivery System Build Then Sell 10:90
in purchasing (23, 26).
However, BTS system will affect small developers in terms of
securing more bridging loans(25, 27) in order to fund the project
and to sustain in the housing property business. Furthermore, by
implementing this system, it may result in less number of unit
houses to supply which causes receiving late revenue. A research
by Shing (27) indicated that developers will start to incur losses if
the properties are not being sold for long period after the devel-
opment project finishes. The trade-off between cost and long term
revenue is crucial for a business to sustain in this global economy
and it is government’s role in balancing price and profit margin to
avoid imbalance in the housing industry in Malaysia(1). Incentives Fig. 4: Model Housing Delivery System Build Then Sell 100%
by Malaysia government are given not to only encourage the de-
velopers to use BTS housing delivery system in the process of However, BTS 10:90 has a different process flow arrangement in
selling the house, but also as exclaimations by the government in an attempt to protect the house buyer. Figure 3 provides a model
STB system to remain(1). Shing (27) recommended the financial that illustrates BTS 10:90 concept with the involvement of a fi-
institutions to provide interim finance to help developers who use nancial institution, a buyer, and a developer as the main stake-
BTS system since they do not receive any payment along the way holders based on the literature review (1, 7, 11, 12, 26-29). It indi-
in the period to complete house within an expected time. cates the process flow of purchasing a house within the construc-
tion phase through BTS system and the financial transactions.
During the pre-construction stage, a house buyer who is qualified
5. Findings to buy a new house will sign a S&P agreement with the developer.
Same as STB system, 10% deposit will be paid by the house buyer
to the developer and developer will try to secure a bridging loan
from financial institution throughout the construction phase to a
complete a housing project.
While during the construction stage, the developer will not collect
any progressive payments from a financial institution but only
depends on the bridging loan throughout all the construction phase.
There is no instalment being paid by house buyer to the financial
institution since the house still under construction work.
After the new house receives the CCC, the selling process will
occur with the loan agreement between house buyer and financial
Fig. 2: Model Housing Delivery System Sell Then Build institution. Another 90% sale balance will be disbursed by the
financial institution to the developer during the post construction
Based on the previous review on housing delivery systems, model phase.
diagrams embracing the concepts were established. Figure 2 pro- Nevertheless, BTS 100% has a slightly difference in term of the
vides a model that illustrates STB concept with the involvement of process of purchasing a house as compared to BTS 10:90. Figure
a financial institution, a buyer, and a developer as the main stake- 4 provides a 100% BTS model that illustrates BTS concept with
holders based on the literature review (1, 7, 11, 12, 27-29). It indi- the involvement of the financial institution, buyer, and developer
cates the process flow of purchasing a house within the construc- as the main stakeholders based on the literature review (1, 7, 11,
tion phase through STB system and the financial transaction. 12, 26-29). It indicates the process flow of purchasing a house
During the pre-construction stage, a house buyer who is qualified within the construction phase through BTS system and the finan-
to buy a house will sign a S&P agreement with the developer. In cial transactions.
most cases, 10% deposit will be paid by the house buyer to the All the financial and transaction arrangements will occur after the
developer and balance of 90% will be borrowed from a financial house is completed and received the CCC. The developer will
institution in purchasing the house. At this early stage, house buy- finally supply completed house with CCC to prospect house buyer.
er and the financial institution will be engaged through a loan During pre-construction and construction stage, there are no 10%
agreement. The developer will try to secure a bridging loan from
 60 International Journal of Engineering & Technology

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