By Professor Dr Ismail Omar
All land development teams are being pushed and back up by politicians, in a way or another. In the end, the price of houses is rocketing and the buyers are having problems in making a repayment.
This issue is known as affordable housing stress. In the end, the new direction must be resulting in a win-win situation to every player in the housing industry. Those players must be able to “give and take” of their shared portions of the cake in front of them equally.
According to Cadman Austin-Crowe and Topping in their book Property Development published in 1995, “land development is a process that involves changing or intensifying the use of land to produce buildings for occupation.
It is exciting, at times frustrating, a complex activity involving the use of scarce resources. It is a high-risk business that requires a large sum of money, lengthy, indivisible product and influenced by the economic environment.
It is more than bricks and mortar – it brings people with different objectives and interests”. Considering the complexity of the housing development process and with different players and diversified roles and interests, the land developer is the key player who is responsible for ensuring good products of the built environment. Bearing in mind that the government is another key player to ensure everything is in good order.
Who is a land developer? He is a real producer of the built environment. A land developer is an entrepreneur, someone who can identify the need for a particular property product and is willing to take the risk to produce it for a profit, and he is shifting roles as a creator, promoter, negotiator, manager, leader, risk manager and investor, adding up to a much more complex vision of an entrepreneur than a person who merely buys low to sell high.
They are more innovators – people who realise an idea in the marketplace – than traders skilled at arbitrage.
The land developers are, therefore, need to step out of their comfort zones and be more flexible and adapt to changes in wants and needs of the people. They have to understand the importance of climate changes to bring down the carbon footprint for sustainability.
In the end, land developers have to adjust the way they are doing business to sharing DNA revitalise and appeal from buyers. Since “sharing is caring”, they must be able and willing to accept some reduction of profits for the sake of a little reduction of house prices in the market.
Whilst researcher Sarah Monk from Cambridge University looked at the attitudes of the parties involved in the housing development process. MacTaggart Professor at Glasgow University, David Adams, asserted that active landowners make the land available in the market smoothly.
Otherwise, passive landowners create a lot of land supply constraints and restrict the supply of land onto the market. Improving the land supply constraining variables requires high transaction costs to the land developers that may push the houses price in the market.
High demand for houses will push the house prices up, and the land developers will be happy to escalate the costs to maximise profits to face and reduce risks and uncertainty in the market. High risks mean lower profit to land developers.
There are so many risks in housing development such as financial, planning, legal, market, structural and not least terror risks too.
In fact, as mentioned by Professor Sirman Jaffe from University of Wisconsin-Madison of the United States of America, anything to do with the land is considered as an investment that comes with risk and future uncertainty.
As such, the future housing industry must consider the mismatch between demand and supply, lack of planning coordination and the market-driven products. One of the solutions is to establish real estate big data as an instrument to detect the “real market signal” and to predict the accuracy of the price mechanism.
Studies show that the profits to developers must be within the ranges of 25% of gross development value and about 15% of the gross development cost of the projects.
There are, however, profits to land developers of more than 60% of gross development values and gross development costs. So, land developers have to go for creative and innovative packages such as rebates and discounts are given to house buyers.
Banks have to explore Islamic and Syariah compliant banking facilities including sukuk and wakaf. The same goes for banks that provide end-financing to house buyers and bridging loans to developers. It is assumed that the demand for houses is always on the rise which in turn, sets market prices soaring.
At the same time, however, it is reported that there are no takers for billions of ringgit worth of residential properties in the market.
Of course, land developers need to apply a comprehensive and detailed market and feasibility studies before embarking on the housing development projects. The reports must be comprehensive and be made compulsory to the land developers by the local authority and bankers.
Verily, the future is full of uncertainties and details and a comprehensive market and feasibility report may offer a clear idea of what is going on in the market in the near future.
Unfortunately, some of the housing projects involving affordable housing were built on Malay Reserved lands, customary or wakaf lands throughout the country. Surprisingly, there are government-linked companies (GLCs) who got involved with those luxury housing projects on those cheap sites but the house is not affordable when completed thereon.
The reasons are always, the same conditions and taxes have to be paid to the government by GLCs. At the same time, GLCs development companies are refusing to adopt Built Then Sell (BTS) rather than Sell Then Built (STB) as proposed a long time ago due to big capital and high risk to them. Therefore, the future housing industry must be able to look into the most suitable delivery system of BTS rather than STB wherever applicable.
Professor Dr Ismail Omar PPERT is the president of the Land Professionals Association of Malaysia (PERTAMA) since 2014 and lecturer in real estate management at Universiti Tun Hussein Onn Malaysia.
This is part 2 of a 3 part series. To read parts 1 and 3, please click on the links below.