SCHOOL OF ARCHITECTURE, BUILDING AND DESIGN BACHELOR OF QUANTITY SURVEYING (HONOURS) DEVELOPMENT ECONOMICS QSB 60303 PROPOSED DEVELOPMENT OF MIXED RESIDENTIAL AND COMMERCIAL UNITS IN PUCHONG, SELANGOR Student Name : Davin Young Qiao Wei 0321065 Gregory Ho Fung Cheang 0321793 Hii Pai Ling 0320598 Herbert Liew Fung Zhean 0316133 Haji Muhd Syafiq Bin Hj Abd Zariful 0314702 Jack Liam Tininczky 0332368 Year : August 2017 Lecturer : Sr. Dianne Kok Hui Wei Submission Date : 29 th Nov 2017
Transcript
SCHOOL OF ARCHITECTURE, BUILDING AND DESIGN
BACHELOR OF QUANTITY SURVEYING (HONOURS)
DEVELOPMENT ECONOMICS
QSB 60303
PROPOSED DEVELOPMENT OF MIXED RESIDENTIAL
AND COMMERCIAL UNITS IN
PUCHONG, SELANGOR
Student Name : Davin Young Qiao Wei 0321065 Gregory Ho Fung Cheang 0321793
Hii Pai Ling 0320598 Herbert Liew Fung Zhean 0316133 Haji Muhd Syafiq Bin Hj Abd Zariful 0314702
Jack Liam Tininczky 0332368 Year : August 2017
Lecturer : Sr. Dianne Kok Hui Wei Submission Date : 29th Nov 2017
PROPOSED DEVELOPMENT OF 26' X 80' DOUBLE STOREY
SHOP/OFFICE LOTS, 22' X 75' DOUBLE STOREY TERRACE HOUSES
AND 20' X 60' DOUBLE STOREY LOW COST HOUSES IN PUCHONG,
SELANGOR
ECHO Consulting Sdn Bhd
1, Jalan SS15/8, 47500, Subang Jaya, Selangor TEL: 03 5636 2641
3.1 An analysis of the number of units for each type of houses 8
3.2 Financial Appraisal of the project 10
3.3 Cash Flow for the project based on ‘Sell-then-Build’ Concept 13
3.3.1 Monthly Cash Inflow For 2013 – 2017 13
3.3.2 Monthly Cash Outflow For 2013 – 2016 16
3.3.3 Quarterly-Yearly Cash Flow For 2010 – 2017 21
3.4 Net Present Value For 2010 - 2017 24
4.0 Comment on the cash flow and viability of the project 25
if it is based on a ‘Build-then Sell’ concept
4.1 Prediction: Negative cash flow under a BTS scenario lead to 26
increased prices for consumers and less profit for developers
4.2 Unviability of build to sell for this development 27
4.3 Case study: Build to sell in Australia 30
5.0 Conclusion 31
Reference 32
4
1.0 Introduction
A property Developer intends to develop a piece of freehold land measuring 10 acres 1 rood 10 pole in Rawang, Selangor. The land was purchased three years ago at
RM15.00 per sq. ft. with a RM6,500,000.00 bank loan. During this period, the Developer had applied for land conversion, subdivision, planning and building plans approval.
The proposed development shall be of mixed residential and commercial units
comprising of 26’ x 80’ double storey shop/office lots, 22’ x 75’ double storey Terrace houses and 20’ x 60’ double storey Low Cost houses. Thirty percent (30%) of the development must be of low cost houses. The Developer intends to have
fifteen percent (15%) of the total units to be double storey shop/office.
Development Order has now been granted and construction is ready to proceed. Construction shall take two years to complete. As the cost consultant engaged for the proposed project, prepare the following based on the project information available as
attached.
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2.0 Project Information
6
7
Table 2.0 : Work Programme
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3.4 Net Present Value for 2010 - 2017
Q4. With a twelve percent (12%) cost of capital, tabulate and calculate the NPV of
the project on a quarter-yearly basis. Give an overall analysis and comment on the viability of the project.
Table ________: NPV for 2010 - 2017
With a positive Net Present Value (NPV) of RM8,532,105.65, it shows that there is a better return in the future with the investor paying less than what the development is
worth and thus the project is to be considered viable. A future cash flow of RM16,305,112.44 can be generated in the project with the payment of the positive NPV RM8,532,105.65 upon completion of the project. The investment will be more
appealing the higher the positive NPV. A period of cash deficits from the year 2010 to 2012 is shown clearly in the table above which is due to the purchase and
financing of the land purchase whereby no developments are present on the land itself. In 2013, there is a considerable amount of capital outflow on the first quarter of the year due to the required external funding by the client to finance the
development cost during the commencement of construction after the development order has been granted. Later in the year only then the cash flows become positive
with the huge amount of cash inflows by selling off the units while still in the period of construction. With that, the client is able to finance the development cost by using the positive cash inflows from sales to pay back the bank interest rate for borrowings
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at the time.
4.0 Comment on the cash flow and viability of the project if it is based on a
‘Build-then Sell’ concept.
In 2004 the then Malaysian Prime Minister Tun Dato' Sri Haji Abdullah bin
Haji Ahmad Badawi remarked that build-then-sell development (BTS) model should
be implemented in the domestic housing market as a means of protecting ordinary
homebuyers from the uncertainty inherent in the sell- then-build (STB) model (Shari
2004). To this end, the Malaysian Parliament has amended legislation to exempt
developers who adopt BTS from paying the RM200,000 housing license deposit
(The Star 2007). Under STB, ongoing construction of the building depends primarily
on the continued sale of units within that building, which generate revenue to finance
construction costs. By contrast, BTS states that the developer may only sell
completed developments that hold a valid building certificate. A common variant of
the BTS model is the 10:90 concept, under which buyers make a 10% down payment
upon signing the sale contract, and remit the remaining 90% upon completion of the
building works. The assignment will attempt to persuade the reader that the BTS
model is unrealistic for all but the most cash-rich developers and proposes the
retention of the existing STB model. The partial or complete non-delivery of project
due to cash flow issues represents a major issue plaguing the Malaysian construction
industry (Rahman et al 2015), and is especially unfortunate insofar as it affects
vulnerable homebuyers. In Selangor alone, there were 63 abandoned housing
projects representing an astounding 14,626 units (Nooi & Hong 2016). In Malaysia
as a whole, there are 25,492 abandoned housing units affecting 17,987 house buyers
(May 2015). Action by various Malaysian government departments has hitherto been
ineffective in resolving the problem of abandoned housing, despite significant public
expenditure.
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4.1 Prediction: Negative cash flow under a BTS scenario lead to increased
prices for consumers and less profit for developers
Note: This section was written before any cash flow analysis had been conducted by
the other group members
In comparison to a STB model, developers under a BTS model would be
required to bear greater costs in the form of interest due to a lack of progressive
payment claims (The Sun Daily 2014). Here the cost of finance is 12% p.a. for
construction works1 and 9% p.a. for land,2 all of which are passed on to consumers in
the form of higher house prices as developers attempt to recoup the additional
expenditure. Without the positive cash flow from progressive progress payments,
developers will face complete negative cash flow throughout the duration of the
project, in this case 48 months. Under such a scenario, banks would be extremely
hesitant to lend money to developers without a strong financial background, with a
large asset portfolio or a significant record of accomplishment (Nooi & Hong 2016).
Interest rates may substantially increase in order to compensate financial institutions
for the greatly increased risks of lending money to developers in the absence of
progress payments. Professionals and other stakeholders in the Malaysian
construction industry (such as architects, quantity surveyors) are often corrupt and
dishonest, and have a strong vested financial interest in perpetuating the existing
STB model (Yusof et al 2010). Architects in particular sometimes yield to pressure
from developers to certify inadequate plans, or plans that do not satisfy governmental
requirements (ibid). Widespread adoption of BTS will result in a reduction in the
numbers of newer or smaller developers, and a reduction in supply of new
developments, further increasing house prices. A strong negative cash flow will also
incentivize developers to reduce the number of properties developed, in order to
minimize the costs incurred by self- financing of materials and labor, and further
raising costs. Together these decreases in demand will worsen an expected housing
shortage within the Klang Valley of 1 million units by 2020 (Rasid 2017).
1 5.5% p.a. + 6.5% BLR 2 2.5% p.a. + 6.5% BLR
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4.2 Unviability of build to sell for this development
Under a normal sell to build scenario, this project is expected to generate
RM54,461,770.00 of inflow from unit sales and a further inflow of RM6,500,000.00
for a land purchase loan, for a total inflow of RM60,961,770.00. The project cash
flow will be slightly negative from Q1 2010 through Q4 2012 (see Fig 1), before
turning positive in Q3 2013.
Figure 4.0: The project net cash flow under a built to sell scenario.
Conversely, under a 100:0 build to sell scenario, the project will generate just
RM6,500,000 in inflow yet retain the same outflows.
(5,000,000.00)
(4,000,000.00)
(3,000,000.00)
(2,000,000.00)
(1,000,000.00)
0.00
1,000,000.00
2,000,000.00
3,000,000.00
4,000,000.00
5,000,000.00
6,000,000.00
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
2010 2011 2012 2013 2014 2015 2016 2017Net
ca
sh fl
ow
(RM
)
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Figure 4.1: The project net cash flow under a sell to build scenario.
The result is a minimal amount of outflow from Q1 2010 through Q4 2012,
but a significant cumulative expenditure of RM35,519,147.18 from Q1 2013 through
Q1 2015. It is extremely unlikely that the developer retains such cash on hand, so
some finance is required. The developer is a prominent developer with significant
assets to use as leverage, and has an impeccable track record of successes in
delivering multi-unit residential developments. Therefore, the developer can obtain
finance for 75% of the additional expenditure (RM17,759,573.59). Assume that the
sales rate for the units was 100%, and all payment is received by the developer
immediately after the expiry of the defects liability period (DLP).3 Also assume that
finance can be obtained at an interest rate of 12% p.a., and interest compounds
monthly. Under such a scenario, the cumulative interest repayment on the additional
debt is RM4,127,181.77, or RM25,013.22 per apartment sold. Assume that the
current market for this type of development resembles monopolistic competition, and
the developer is only at liberty to “pass on” 25% of the additional financing cost. The
end result is an increase in the gross development value of RM1,031,795.44 and an
increase in the finance cost of RM3,095,386,33, corresponding to a reduction in
profit of RM2,063,590.89.
3 Ninety days from the conclusion of construction works
(9,000,000.00)
(8,000,000.00)
(7,000,000.00)
(6,000,000.00)
(5,000,000.00)
(4,000,000.00)
(3,000,000.00)
(2,000,000.00)
(1,000,000.00)
0.00
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
2010 2011 2012 2013 2014 2015 2016 2017
Net
ca
sh fl
ow
(RM
)
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SUMMARY
A Gross Development Value
RM54,461,770.00
55,493,565.44
B Cost of Development
1 Land cost
6,738,187.50
2 Construction cost
19,265,375.00
3 Administrative cost 5,376,925.60
4 Finance cost
5,812,900.71
8,908,287.04
5 Contingencies
963,268.75
Gross Development Cost
RM38,156,657.56
41,252,043.89
C Developer's Profit
RM16,305,112.44
14,241,521.55
D % Developer's Profit 43% 34.5%
Table 4.0: Development Plan.
The use of a build-to-sell development model in this case represents a lose-
lose scenario whereby the developer’s profit is reduced from 43% to 34.5%, and the
purchase price of each apartment increases by RM25,000. This analysis represents a
“best case” scenario, and uses favorable assumptions, generalizations, and
approximations. It is likely that the actual result will be even more undesirable.
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4.3 Case study: Build to sell in Australia
The BTS system is more viable in developed countries such as Australia
because of a greater focus on small-scale developments comprising less than 50
houses per project (Nooi & Hong 2016). While the Malaysian proper market is
preoccupied with meeting the basic housing needs of a burgeoning urban population,
Australian consumers generally demand low-density high-quality developments
featuring large individual floor space, unique architectural designs,
interconnectedness of public and private infrastructure, and communal amenities.
This difference in emphasis stems from a large disparity in purchasing power
between the two economies. For example, the average pre-tax personal income for an
urban Malaysian is RM29,500 (PPP$20,800) per annum, or RM59,000 (PPP$41,500)
per household. 4 By contrast, the average pre-tax income for an Australian is
AUD$86,000 (PPP$58,850),5 which suggests a household income of AUD$172,000
(PPP$117,000).
4 Two adult persons both working full time 5 Including overtime and bonuses
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5.0 Conclusion
A build-to-sell model is overwhelmingly unsuited to the current Malaysian
construction industry expect in the case of exclusive, high cost projects directly
primarily at the upper-end of the income spectrum. Adoption of BTS in this project
will render the project completely unviable due to negative cash flow and other
considerations (see above).
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References
Department of Statistics Malaysia 2016, Press Release – Salaries & Wages Survey
Report, Malaysia, 2016, Department of Statistics Malaysia, viewed 21 November
