With recent increases in the number of abandoned projects, several observers seem to believe that the Build-Then-Sell (BTS) approach could be the panacea for preventing an even greater incidence of this unwelcome phenomenon.

However, it should be quickly recognised that this approach is not entirely sound; so, one should tread with caution and become more aware of the real issues involved here. While the BTS approach protects consumers from being stuck in case a development project is abandoned, it cannot prevent a development project from being abandoned in the first place. Risks associated with property development would still exist with or without the BTS approach. These include increases in project costs, main contractors’ capacity, regulatory issues and so forth. These can all affect the risks associated the project and, ultimately, whether it is completed or not.

A common practice which is currently in place is for developers to sell their properties before commencement of construction. Under this Sell-And-Build (SAB) approach, house-buyers part-finance the developer’s costs during the construction period via individual end-financing obtained from a financial institution (end-financier). The developer may also obtain a bridging loan from its banker (bridge-financier) to bridge-finance the construction costs paid out pending receipt of progressive payment from the house buyers/end-financiers.

Under the BTS approach, the developer does not receive progressive payment from end-financiers as mentioned above and therefore requires higher financing from the bridge-financier in order to finance the project.

As mentioned above, the BTS approach does shield house-buyers against the risk of the project not being completed. However, from the bridge-financier’s point of view, the completion risk remains relatively unchanged vis-à-vis the SAB approach. In addition, the absence of progressive payments from end-financiers means that the developer would most likely require higher bridge-financing to complete the project. This also means higher risk to the bridge-financier. Hence, to minimize the likelihood of abandonment of the project, the bridge-financier of a BTS project would most likely fund only experienced developers who have the required track record and adequate financial strength. This invariably means that smaller developers who are weak in financial strength and experience or track record would have great difficulty getting financing for a BTS project.

From a bridge-financier’s point of view, a pre-sale condition serves two purposes. First, it demonstrates a certain level of saleability for the project; and, second, it minimises the additional money required (on top of the bridging loan) to fund the cost of completion in the event the developer fails to achieve further sales after the disbursement of the bridging loan.

The higher risk of financing a BTS project means the bridge-financier will increase its loan pricing. Since the purchaser/end-financier no longer part-finances the construction of the project, a developer would most likely pass this higher financing cost to the purchaser.

In many cases, developers fund only 30-40% - less in many cases – of the land cost which can be loosely translated into about 10% of the total development cost. In the event of successful sales upon completion, developers usually can make 20% to 30% of the development value. Compared to the developer, the bridge financier usually funds a higher percentage of the total development cost, especially in the case of a BTS project. Notwithstanding the higher pricing charged for the bridging loan for assuming a higher risk, the bridge-financier is still making relatively thin margins compared to what the developer stands to make from the project.

Since the financing institution is not in the business of property development and does not reap the kind of profit margins that developers do, it is necessary to take calculated risks in order to ensure that shareholders’ interests are protected.

Under the BTS approach, the developer/bridge-financier has to shoulder the bulk of the project financing. Overall, this is likely to lead to a smaller number of projects being launched as well as to reduce the quantum involved in the end-financing business given the smaller scale of the launches.

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