BTQS 3062 Integrated Project

(Property Development)

• Week 12
• Tutor Identified Incident
• Semester 1 : 05/2023

• Sr Ng Chooi Chooi

BTQS 3062 - WEEK 12 1

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Compliance Cost and What its Means

❖ What Compliance cost covers and how it impacts house prices ?

✓ Expenditure derived from complying with set regulations.

✓ Includes development charges, Improvement Service Fund (ISF), strata title
application and land conversion premium.

❖ Improvement Service Fund – a fund established in each local authority to collect

funds for the purpose of the beautification, construction or laying out of any street,
drain, culvert, gutter or water-course in their jurisdictions, according to the Street
Drainage and Building Act 1974.

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Compliance Cost and What its Means

❖ Capital contributions :

✓ Payment made by developers to utility providers for the provisions of sewerage,

telecommunication services, water and electricity in their projects.

❖ Capital contributions and compliance costs are significant in influencing a project’s

feasibility, especially for developments under affordable housing schemes.

❖ The passing on of these costs to homeowners could directly contribute to reduced

housing affordability.

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Compliance Cost and What its Means

❖ Housing and Local Government will revealed a guideline under the affordable
housing sub-policy of the upcoming National Housing Policy 2.0 (NHP 2.0), that
requires utility companies to take over the cost of building utilities such as water,
electricity and telecommunications from developer of affordable houses for the B40
group.

❖ This approach will be relief for property developers, it might not be so positive for
utility companies.

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Compliance Cost and What its Means

The removal/reduction of this

development barrier will
definitely help increase housing
affordability.

Percentage of distribution of the total development

costs.

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Various Costs and Requirements Imposed to Developer

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Various Costs and Requirements Imposed to Developer

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Compliance Cost and What its Means

❖ To improve housing affordability, most approach will reduce this 2 major

components:

❖ Land Cost
❖ Construction Cost.

❖ Limitation to reduce 2 components , due to :

❖ Prime location of the land.

❖ No compromise on quality.

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Compliance Cost and What its Means

❖ Suggestion to reduce development cost:

✓ To reduce or remove unnecessary compliance and capital charges.

✓ Range from 8% to 20% of the gross development value (GDV) of a property
project.

❖ To illustrate how compliance cost and capital contributions can effect the
development cost, an example showed in the subsequent slides.

BTQS 3062 - WEEK 12 9

Tutor Identified Incident

❖ Sample of cost
breakdown for
an apartment
project

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❖ Sample of cost
breakdown for
an apartment
project

BTQS 3062 - WEEK 12 11

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❖ Sample of cost
breakdown for
an apartment
project

BTQS 3062 - WEEK 12 12

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❖ Impact on property prices – From the developers’ views

❖ Scenario :
➢ Agriculture land : 5 acre.
➢ Development density : 100 unit/acre.
➢ Conversion to residential land.
➢ Product : 900ft2 standard apartment @ selling price RM250,000/unit.

➢ Total compliance cost + capital contribution :

✓ RM8.23 mil.
✓ 6.6% of GDV of RM125mil.

➢ After tax profit margin estimate @ 7.7% of GDV.

➢ Less than the margin.

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❖ Impact on property prices – From the developers’ views

❖ Scenario :
➢ Increase the selling price from RM250,000 to RM350,000 to ensure the feasibility
on margin.
➢ Any costs , charges imposed on developers, ultimately passed on to the
homebuyers, causing an increase in housing price.

❖ The impact of compliance cost is significant.

❖ It includes development charges, contributions to various authorities, professional
fees, setting aside land and infrastructure for public utilities.
❖ Development charges are charged upfront before the development obtain approval.

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❖ Impact on increase selling price to RM350,000

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❖ Impact on
increase
selling
price to
RM350,000

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❖ Compliance cost increments from 2008 to 2018

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❖ Example of utilities contribution by developer

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❖ Example of utilities contribution by developer

BTQS 3062 - WEEK 12 19

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❖ Utility players’ views

❖ While developers may welcome the news that the utility companies will need to
bear their own cost when providing their respective utilities, lets listen what the
utility companies have to say about that??

❖ National Water Services Commission (SPAN) CEO warns:

✓ If the utility companies are to put up their respective infrastructure and pay for it
upfront, it will make many, if not all utility providers become insolvent.
✓ Take into consideration of their current financial situation where revenue hardly
cover operational costs.

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❖ Utility players’ views

❖ National Water Services Commission (SPAN) CEO warns: (cont’d)

❖ Water supply and sewerage development require huge upfront costs.
❖ PAAB need to raise the infra costs and charge a lease rental to the water
operators.
❖ The assets will need to be transferred to PAAB until all payments due have been
settled.
❖ The biggest risks is if the developer does not complete the building portion, thus,
upsetting the entire investment made.
❖ Hence, the current system which requires developers to build the utilities for
their developments is still the BEST.

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❖ Utility players’ views

❖ Indah Water Konsortium Sdn Bhd (IWK) CEO concurs with :

❖ The utility companies are already bearing a heavy financial burden and any
further increase in operating costs will add to their load.
❖ IWK still rely on government assistance to balance its operating deficit.
❖ Despite the annual sewerage management collection increase to 90% efficiency.
❖ Increase in operating costs will impose higher charges on consumers or more
government assistance.

BTQS 3062 - WEEK 12 22

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How expensive is building/construction cost in Malaysia?
❖ The average per m2 of building cost for selected global economies.

Source : Turner & Townsend

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How expensive is building/construction cost in Malaysia?

❖ The average building cost per m2 recorded in Malaysia at USD650.

❖ Much lower than Hong Kong (USD4,237), Singapore (USD2,250, Japan (USD2,093)
and South Korea (USD1,586).

❖ House price per m2 in Malaysia (USD1,668) , is far behind most Asian countries like
Hong Kong (USD23,977), Singapore (USD12,505), China (USD6,149) and Thailand
(USD2,689).
❖ House price in Malaysia consider not “expensive”.

BTQS 3062 - WEEK 12 24

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What about preliminary (compliance) cost? How expensive is it in Malaysia?

The preliminary (compliance)

costs in Malaysia is on the high
side.

Higher than Singapore (8%),

China (7%), close to Hong Kong
(12%).

Malaysia :
Lower –
House price and construction
cost
Higher –
Percentage of preliminary costs of selected global economies Preliminary (compliance) costs
(Source : Turner & Townsend)

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What are the effects of high compliance cost on house prices?

Profit
oriented
Developer

Higher
Selling
Costs
Price
imposed by
the
Government

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What are the effects of high compliance cost on house prices?

The compliance cost range from

RM9,000 to RM150,000 or from
2.1% to 35.1% of the typical unit
selling price.

Impact more significant on

landed development :-
▪ land surrendered for
infrastructure or public
services.

Impact of compliance costs on house prices

(Source : REHDA Selangor)

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What are the effects of high compliance cost on house prices?
The larger the development
increases community facilities
and infrastructure & utilities.

50 acre to 200 acre:

Land used on utilities : 31.65% to
44.56%
Land used for residential +
commercial : 48.81% to 40.51%

Fulfilling planning requirements

+ maximize revenue = high end
houses
Percentage of land use with varying development
(Source : REHDA Selangor) Mass affordable houses
BTQS 3062 - WEEK 12 28
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Why is the compliance cost so high for developers in Malaysia?

❖ The housing industry heavily regulated by various laws, policies, guidelines and standards.

❖ Imposed at federal, state and local government levels.

❖ Negative impact on housing affordability and availability.

❖ Compliance cost ranging from :

❖ 2.8% to 19.9% of GDV in high rise development,
❖ 9.5% to 35.1% of GDV in landed development.
❖

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Why is the compliance cost so high for developers in Malaysia?

❖ Compliance cost is contributed by :

1) Processing fee;
2) Statutory contribution;
3) Land matters;
4) Development of price controlled social housing;
5) External infra upgrading work;
6) Development charges;
7) Utilities contributions;
8) Premium for substation;
9) Land surrendered (social amenities infrastructure)
10) And so on.

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In short, the compliance cost can influence project feasibility.

❖ Suggestion to increase housing affordability:

▪ Reduction of the compliance cost.

▪ Removal of the compliance cost.
▪ Reducing minimum parking requirements, especially in a transit-oriented
development (TOD).
▪ Building on government land that is free.
▪ Pre-approved and converted land for developers.
▪ Co-operation between federal and state government on federal owned land.
▪ Abolished land conversion premium.
▪ Increase household income.

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There is no harm in repeating a
good thing
By Plato

Quote of the day

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