So you’ve got a piece of land, what next?
The Malaysian property development business is often one that is not fully understood. A property developer is sometimes thought to be a greedy, money-grabbing ogre who squeezes every Ringgit that he possibly can from his projects.
The traditional image of the brash, cigar-chomping and Mercedes-driving businessman is not helped by his other accoutrements – gold-capped teeth, a solid gold Rolex watch and chain, plus the obligatory extra-large jade ring. Thankfully, the developers and businessmen of today have moved away from this predilection and they are generally more educated, refined and professional.
Whatever your opinion, I’m sure you wouldn’t think of a successful developer as a maestro, would you? If one likens a good developer to a maestro, then the concept and design plans are like the musical score of a stirring symphony. As in the case of an accomplished conductor, a reputable developer must be able to muster and weave together all the diverse skills of his ensemble (consultants, contractors, suppliers, bankers, lawyers, real estate professionals and so on) in such a harmonious way that the soaring symphony (or project) will excite and enthrall his audience (or buyers).
The property development journey starts with the acquisition of a piece of land. The land can range from thousands of acres outside the urban areas, or just a one-acre plot in the middle of Kuala Lumpur. This acquisition process can be achieved in a number of ways, but we shall not go into that for now.
The developer then thinks of the highest and best use of the land and determines his concept, feasibility and project details. Assuming his bankers are happy with what he has proposed, he will then have to navigate through the labyrinthine bureaucratic process to secure approvals from at least 15 government departments.
The process from the acquisition of virgin agricultural land to securing the building plans approval could take up to five or more years. And especially for virgin agricultural lands outside urban areas with no infrastructure or master plan, one can expect the process to be lengthier; it may even need something called the “Fragmentation” approval.
For areas with an existing master plan, things will move a lot faster but it also depends on the maestro-developer’s skill, diligence and the jurisdiction that the project comes under. Up until this point, the developer only sees his cash flowing out; cash only starts to come in when he gets the green light from the Ministry of Housing and Local Government that allows sales to commence.
After approvals, the developer will tender out the construction work, and then spends the next two to three years supervising the construction work to ensure that it is done to the highest possible quality. This is one of the most difficult parts of the developer’s task because construction is mostly manual and it is in foreign hands. While there is a trend to use the various Industrialized Building Systems (IBSs), their usage and efficacy is still somewhat limited.
Even in good times, the sale of the units in a project is not easy. A lot of market research is needed and one has to be up to date with the competition’s pricing and features. There could also sometimes be unpleasant surprises – for example, the market could suddenly tank for a number of reasons, including overly aggressive pricing, banks pulling back loans or new restrictive government policies. The project could also be jeopardized by macro-economic factors like the recent financial meltdown.
Reports of eager buyers queuing up for several nights in developers’ offices make great headlines, but they are not the norm. Such established and branded developers have this luxury only because they have, over the years, ‘paid their dues’ and have consistently delivered on their promises.
From the brief and simplified account of the entire development process, one will realize that developers truly have to be maestros in their line of work. Doing a project from inception to completion takes years, and in that time, there are so many imponderables to overcome. To shorten this period, one can, of course, buy land that is already approved and ready for construction, but that will mean paying a lot more upfront money for the land. When one considers all these factors, one wonders if the profit margin of 10% to 30% earned over five to eight years is worth it. If one were to also factor in the many unexpected contingencies and charges, the risks become even more daunting. It is therefore not a fact that developers are mostly fat cats who make easy money! For every one who has made it, there are many others who have failed. All in all, this is really not a business for the faint-hearted!
In the next installment, we shall deal with the second M – Method.
PK Poh has been in the property development business for 33 years. Working as a project consultant for the first two years after his graduation and then moving up the ranks of various private and public–listed development companies, he was thrown into the deep end of the very complex and exciting world of property development. From 1992 to 2007, Poh helmed and built up Dijaya Corporation Bhd and Tropicana Golf and Country Resort Bhd into a much-respected and multi-award-winning property group by pioneering the art of high-end gated and guarded lifestyle residential projects, when other developers were only focused on maximizing their project densities with bread-and-butter terraced houses.
In 2007, Poh opted for a slower pace of life and retired from the group as its Group Managing Director. Poh is currently an advisor and director of another public-listed group and during his spare time, he is patiently working with a partner on a small boutique project which he fondly calls his ‘labor of love’.
We asked this property veteran to share with us some of the many interesting and little-known facets of the property development business. His insights will offer more than a glimpse into what goes on behind the scenes. For easy reading, Poh has summarized some of his experiences into what he calls The 4 Ms (Maestro, Method, Money and Market) which most aspiring developers would have encountered as they embark on their property development journey. Some of his comments are tongue-in-cheek while others delve deeper into the developer’s psyche and mindset. Maestro gives an overview while the other 3Ms (Method, Money and Market) elaborate what is stated in the first M.