Condo defaults forecast as the cash runs out

Off plan sales of condominium units in Yangon have slowed this year, following a three year boom. As a result, some developers are likely to be left without enough money to continue to build and will be forced to default on their projects, which could further hurt market confidence, say experts.

“Of over a hundred projects that have been approved, no more than 10 or 15 percent are likely to be completed in the next three years,” said John Anderson, managing director at Meinhardt.

“Relatively very few projects are actually under construction,” he said. “In many cases, the developer has underestimated the cost of the project, sometimes by as much as 100pc. Often the design is fine, but developers can’t find a suitable contractor with high-rise experience to build within their budget.”

To make matters worse, many developers have found themselves with a lower budget than they anticipated. In Myanmar, most condominium projects are funded through off-plan sales. This means that the developer sells units before starting construction, and uses the proceeds to fund the project. However, in many cases this has not gone according to plan, said Edwin Vanderbruggen, partner at VDB Loi.

“Many developers don’t have enough funding to finish the projects and they are gambling on achieving their [fund-raising] targets through off-plan sales,” he said. “In 2012 this was fine but in 2014, projects popped up like mushrooms and increased competition led to the pool of buyers drying up. If sales drop and rumours start circulating, it’s over – people freak out,” he said.

For the past few years most buyers were speculating on the value of real estate, rather than buying to live in the units, said U Nyan Min Htut, managing director of Green Vision. “Prices went up too quickly without any actual demand or real transactions. Myanmar has a history of betting on prices – of gold or currency or cars. When these prices were standardised, condominiums became the most popular way to try and make some quick cash,” he said.

“In 2012, not many people could afford to buy a condominium for US$300,000, yet some of the units were selling for up to $1 million two years later, with prices doubling or even tripling within 2014.”

Rising costs

Now the speculators have stopped buying.

“Across the high-end market I think only an average of 20pc to 30pc of units have been sold altogether,” said a Yangon based head of a real estate consultancy. Others estimate the figure is more likely to be 40pc or 50pc, but say that this is still much lower than developers had anticipated.

Many reasons are given for the slowdown in sales, which began at the end of last year, but most say it is due to a growing level of uncertainty ahead of the general election this November. Confidence has also been knocked, following the suspension and cancellation of five projects near to the Shwedagon Pagoda, said Julien Esch, Myanmar country manager at Bouygues Bâtiment International.

“People think – if even prestigious projects such as Dagon City are stopped, what about the small condo I want to buy,” he said. The five projects were cancelled in July after critics argued the developments would impede the view of the city’s most famous landmark. The government has publicly stated it will compensate the developers.

A lack of financing options for both developers and buyers is a major issue, said Mr Esch, as is the potential for oversupply. Others say the pool of buyers is too small to support the pipeline, or that those with cash have already bought as many condo units as they can. However, Cyrus Pun, head of real estate at Yoma Strategic Holdings believes the issue is not buying power, but decision making.

“People are still interested, but they are taking their time,” he said. “A lot of people have been nervous about the currency and haven’t wanted to part with US dollars, which have recently been in short supply.”

Others agree that US dollars are likely to be the favored “store of value” leading up to the November 8 election. “People will sell assets and hold cash – dollars preferably – and gold. Those with extra condo units for lease may well consider exiting their investments,” said the director of a Myanmar investment firm.

In the meantime, costs for developers are rising, said Lilian Fok, managing director of RHLB Myanmar. “The overall cost of hiring a contractor has increased,” she said. “This is partly due to rising labour costs – apart from an increase in wages for local workers, foreign contractors need to hire skilled labour from overseas, as productivity and skill levels in Myanmar are low and they want to avoid paying delay damages. Also if a contractor is not confident that the developer can pay promptly during construction, he will also tend to submit a higher tender price.”

The developers most at risk of default, said Mr Anderson, are those who do not own the land, but are having to cover the cost of rent, despite much lower levels of income than they had bargained for.

Easy come, easy go

In the meantime, buyers are still paying monthly installments, even though they can see that no progress is being made. “They must pay the installments … or forfeit their rights. They are in a bind,” said the director of the Myanmar investment company.

In other countries such as Malaysia or Singapore, developers must demonstrate they can finance a project before they are allowed to build, said Mr Vanderbruggen. In Myanmar, due to underdeveloped laws and regulations, anyone can announce that they will build a project and start selling units, according to a project director for a local company, who preferred not to be named.

“It’s quite worrying because the authorities are not regulating sales at all – there is no standard contract for developers to follow, so they create their own, which puts buyers at a disadvantage,” he said.

Furthermore, there is nothing in the law that says the money raised from off-plan sales must be spent on building the condominium project, said one head of the Myanmar practice at a global law firm. “In some countries there are laws ensuring the capital from off-plan sales goes into an escrow account which can be used only for the purpose of building the project,” he said.

Myanmar developers say that in some cases, the proceeds from off-plan sales have been spent elsewhere. “Much of the initial capital has been spent on other businesses within the companies, so some developers are unable to build past the piling stage and they’re in trouble,” said a Yangon based head of a real estate consultancy.

Larger companies and conglomerates may be able to use capital from other parts of their businesses to make up for the lack of sales, allowing them to finish the projects. They may also attempt to secure a bank loan, though domestic banks generally do not have enough funds to lend to large-scale property developments. Others may try to raise more equity from investors or even ask friends and family for support.

Alternatively, companies may leave projects half-finished and draw out the construction process over 10 or 15 years, as happened in the past with projects such as Zaykabar’s office and condominium project on Pyay Road. According to Mr Vanderbruggen, a default can only be enforced if a creditor takes the developer to court. “But this is fairly rare in Myanmar as people prefer to work things out amicably. For the moment there will be many unfinished sites,” he said.

Others say that contractors, buyers or even the government may force insolvent developers to default. If this happens, it will be a first for Myanmar, said Mr Pun. “In many other countries, such as China and Indonesia, a lot of people came in with hot money to build and many ran out of steam – leading to unfinished buildings and distressed assets. But Myanmar hasn’t seen a wave of defaults before,” he said.

Picking up the ball

Once defaults happen, the future of the market will depend on how cases are resolved, said the Myanmar project director. “Defaults are natural, there’s no point propping up something that won’t work,” he said. “However, legally, there is no recourse for buyers, so if one or two black sheep developers take advantage of this, it will affect the entire industry.”

Many say that clearer regulations on the rights of the buyer are needed, and that these could be fast-tracked if defaults begin to happen. “In the absence of regulations, defaults could happen. When they do, it’s likely that housing developers’ rules will be introduced regarding the timing of payments,” said Swee Gim Cheah, director at law firm Kelvin Chia Yangon. “For example, rules may say that developers shouldn’t be able to collect money before the piling begins,” she said.

Ms Cheah added that there is a need for regulations that safeguard the rights of the buyer, including a Strata Title Law. Such a law would allow individual ownership of a particular unit as well as collective ownership of the development as whole. “There is currently legal ambiguity on what a person acquires when they buy a unit. Parties therefore enter into complicating contracts,” she said.

Developers should also make it clear whether they are selling units on freehold land or BOT land, said Mr Vanderbruggen. Furthermore, he said, Myanmar needs a titling system – not only for condominium projects but also for apartments.

A long-awaited Condominium Law would have a positive impact on the market, as it would provide much more legal certainty to buyers, and would also permit foreign investors to directly buy property in Myanmar for the first time, said John Barnes, director at Marga Group.

“[A Condominium Law] would have an incredibly positive impact on the market. We expect clarifications on foreign ownership, strata-title, mortgages and other general property rights to be included, so that Myanmar’s ownership laws can be in line with the other advanced economies in Asia,” he said.

Mr Vanderbruggen said that in the meantime, “there are still good projects and opportunities, but people will need to do more due diligence. The rose tinted glasses are off. Now there is a need to pick up the ball and fix things,” he said.

For Mr Pun, a wave of defaults at smaller projects would not have a huge impact on the rest of the market. “Depending on the markets after the election and how quickly sales come back, defaults could be quite substantial in terms of numbers but not to an extent that it would derail the whole industry,” he said.

“Smaller projects that have only sold a few units will stop, but the bigger players are quite well capitalised and can support projects with cash from other businesses,” said Mr Vanderbruggen. “Some of the froth from 2012 to 2013 is wearing off – that’s not necessarily a bad thing.”

Source: Myanmar Times

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