Should property developers be protecting their Investments?
Are property developers in Pattaya doing the right thing by allowing investors with large sums of money to purchase large numbers of units in their projects at massively discounted prices?
We have to admit, the last two years have been much more profitable than the hard times during the global recession. The local property market has flourished again and we are seeing end-users and investors show confidence in the markets in Asia.
In other parts of the world there are restrictions on how you are allowed to sell property when purchased from a property developer before completion of that property. One of the things that I have never understood from property developers here is why they do not protect their projects and allow buyers to re-sell the properties they have purchased in pre-construction prior to completion.
The reason I raise this point this month is that it is becoming apparent that there are more and more investors coming into the local market and purchasing large numbers of units in most of the more sort after projects around town. These groups are then immediately contacting most local agents and marketing their re-sale units, and in most cases this is before the project has even started. The re-sale prices seem to be a little more than the developer's prices, which indicates that the developers have been able to provide a large discount of the multiple purchase, due to the fact the agents charge a commission on the re-sale.
Don't misunderstand me , I'm not saying this is wrong from the developers point of view. They have been able to sell a large number of units at a discounted price and have then guaranteed a huge investment and secured the funds to their development. What I can't understand is why the local developers aren't forming some guidelines to protect their investment and not allow these multiple purchase buyers to be able to influence the future selling guidelines of the developer.
In terms of an example, look at it from this point of view. Recently we have just listed a property within a project that has recently started construction with a 36 month build time. The buyer purchased the unit around 12 months ago directly from the developer.This unit in particular is a very nice unit located well within the building, and so sort after. The seller, due to receiving a small discount when buying the unit is now able to sell his unit cheaper than the developer themselves, after they increased prices by around 15% in the last year.
Where the issue arises here is that the developer has only sold around 60% of the project to date. What they have allowed is pre-construction sales prices to now influence their current direct sales. Early buyers can sell their units, offer to agent the standard 5% commission and still walk away with 10% profit on the original sales price within 12 months. This may be good business for the original investor, but the developer may now start to struggle to gain sales and raise the funding to guarantee construction and completion on time.
So going back to my original question, should these local developers start thinking about protecting themselves from these investors, or at least form some guidelines to protect their project. In the past many developers used to, and some still do, have an "assignment fee" included within their purchase contracts.This would be a fee that the original seller would be obligated to pay should they sell their purchase contract prior to completion and transfer of the property. Where the issue arises again, is, this fee is usually minimal and doesn't influence the original buyers selling price.
Should developers be allowing this to happen? Should they introduce clauses to protect their projects and allow these re-sales only to occur once the project has sold the required percentage to be profitable to the developer? Could they increase the assignment fee to be a percentage of the re-sale value? Maybe re-sales are only allowed before transfer through the developer's office, so that the developer themselves can recoup the discounts they offered to the original buyer? I should imagine there could be a number of ways to limit this from happening; it's just whether the developers feel they need to.