indepth

Lending by developers to have minimal impact

Tan Sri Noh OmarKUALA LUMPUR (Sept 13): Analysts expect no significant impact on the local property market, following the government’s move to allow eligible property developers to obtain a licence under the Moneylenders Act and Pawnbrokers Act to provide up to 100% financing for homebuyers.

Urban Wellbeing, Housing and Local Government Minister Tan Sri Noh Omar (pictured), who announced the government’s decision last Thursday, said the interest rate for the financing facility will be capped at 12% per annum for borrowers with collateral and 18% without, with loan repayment periods of between 10 and 20 years.

MIDF Research analyst Alan Lim said the move is expected to slightly increase sales, but thinks developers will be very selective in applying the new scheme to their products.

“On the positive side, the new rule is expected to increase property developers’ sales slightly and hence may reduce the number of unsold units in the market.

“Having said that, we believe that property developers will be very selective in applying the new scheme to their products as the cash flow from repayment periods exceeding 10 years is slower than the current period of between three to five years,” he said.

AmInvestment Research analyst Thomas Soon said the initiative will not have a significant impact in the near- and medium-term, due to the high interest rate.

“Broadly, we do not believe the initiative would have a significant impact in the near- and medium-term as the high interest rates would be a hindrance, but more significant risks could emerge over the long run if such balance sheet items [were] built up and needed to be offloaded.

“The memory of the 2008-2009 subprime mortgage crisis is not that far in the distant past,” wrote Soon in a note.

ExaStrata Solutions Sdn Bhd chief real estate consultant Adzman Shah Mohd Ariffin told The Edge Financial Daily that while the move could stimulate the domestic property market, house prices could rise over the longer term.

“There is always the issue of cost of funds involved for the developer to finance this and it is feared that this cost will be reflected in the property price similar to the DIBS (developer interest bearing scheme) concept previously, hence property prices could be increased further to cover the cost of funds,” he said.

CIMB Investment Research analyst Saw Xiao Jun also highlighted the same issue, noting that developers’ cost of funds is unlikely to be lower than that of commercial banks.

“Since the banks already allow debt service ratio (the proportion of income used to service borrowings) of 60% to 70%, financing from developers will either raise homebuyers’ overall purchase cost or introduce default risks to the developers,” he said.

He added that most developers are not keen to provide financing to their buyers in the near term, based on checks by the research house. However, developers have not ruled out offering some form of financing facilities in the future.

“In any case, we believe only the developers with strong balance sheets will be keen to explore this option to boost their sales,” said Saw, adding that UOA Development Bhd and Mah Sing Bhd are the developers in net-cash or near-net-cash positions, among those under its coverage.

On the other hand, Andaman Property Management Sdn Bhd managing director Datuk Seri Vincent Tiew said even the smaller developers can benefit from this, as developers have flexibility in regulating their lending.

“It’s not about having a big cash pile. The big players wouldn’t necessarily be the only ones benefiting from this. Even the smaller players can benefit, as the financing can be tailored to the size of the project,” he said.

For example, Tiew explained that the loans can be given based on a project-by-project basis, instead of a blanket policy covering all of a certain developers’ project.

However, property developers said that there is still a lack of clarity of the initiative, leaving companies uncertain about the feasibility of the move.

“We can review the feasibility of such a moneylending programme once more details are available,” said Mah Sing Group managing director and group chief executive Tan Sri Leong Hoy Kum.

“Mah Sing has been actively launching for the past few months and we have received very good take-up,” he said. “There is keen interest from buyers and the main thing delaying their purchase decision is their inability to procure loans. Our focus will be to assist buyers with easy ownership schemes.”

Similarly, S P Setia Bhd president and chief executive officer Dato Khor Chap Jen said the group will assess the option further, once the details are out.

“Setia is open to this initiative and will assess it further,” he said.

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This article first appeared in The Edge Financial Daily, on Sept 13, 2016. Subscribe to The Edge Financial Daily here.

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