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Rising property defaults expected

KUALA LUMPUR (Mar 19): The completion of property developments under the low deposit incentive schemes, coupled with Bank Negara Malaysia's (BNM) changes in bank loan computations from gross to net income, may result in higher rates of defaults, according to industry observers.

The low deposit incentives — often referred to as 5/95, 10/90, 15/85 or 20/80 schemes — allow home buyers to pay a small down payment of 5% to 20% of the property price.

The balance 80% to 95% is only due after completion of the property, and is often covered by a bank loan.

These incentives became very popular in early 2009, as developers offered them to promote sales following the US subprime crisis that dampened confidence in the property market.

Some developers, notably of luxury condominium projects, even extended the incentives to include a delayed repayment period of up to two years after the handover.

An analyst said these incentives effectively created a “warrant-type” of instruments for property investments, as buyers paid low up front costs with potentially high returns on investment.

The analyst added that capital appreciation gains have been strongest in landed developments, compared with luxury condominiums, over the last three years.

He cited the example of S P Setia Bhd's Setia Eco-Park township in Shah Alam, Selangor, where prices of landed homes have surged 50% to 100% in the last three years.

S P Setia was the first to introduce the 5/95 scheme in January 2009, and Setia Eco-Park buyers had enjoyed tremendous gains as its township gained popularity.

For instance, a semi-detached home in the township launched in 2009 at around RM1.2 million is now fetching about RM1.8 million, according to property valuers.

"For a buyer who paid a 5% or RM60,000 initial payment for a RM1.2 million S P Setia property, a 50% gain on the property's price would effectively yield a gain of RM600,000. Based on his or her initial capital of just RM60,000, it is a 10-fold return on investment," the analyst explained.

Setia Eco-Park, developed from former plantation ground by S P Setia, has become the choice Klang Valley residential address with its emphasis on nature and greenery, a low density ratio, direct highway interchange and a self-sustaining community with an international school and ample amenities.

But there are fewer successful stories elsewhere.

This is especially so for buyers who had bought luxury condominiums in upmarket areas of Kuala Lumpur, such as the KLCC and Mont'Kiara. Unlike Setia Eco-Park and secondary landed homes elsewhere in the Klang Valley, prices in these upmarket areas have hardly moved over the last three years due to high supply, lack of demand and affordability issues.

A market observer cites as an example the KLCC, where prices of condominiums have have yet to recover to the pre-2008 peaks, while prices of landed developments elsewhere have scaled new heights.

Prices of several upmarket condominiums sold under low deposit incentive schemes in 2009 in Mont'Kiara, such as Seni Mont'Kiara by Aseana Properties Ltd, have not appreciated much, the observer noted.

Three years after these incentive schemes were launched, many of these projects are now nearing completion — raising concerns if property loan defaults will increase.

Buyers of these properties will have to start servicing their loans. They will need to find tenants or even sell off their properties if they were bought for speculation purposes. According to industry observers, those who hope to make a quick buck may encounter problems servicing their loans.

They note that prices and rental rates of residential properties, especially in the high-rise segment which has a healthy supply of condominiums, have softened, leading to lower yields and returns.

Apart from the glut in condominiums, Malaysia's high level of household debt is another factor.

With household debt running at 78% of GDP, the propensity for households to borrow is less, and BNM is prudently tightening the screws. BNM's Guidelines on Responsible Financing appeared to have affected January's lending indicators which showed a deceleration in loan growth to 12.1% from 13.6% in December 2011.

Loan applications fell 2.7% in January compared to a 10.7% growth in December.

The January statistics showed a 16.4% contraction in consumer loans, particularly for car purchases and residential property, which fell 15.5% and 6.3% respectively.

Similarly, loan approvals declined by 2.9% against a 11.3% growth in December as a result of a 24.4% plunge in loan approvals for the household sector.

Analysts expect the loan approvals — which are leading indicators — to result in much slower growth in the months ahead. The contraction comes after a long period of growth in lending to property buyers.

The loan growth in residential and non-residential property has been steady between November 2011 and January 2012, expanding at an annual pace of between 12.8% and 13.2% for the former, and 20.9% to 21.3% for the latter.

There are some nascent signs of a decline in banks' asset quality, but analysts are not concerned as it is marginal.

Gross non-performing loans (NPL) rose slightly to 2.71% in January from 2.67% in December last year. The increase in NPLs was broad-based across various segments with residential property NPLs up marginally to 2.41% from 2.39% in December 2011.

Another indicator of the property market, the supply overhang, is nonetheless still healthy.

According to data by the National Property Information Centre, the overhang of property in the residential market was down from 23,389 units in 1Q11 to 19,607 units in 4Q11.

However, an analyst said the low level of unsold units was due to the robust property market last year as banks lent aggressively to purchasers of new launches.

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