BY Chris Prasad
Just over a week ago, the government announced an initiative that will allow property developers to apply for moneylending licences so they can provide would-be buyers with loans, offering an alternative for those having difficulty securing loans from banks.
In the wake of this, reactions to the proposal have spanned from deliriously optimistic to complete outrage, but market watchers also point out that a large majority of key industry players have given the concept a surprisingly lukewarm reception.
The “fence-sitting”, in part, is due to the fact that there is still very little information from the authorities on how such a scheme would work and the various mechanisms that would define it.
Urban Wellbeing, Housing and Local Government (KPKT) Minister Tan Sri Noh Omar said that more would be revealed at the tabling of Budget 2017 next month, but until such time, most developers are likely to remain cautiously optimistic but also non-committal.
Property big guns such as Mah Sing Group Bhd have applauded the initiative as a positive move, but its group managing director Tan Sri Leong Hoy Kum also qualified that the “feasibility of such a programme can be reviewed once more details are made available”.
See Hoy Chan Holdings executive director Tan Sri Teo Chiang Hong said the move will help developers sell their properties, provided they have good cash flow. However, he said developers might be concerned about undertaking financial risks as well as business risks.
Similarly, Eco World Development Group Bhd executive director Datuk Voon Tin Yow said the scheme would be useful to developers with financial strength. He pointed out that some industry players had engaged in comparable schemes in the past, but there were not many takers because the interest rates were considered too high.
Indeed, some trepidation is centred on KPKT Minister Noh Omar’s suggestion that interest rates under the scheme could vary between 12 per cent (with collateral) and 18 per cent (without collateral). This is considerably higher than the prevailing interest rates of 4.5 per cent to 5 per cent, which is hardly enticing for the average buyer.
Critics have called this plan a recipe for disaster. They point out that at such high interest rates, the scheme would only attract those who cannot qualify for regular loans at financial institutions, which means many would be high-risk individuals and loan defaults would be at an all-time high.
Furthermore, they point out there would be a conflict of interest in allowing developers to hand out loans. Though the guidelines have yet to be stipulated, they say that it is in the developers’ best interest to generate as many buyers as possible and this means there will not be a strict vetting process for loan applicants.
There is also a big question mark on which developers will be allowed to hold a moneylending licence, as not all are as financially stable as others. However, being selective about licencing could also lead to unfair competition among companies as larger corporations with better financial standing would then put smaller businesses in peril.
CIMB Research believes that only developers with strong balance sheets and appetite for lending risk would start
providing financing to their buyers.
“Plus, the interest rate is capped at 12 per cent per annum (or 18 per cent per annum without collateral). This is lower than the return thresholds required by most developers,” it said.
The research house also pointed out that developers’ cost of funds is unlikely to be lower than that of commercial banks. It added that since the banks already allow debt service ratio of 60 per cent to 70 per cent, financing from developers will either raise homebuyers’ overall purchase cost. It will also introduce default risks to the developers.
“Based on our checks, most developers are not keen to start providing financing to their buyers in the near term. But they do not rule out the possibility of offering some form of financing facilities in future. In any case, we believe only the developers with strong balance sheets will be keen to explore this option to boost their sales,” CIMB research said.
Among the harshest critics of the “developer loans” concept is the National House Buyers Association (HBA), which has described it as “ridiculous” and accused the housing minister as being “ill-advised” on the matter.
“Instead of assisting house buyers get a ‘soft loan’, it seems that house buyers are [now being] dragged into deeper debts unwittingly,” it said in a statement to the press.
“Many borrowers are already struggling with housing loans of 5 per cent. Taking a housing loan with interest of 12 per cent is just plainly asking for trouble,” it said.
HBA also warned that the scheme would put various check and balance mechanisms in jeopardy.
“The Housing Development Project Account requires all transactions to go through the said account under the law. If the developer gives loans to buy its own houses and if it fails to complete the house, what would happen? Will it release the loan amount to itself? Isn’t there a conflict of interest in this scenario? Will they exercise a fiduciary duty of care to their customers cum buyers cum borrowers?” it asked.
HBA said, unlike banks, developers do not have large amounts of resources to develop the necessary tools to carry out proper credit assessments, collection monitoring and recovery.
“This means that the chances of default of such borrowers are very high and developers will not be able to face the financial implications if too many borrowers start to default on their loans. These developers could go belly-up and the property market, being the catalyst engine of growth, would affect our economy nationwide,” HBA warned.