PETALING JAYA: Allowing property developers to offer financing to homebuyers could have a negative impact in the long term, said Association of Valuers, Property Managers, Estate Agents and Property Consultants in the Private Sector Malaysia (PEPS) president Foo Gee Jen.
“To me, this is not the right solution, it is very much a piecemeal solution to the credit crunch issue that we are facing at the moment. To me, an ad-hoc or piecemeal solution may have negative impact in the long term,” he told SunBiz.
Last Thursday, Urban Wellbeing, Housing and Local Government Minister Tan Sri Noh Omar said property developers could apply for a licence under the Moneylenders Act 1951 and the Pawnbrokers Act 1972.
He said the interest rate would be capped at 12% a year for borrowers with collateral and 18% a year for those without collateral while the loan tenure would be between 10 and 20 years.
Eligible property developers may provide up to 100% financing to all homebuyers. It would not be restricted to any type of property.
On Saturday, however, Noh said his ministry would first conduct a comprehensive study on the proposal. He said the move was to help homebuyers who faced difficulties in securing loans from financial institutions.
Foo said such a move means property developers will be getting into small loans as the financing offered will be under the Moneylenders Act 1951 and Pawnbrokers Act 1972.
“They are meant for small loans but purchasing property is completely different. It is too big a ticket item. The financing market is under the purview of the Finance Ministry and Bank Negara Malaysia. Having another level of financing apart from banking means there won’t be healthy monitoring of the financial situation of the country,” he said.
“Can you imagine, we have banks giving loans and other people also giving loans in such a big magnitude? We are not talking about RM50,000 loans or things like that, we are talking about large loans,” he added.
Foo said every institution has its own role to play and because banks and property developers have different functions, there will be conflict of interest.
He said such a move would also seem to contradict Bank Negara’s reason for not relaxing lending guidelines, which were introduced to address the country’s high household debt.
“In the short term, it may be able to resolve some issues here and there, but it is not healthy in the long term,” he added.
AmBank Research said such a measure could be positive for larger developers as it gives them the option of doing so in good and bad times, with each having the ability to assess and staking it up against its own balance sheet strength. However, it could be a double-edged sword because, unlike household goods, housing is a big-ticket item that carries much greater risks.
“In our view, the downside includes the high interest rate being charged, the likelihood of bringing back speculative activities (though not necessarily a bad thing on a moderate scale), and part of the risks and costs, including defaults and chasing of monthly installments, shifting to the developers.
“It will also introduce new risks to banks’ lending to developers themselves,” it said in a report on Friday.
AmBank Research said such a move would not have a significant impact in the near and medium term as the high interest rates would be a hindrance.
“More significant risks could emerge over the long run if such balance sheet items build up and need to be off-loaded. The memory of the 2008-2009 subprime mortgage crisis is not that far in the distant past,” it said.
Property developer Paramount Corp Bhd group CEO Jeffrey Chew said property developers are unlikely to intrude into the mortgage space of the banking business.
Chew said because the capacity for funding buyers of property is limited, developers will be forced to channel the funding to specific areas of gaps in mortgage lending.
These include first-time home buyers without capital outlay for downpayment and the affordable segments where buyers fail to meet the more stringent lending requirements of commercial banks in terms of credit screening.
Chew said these initiatives can bring some “serious challenges” to developers, including impact on gearing and liquidity, in the context of balance sheet requirements to fund the long-term financing.
“As developers, our balance sheet is generally tied up with substantial landbank that involves long gestation periods, and this can be another significant burden to developers,” he added.
Chew said the cost to set up a proper credit evaluation framework, loan management and processing, risk monitoring and collection procedures can be a daunting task and requires substantial efforts and investment, while under investing would cause huge credit losses and expose developers to fraud risk and losses.
— THE SUN