By Mak Kum Shi

Pros and cons in issuing money lending licenses to enable home financing by developers, including implementation challenges and improvements in market sentiment

There are many issues for developers and homebuyers to consider when home financing is provided by property developers.

The Urban Wellbeing, Housing and Local Government Ministry will be issuing money lending licenses to eligible property developers to provide up to 100% financing for homebuyers.

The license is regulated under the Moneylenders Act 1951 and Pawnbrokers Act 1972, and does not involve Bank Negara. Developers with the license are allowed to provide 100% or just the portion not covered by bank loans.

CIMB Equity stated that this development is a positive surprise as it provides an option for the developers to boost their sales. However, it is believed that only developers with strong balance sheets and appetite for lending risk would start providing financing to their buyers.

Furthermore, the interest rate is capped at 12% p.a. or 18% p.a. without collateral. This is lower than the return thresholds required by most developers.

While financing from developers is expected to have limited impact on property sales in the near term, this signals that the government’s stance to introduce cooling measures on property has ended and has possibly begun to reverse. It could even be a precursor to more relaxation measures, especially when Budget 2017 is revealed in October.

IJM Land managing director Edward Chong Sin Kiat commented that the proposal announced by the Minister will provide some windows of opportunities for developers to make their offerings more attractive.

However, this proposal needs to be evaluated in greater detail from various factors, including but not limited to the amount of capital required and credit risk assessment.

Mah Sing Group Bhd group managing director Tan Sri Datuk Seri Leong Hoy Kum commented that the feasibility of such a money-lending programme can be reviewed when more details are available.

“Mah Sing has been actively launching (developments) for the past few months and we have received very good take-up. There is keen interest from buyers and the main thing delaying their purchase decisions is their inability to procure loans. Our focus will be to assist buyers with easy ownership schemes. It is important to help Malaysians acquire assets and property is still the most resilient asset class,” Leong said.

Paramount Corp Bhd group chief executive officer Jeffrey Chew commented that this is a bold an innovative move by the ministry in supporting both the property industry and meeting the current needs of consumers in owning a home.

Since the size of the balance sheet of developers is a fraction of commercial banks, the capacity for funding buyers for property purchase is limited.

Therefore, this will force developers to channel the funding to specific area of gaps in mortgage lending, such as first-time home buyers without capital outlay for down payment and also the affordable segments where buyers fail to meet the more stringent lending requirements of commercial banks in terms of credit screening and also expected return on yield for associated risks.

As such, this move will unlikely see property developers encroaching into the banking space of mortgage business.

While these initiatives can bring some advantages to homebuyers and developers, there are some serious challenges to developers.

In the context of balance sheet requirement to fund these long term financing, it will have an impact on the gearing and also the liquidity. As developers, their balance sheet is generally tied up with substantial land bank that involves long gestation periods and this can also be another significant burden to the developers.

Cost of setting up a proper credit evaluation framework, loan management and processing, risk monitoring and collection procedures can be a daunting task and requires substantial effort and investment.

Underinvesting will result in huge credit losses and will also expose developers to fraud risk and losses.

System investments for loan origination, loan management, risk management analysis and monitoring, as well as debt collection are quite costly themselves. Costs of expert resources required to operate these processes and systems should be considered as well.

“Since developers are quite innovative, perhaps the industry can lead in the ‘digitalisation’ of the whole loan origination process by employing more technology and big data to reduce the cost of loan processing and to speed up the loan approval and disbursement process.

“However, this may also require some amendments to current Moneylenders Act 1951 to facilitate the end-to-end processing of loan via an online and straight through process (STP),” Chew said.