Plenty of pent-up demand for mass-market housing that the developers can tap into

KUALA LUMPUR: The government’s move to allow property developers to provide up to 100% financing to their buyers is a positive surprise as it is an additional option for the developers to boost sales, says CIMB Equities Research.

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

“This suggests that government's stance to cool down property market has stopped or even begun to reverse. Stay Overweight. Top picks: Eco World Development Bhd, Mah Sing Group Bhd,” it said. This new development could even be a precursor to more relaxation measures, especially when Budget 2017 is revealed in October.
However, the immediate impact on sales could be small as most developers are not keen to start, it said on Friday.

CIMB Research noted there is plenty of pent-up demand for mass-market housing that the developers can tap into. Based on the research house’s channel checks, there was strong demand for the recent launches of mass-market properties by the developers that it covers.

“Stronger property sales in 2H16 compared to 1H16, in our view, could re-rate property stock prices. Downside risk to our sector call is deterioration of macroeconomic conditions,” it said.

To recap, CIMB Research said this development is a positive surprise as it provides an option for the developers to boost their sales.

“But we believe 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 annum (or 18% per annum without collateral). This is lower than the return thresholds required by most developers,” it said.

The research house pointed out 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%-70%, financing from developers will either raise homebuyers’ overall purchase cost or 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.

“Among the developers we cover, UOA Development and Mah Sing are in net cash or near-net cash positions,” it said.

CIMB Research stayed Overweight on Malaysian property. The sector currently trades at 0.9 times price-to-book value, 26% above the trough seen during the global financial crisis but 25% below its 10-year mean.

“The sector's valuation is cheap by historical standards, and we think this is unjustified because the sector's fundamentals are still decent,” it added.