Cover Story: Initiative could increase developers' risk profile

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This article first appeared in Corporate, The Edge Malaysia Weekly, on September 12 - 18, 2016.


AS property developers are given the option to take on the role of moneylenders to homebuyers who cannot obtain bank loans, it remains to be seen whether they will jump on the bandwagon en masse. According to market observers, the established players with deep pockets are likely to explore this option to boost their sales compared with their smaller, highly geared counterparts.

Based on data compiled by The Edge (see table), only six or 20% of the 30 largest property developers by market capitalisation are in a net cash position, which puts them in a better position to offer financing to homebuyers. That said, developers with low gearing also tend to have a more conservative capital management policy and may not have the risk appetite to take on lending risk.

Analysts generally opine that while the government’s new initiative could help to reduce the number of unsold units in the market and boost property sales in the short term, developers would be exposed to new borrowers’ default risk over the longer term.

“Potential buyers who seek this channel of financing for almost the entire value of the property may have relatively weak credit quality and this raises concerns over their debt-servicing ability. If implemented on a large scale, this initiative will also tie up developers’ balance sheet capability, which should instead be deployed for landbanking,” Maybank Investment Bank Research says in a note to clients last Friday.

On top of that, developers’ cost of funds are unlikely to match those of commercial banks, which can tap into cheaper deposit funding.

“With the new government initiative to carry high interest rates of 12% to 18% versus the existing bank mortgage rates of 4.25% to 5.1%, the new initiative may only be taken up by the weaker buyers.

“Also, the new initiative may drive property prices up as developers may price in borrowers’ financing risk, defeating the government’s efforts to control property prices. From the macro aspect, this new home financing avenue could keep household debt elevated … [Household debt] stood at 89.1% of the country’s gross domestic product as at end-2015,” says the research house.

Based on the latest Bank Negara Malaysia statistics, approved loan for the purchase of property fell 13% year on year to RM10.5 billion in July. It has declined continuously for 18 months since February last year.

According to the National Property Information Centre, unsold properties increased 16% to RM9.4 billion in the first quarter of this year from the previous quarter. Many developers attributed the sluggish sales growth to borrowers failing to obtain bank loans.

Regarding developers’ request for Bank Negara to review the lending guidelines, the central bank said in a statement in July that access to credit is not the problem confronting potential buyers in owning affordable houses. It added that there are more fundamental issues that require resolution, such as affordability and the shortage of supply of reasonably priced houses.

According to the central bank’s annual report, the country is experiencing an undersupply of affordable houses, particularly in the major urban areas, and an oversupply of office and retail space in several major cities and towns. It noted that the imbalance between demand and supply, particularly in the affordable housing segment, has contributed to a rapid increase in house prices and compounded housing affordability issues.

Amid the continued slowdown in the property market, S P Setia Bhd introduced the “Setia 10:90” package while Sunway Bhd came up with its “Certainty Campaign” whereby guaranteed loans would be provided to buyers without commercial bank loans for selected projects. However, the take-up rates for these schemes have been less than ideal due to the more expensive price tags, says Maybank IB Research.

While the more established developers could come up with marketing schemes to entice homebuyers, smaller developers that do not have the financial muscle could be financially distressed if the slowdown in property transactions last longer than expected. Looking at the table, six — or a fifth of the 30 developers — have a net gearing ratio of over 50% or an interest coverage ratio of less than 2.5, indicating potential cash flow issues.

That said, smaller developers appear to be more at risk, with substantially higher gearing. Out of the 77 listed property developers on Bursa Malaysia, Encorp Bhd has the highest gearing ratio of 273% and an interest coverage ratio of just 0.98. This is followed by BCB Bhd and PLB Engineering Bhd, which have high gearing of 102% and 97% respectively.