Only developers with strong balance sheets can undertake financing scheme, says RAM

RAM Rating Services does not expect the property sector to be significantly lifted by the move to allow eligible developers to apply for a moneylender's licence to provide loan facilities to house buyers

KUALA LUMPUR (Sept 13): Malaysian homebuilders' accumulation of debts to finance their land purchases over the past few years have left little room for them to undertake the developer financing scheme sanctioned by the Ministry of Urban Wellbeing, Housing, and Local Government, said RAM Rating Services Bhd.

The local credit assessment agency, therefore, does not expect the property sector to be significantly lifted by the move to allow eligible developers to apply for a moneylender's licence to provide loan facilities to house buyers, it said in a statement today.

"Most of these players had geared up in the past two years to fund land acquisition and working-capital needs. This had resulted in 60% of the sample chalking up hefty debts, with gearing ratios of more than 0.7 times and/or debt-to-revenue ratios of above one times.

"Accordingly, not many developers have the capacity to provide mortgage financing on a large scale," said RAM. "Only developers with strong balance sheets will, in our view, contemplate this option to spur sales."

Last Thursday (Sept 8), Minister of Urban Wellbeing, Housing, and Local Government Tan Sri Noh Omar announced that property developers are able to seek money-lending licences issued by his ministry under the Moneylenders Act 1951 and Pawnbrokers Act 1972. This move, he said, was to help spur the languid property sector and assist buyers who could not afford down payment.

Property developers have the discretion over whom they intend to disburse the loans to, as this scheme is open to anyone — not just first-time buyers. The quantum of the loan-to-value ratio, too, can be set by the developers, with the interest rates capped at 12% for those with collateral, or 18% without.

Obviously, as the credit agency pointed out, homebuilders' credit risk level will definitely rise should they take this route. People who opt for full or partial loans from homebuilders will be those who are unable to obtain the required loan amount through the traditional mortgage financing from banks and as such, will naturally carry a higher credit risk, said RAM.

"Further[more], the cost of establishing a moneylending business, i.e. manpower, and evaluation or risk management systems, will add to operating costs," said the agency.

Already, various incentives and promotions offered by developers since early this year — namely deferred-payment arrangements, minimal down payment offers, and build-then-sell home ownership schemes — are likely to crimp their profit margins and increase working capital requirements, RAM opined.

The developers' debt level, too, could rise from making this sort of incentives available.

"Offering loans to house buyers who cannot meet the eligibility requirements of banks will, consequently, present further risks to developers in the event of non-payment by the buyer, especially in the absence of collateral," RAM concluded.

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