Initiative could increase developers’ risk profile

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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 the data below, 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.

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“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 current house prices up as developers may price in borrowers’ financing risk, defeating the government’s efforts to control current house 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.

NO.PROPERTY DEELOPERMKT CAP
(RM MIL)
NET GEARING (%)NET DEBT/EBITDA
(TIMES)
EBITDA/INTEREST PAID
(TIMES)
1IOI PROPERTIES11,33713.72.17.9
2SP SETIA9,66536.91.65.5
3SUNWAY6,30343.66.38.2
4UEM SUNRISE4,94631.211.72.3
5UOADEV4,209NET CASH(1.0)70
6MAH SING GROUP3,8797.20.47
7IGB CORP3,40431.72.35.7
8ECO WORLD3,14454.210.41.4
9EASTERN & ORIENTAL2,12578.412.00.8
10TROPICANA CORP1,48532.78.73.6
11MATRIX CONCEPTS1,43215.70.399.6
12KSL HOLDINGS1,1845.60.541.2
13MKH1,17442.91.66.1
14LBS BINA GROUP1,06032.02.84.2
15GUOCOLAND MALAYSIA85585.412.91.7
16YNH PROPERTY84695.410.41.8
17SHL CONSOLIDATED784NET CASH(3.2)1,775.1
18ISKANDAR WATERFRONT CITY67411.03.810.8
19SUNSURIA65511.8(1.3)500.2
20PLENITUDE664NET CASH(2.9)23.2
21TAMBUN INDAH653NET CASH(0.1)26.4
22PARAMOUNT CORP58444.74.55.4
23I-BHD587NET CASH(2.0)NA
24GLOMAC55727.11.84.6
25TITIJAYA LAND54623.41.647.6
26AMCORP PROPERTIES50119.44.13.9
27IBRACO49631.61.410.1
28HUA YANG48649.61.2225.4
29LAND & GENERAL480NET CASH(4.4)27.1
30YTL LAND481169.547.80.5

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 current house prices and compounded housing affordability issues.

Amid the continued slowdown in the house 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.

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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.

 

News Source:(Alex Chong)

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