Bank Negara advises caution to all parties concerned
Slow sales in 2014 and 2015, and an even slower market since the start of this year have prompted developers to introduce various innovative marketing schemes to boost sales.
Some of these include rent-and-purchase arrangements, the offering of “safety net loans” and even a re-focus on built-then-sell units to re-assure risk-averse buyers. The schemes include both unsold completed units and yet-to-be-built ones.
As the year moves into the second half, it is possible that other developers may jump on the bandwagon (of creative marketing) but it is likely that these creative schemes may well be the domain of developers who have some financial muscle.
There are certainly no rules against such marketing. In fact, some property consultants are glad as in some ways, it signifies that prices are coming off from its peaks.
The provision of various creative marketing schemes is not lost on Bank Negara. According to Bank Negara sources, developers are introducing these schemes because of “the need to sell”. Nonetheless, the central bank advises caution for all parties concerned.
According to Bank Negara’s Financial Stability and Payment Systems Report 2015, the central bank has been “vigilant” about the property market for the last several years, and for good reasons. The two sectors are closely linked because buying a house, being a big ticket item, generally involves taking a loan. With household debts at 89.1% to gross domestic product (GDP) – and rising – Bank Negara is keeping an eye on lending. Malaysia’s household debt level is one of the highest in South-East Asia.
The introduction of these innovative marketing strategies is “a strong indication that they want to sell their houses/properties”, central bank sources say.
But “if purchasers are unable to service their loans, the developers will end up with the houses later on,” the sources say.
Sources from Bank Negara are expecting more completed unsold units to enter the market and also for more properties to enter the auction market.
Although these “new” schemes may not have as wide and as far reaching effects as developers interest bearing schemes (DIBS) – introduced in the first quarter of 2009 and banned on Jan 1, 2014 – Bank Negara sources say the results and effects of these schemes will only “emerge or seen a few years later.” DIBS cast a wide net over a broad spectrum of buyers and property types, boosting speculation and lending.
The slew of strategies vary from developer to developer but they have two common features. The first is a low initial financial outlay only to be followed by a larger commitment three years later.
The second common feature is that they are premised on two hoped-for eventualities – the financial fortunes of the buyer will turn three years after signing the sales and purchase agreement.
Says a developer: “Their salary may increase or they may find a better-paying job.”
The second premise is that, hopefully the property cycle would have turned three years from today. Why three years? Because it generally takes three years for a project to be completed.
Says a developer: “In three years, the sector would have turned. Property comes in cycles.”
Based on these two assumptions, and in order to boost sales, developers are prepared to take this financial aspect onto their balance sheets.
But as with all things, there is also the risk that the hoped-for eventualities may not materialise, and buyers, for whatever reason, are forced to abort the sale. This is when units revert to the developers.
In order to understand Bank Negara’s concerns about these properties landing on the laps of developers, there is a need to consider some of the marketing strategies available in today’s sales galleries.
SDB Properties Sdn Bhd is offering a rent-and-purchase scheme for its unsold completed condominium in Cheras and landed units in Puchong.
Explaining how the scheme works, head of sales and marketing Khong Wei Chung divides the house price into two portions – 30% and 70% portions.A buyer pays 5% of the total price of the house. He gets 17% rebate on the remaining 25% out of the 30% portion. He pays the remaining 8% over three years.
Khong gives a real example of a 1,792 sq ft unit which costs RM1.08mil. The buyer pays the 5% (RM54,000) and moves in. The monthly repayment is about RM3,000, including a maintenance fee of RM564. This RM3,000 is collected quarterly.
Says Khong: “Six months before the three years are up, the buyer looks for a loan for the remaining 70%. If he cannot get a loan, all that he has paid for the last three years will be forfeited.”
“He can sell the unit if he fails to get a loan. But in order for him not to make a loss, he has to sell it at more than RM1.08mil. We will collect RM1.08mil from him.”
Khong highlights some positives about this rent and purchase scheme. It allows the buyer to move in immediately with a 5% payment. Secondly, he saves 36 months of interest.
There is a very small element of interest, says Khong, so the buyer essentially saves quite a bit during the 36 months. Thirdly, the buyer locks in the price. Three years later, the price would have risen, says Khong.
The drawback, says Khong, is when he fails to get a loan. Even if he succeeds to sell the property, he has to sell it at a price way above RM1.08mil in order to cover his last three year’s payments to avoid a loss.
Says Khong: “When a buyer enters into such a deal, he has to be able to time his finances, that in two to three years, he can get a chunk of money and put it in. Properties come in cycles and we expect the economy to be better three years later.
“It is almost at the bottom now. Prices cannot be subdued forever, so three years will be just nice,” Khong says.
‘Safety net’ loans
The Sunway Group is offering loans to buyers as a temporary measure in the event they are unable to get a regular commercial loan. Sunway loans come with higher interest rates compared with normal housing loans.
Under the 12:88 payment structure, Sunway Property managing director of property development division for Malaysia and Singapore Sarena Cheah says the buyer pays an initial 3%. The remaining 9% is paid over a 12- or 24-month period.
The scheme is limited to yet-to-be-built residential units and ends in December. However, each project that comes under the scheme will have small differences, she says.
Just before the unit is completed, the buyer shops around for the remaining outstanding sum.
“We are not competing with banks but we are providing a safety net until the buyer gets a loan. The buyer may need help for six to 12 months,” Cheah says.
If the buyer is unable to get a loan, and unable to pay the interest which Sunway is charging, this will be considered as defaulting. However, Cheah is of the view that the likelihood of that happening is minimal because the property can be rented out.
“We know our properties can be rented out. But the buyer has to pay the interest,” Cheah says.
“We are not giving it to everybody. If you lose your job, we will give you the option to terminate your option. But we are not here to cover you when you lose money in the stock market. It is not a gimmick.
“Will it help sales? Of course it will help sales. The economy needs sales. Why are we doing this? Because we want to make sales, we want to built a community in order to build the economy. The property market cannot halt, it must be sustained,” Cheah says.
The group expects to offer this scheme for about 10% of its RM1bil worth of launches.
On the May 14-15 weekend, SP Setia Bhd saw an overwhelming interest for its Setia Eco Templer project, a gated and guarded development it is developing about 20km from the city, and 10km for Rawang town centre. About 90% of its units were taken up, although not all of them have been formalised with the signing of a sales and purchase agreement.
SP Setia deputy general manager Dianne Chan says the Rawang community is ready for an upgrade. The other reason for quick take-up rate is the 10:90 marketing strategy. Buyers only pay 10% and the remaining 90% on completion of the unit.
If, for whatever reason, a buyer wants to exit from the purchase, he loses 10% but the likelihood of buyers opting for an exit is minimal. In three years, the prices of these properties would have moved up, says Chan.
Eco World Development Group Bhd is offering business grants to buyers of its commercial property in the Klang Valley, Penang and Iskandar Malaysia. With the challenging market today, the company is of the view that now is the best time to offer buyers assistance.
“Rather than being a developer who just produces buildings, we want to look at the other side of things as well,” president/CEO Datuk Chang Khim Wah says.
The aim, he says, is to help make the overall environment conducive for business as this will ultimately help boost the image of the entire development. “If the buyer, who is an end-user, sets up business within six months of taking over the keys of a new development, we will give them business grants of between 2% and 3.5% of their purchase price.
“This will be paid over 12 months from when they start their business,” he says.
The company is offering three types of grants. Buyers can submit the application within three months after the delivery of vacant possession.
According to ratings agency RAM Ratings Services Bhd in a commentary on the property sector earlier this month, these deferred-payment arrangements and minimal downpayments are reminiscent of the attractive financing packages and payment plans offered in 2009/2010 to spur sales.
Commonly known as developers interest bearing schemes (DIBS), the scheme was banned in January 2014.
RAM says: “Although they (deferred payment and minimal downpayment arrangements) had been successful in the past, we believe that consumer sentiment will stay weak on the whole (and) a material lift in sales is thus unlikely.
“On the other hand, these initiatives are likely to crimp developers’ margins. As such, we expect developers to remain cautious on their launches this year.”
While both DIBS and the current marketing strategies have the common feature of low initial outlay followed by a larger deferred payment, the developer carries little or no risk under a DIBS scheme.
Instead, the developer gains from it because the buyer will be buying a higher priced property because DIBS properties are priced between 20% and 25% higher. There is the snowball effect with subsequent launches, which again benefits developers.
Today’s schemes, on the other hand, forces developers to carry the cost on their balance sheets.
The market thrived on DIBS between 2009 and 2013. The effect of selling properties on DIBS are expected to be seen this year and in 2017/18. In some areas, this is already evident in the growing over supply, especially of high-rise residential units.
According to Bank Negara’s Financial Stability and Payment Systems Report 2015, loans issued in 2009 are seeing a small rise in non-performing loans, an indication that the first batch of DIBS loans are turning sour.
Because there is an oversupply in the high-rise residential sub-segment, owners may not get the rental they need to cover their mortgages. Coupled with rising cost of living, repayment difficulties may increase which may eventually result in some of these units entering the auction market, says Bank Negara sources.
This explains the central bank’s views that the effects and results of today’s creative marketing schemes may only be seen a few years later. - The Star