Tilting the risk factor

We are surprised by the latest government initiative whereby developers are allowed to offer home financing. Positively, this could help overcome homebuyers/developers’ difficulties in securing financing/closing sales. Negatively, if implemented on a large scale, this initiative will tie up developers’ balance sheet capability which should instead be deployed for landbanking, and it will expose developers to new borrowers’ default risk. Buying sentiment has improved lately but we think a full recovery in the sector will take time.

Developers are allowed to offer home financing

According to mainstream news articles, eligible developers can now apply for moneylenders license to help homebuyers finance their property purchases. Tan Sri Noh Omar, Urban Wellbeing, Housing and Local Government Minister said that the interest rate will be capped at 12%/ 18% p.a. for borrowers with/without collaterals. The scheme, which could offer up to 100% financing for between 10-20 years, is open to all homebuyers. The initiative is aimed to overcome homebuyers’/ developers’ difficulties in getting financing/closing sales.

The balance of risk

While the new initiative provides for alternative home financing and could help to boost property sales in the short-term, developers will be exposed to new risks 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 (they may not have qualified for bank loans) and this raises concerns on their debt servicing ability. Also, this new initiative may drive property prices up as developers may price in borrowers’ financing risk, defeating government’s efforts in controlling property prices. From the macro aspect, this new home financing avenue could keep household debt elevated (end-2015: 89% of GDP). Under the Moneylenders Act 1951, lending activities do not fall under the purview of Central Bank which provides check-and-balance in the credit system.

Recovery to take time

This latest government initiative is unlikely to be a precursor for broadbased relaxation of property measures in the upcoming 2017 National Budget. Latest NAPIC data shows that the sector remains weak as unsold stocks grew +16% QoQ and +13% YoY. We remain NEGATIVE from a topdown sector view. Bottom-up stock pick, we prefer SP Setia.

Source: Maybank Research - 13 Sep 2016