FundMyHome and the risks taken by all play­ers

The Star Malaysia - StarBiz - - Viewpoint - On your own TAN THIAM HOCK

I DO not en­joy dis­cussing busi­ness ideas with my el­dest son. We al­ways end up in an ar­gu­ment over the din­ner ta­ble. My wife will roll her eyes while the rest of the fam­ily will keep quiet, not know­ing what we are ar­gu­ing about.

I am the big idea guy, al­ways look­ing at the vi­a­bil­ity of the busi­ness model and I don’t read the fineprint. My son does, so he nor­mally wins the ar­gu­ment. On tech­ni­cal­i­ties, of course.

The only pos­i­tive de­rived from our ar­gu­ment is that he now un­der­stands the big pic­ture and the tech­ni­cal struc­ture of the busi­ness model. I hope he does, as it would be point­less for us to ar­gue over that point.

Our lat­est dis­course was on the topic of FundMyHome, which was an­nounced by saudara Lim Guan Eng in his re­cent Bud­get 2019 speech. The big idea is a peer-topeer lend­ing prop­erty plat­form pow­ered by dig­i­tal tech­nolo­gies man­aged by EdgeProp­

The first project an­nounced is meant for first-time prop­erty buy­ers who are not able to get a hous­ing loan from fi­nan­cial in­sti­tu­tions. Our banks have gone through their mort­gage ap­pli­ca­tions and have found that the ap­pli­cants’ salary or com­bined hus­band and wife salaries are not suf­fi­cient to pay the mort­gage pay­ments based on 80% fi­nanc­ing of the prop­erty.

Most de­vel­op­ers have many un­sold prop­er­ties (huge in­ven­to­ries ex­ac­er­bated by slow ap­provals from state gov­ern­ments to re­lease un­sold units re­served for bu­mipu­tras). The big in­ven­tory of prop­er­ties can cause a ma­jor cash­flow crunch on highly lever­aged prop­erty de­vel­op­ers, so I would ex­pect them to jump on this band­wagon plat­form.

Since peer-to-peer lend­ing by the in­vest­ing pub­lic will take some time to ma­ture (ap­proval by the Se­cu­ri­ties Com­mis­sion is re­quired), EdgeProp­ has on­boarded CIMB Group and May­bank to in­vest in a se­cu­ri­tised debt in­stru­ment, lend­ing against se­cu­ri­tised prop­er­ties. I be­lieve, like fu­ture pub­lic in­vestors, they are guar­an­teed a re­turn of 5% per an­num over the next five years plus a per­cent­age of the up­side when the said prop­erty is reval­ued by an in­de­pen­dent val­uer.

Po­ten­tial buy­ers will only need to pay a 20% down­pay­ment for a com­pleted prop­erty of their choice, move into the house/apart­ment and stay/rent out for the next five years with­out hav­ing to pay any mort­gage in­stal­ments or as­so­ci­ated in­ter­ests. All good so far for prop­erty buy­ers.

My ar­gu­ment with my son was about what hap­pen when the five years is up. An in­de­pen­dent val­uer will then as­sess a new val­u­a­tion on the prop­erty. As­sum­ing the buyer had signed for the prop­erty at RM400,000 five years ago and it is now as­sessed at RM500,000, the buyer will now have to re­fi­nance the bal­ance prop­erty price of RM416,000 (ear­lier down­pay­ment was RM80,000 plus share of up­side RM4,000).

The first 20% of new val­u­a­tion (RM80,000) up­side goes to the de­vel­oper. The bal­ance 5% up­side (RM20,000) is shared by in­vestors (RM16,000) and house buyer (RM4,000). Be­fore we com­ment on who is on the los­ing side, we should ex­am­ine the risks taken by all the play­ers on­board the plat­form.

De­vel­op­ers prac­ti­cally dis­counts 20% net present value on the prop­erty sold as they have to pay the in­vestors a 5% coupon for five years on the bal­ance 80% fi­nanc­ing. De­vel­op­ers will only en­joy the up­side if the new val­u­a­tion af­ter five years ex­ceed cur­rent sell­ing price. Their risk is if the val­u­a­tion re­mains the same or goes below cur­rent pric­ing, they will end up with no up­side. In the mean­time, they have dis­counted 20% on the sale of their prop­erty. How long will the cur­rent prop­erty glut de­press the mar­ket, no­body knows.

In­vestors will have a se­cured 5% per an­num coupon for five years as­sum­ing the de­vel­op­ers are able to pay ac­cord­ing to sched­ule. Or to be safe, in­vestors can ask the de­vel­op­ers to pay them 20% up­front which, at net present value, is al­most equiv­a­lent to 5% per an­num for five years. The risk for the in­vestors is when the buyer refuse to re­fi­nance af­ter five years for what­ever rea­sons and the in­vestors are now stuck with a prop­erty which they have to sell off at what­ever price. It will be a per­cent­age game for the in­vestors.

For the house buyer, as­sum­ing he had bought the prop­erty at RM400,000, he would have made a down­pay­ment of RM80,000. Again, as­sum­ing an al­ter­na­tive mort­gage loan from banks car­ries an in­ter­est cost of 5% per an­num, he would have saved RM16,000 a year on a RM320,000 loan or RM80,000 over five years. Not to men­tion sav­ings on rental of al­ter­na­tive ac­com­mo­da­tions.

Dif­fer­ent sce­nar­ios carry dif­fer­ent risks for house buy­ers.

If prop­erty val­u­a­tion ex­ceeds 20%, then he will be asked to buy the same prop­erty at a higher price five years later. If he is un­able to re­fi­nance with a new loan, his prop­erty will be sold and he car­ries the risk of los­ing his RM80,000 de­posit or part of it, de­pend­ing on the fi­nal sale price. He will only en­joy a five-year free ac­com­mo­da­tion.

If prop­erty val­u­a­tion is ex­actly at 20% above the orig­i­nal price, then the de­vel­oper gets the up­side, the in­vestor gets noth­ing and the house buyer gets to en­joy free ac­com­mo­da­tion for five years.

If prop­erty val­u­a­tion ex­ceeds not more than 20%, the de­vel­oper en­joys what­ever the up­side, the in­vestor gets noth­ing and the house buyer gets to en­joy some mort­gage fi­nance sav­ings and free ac­com­mo­da­tion for five years.

If the prop­erty val­u­a­tion is sim­i­lar or below the orig­i­nal sales price, the de­vel­oper gets noth­ing, the in­vestor gets noth­ing and the house buyer gets to save RM80,000 in mort­gage in­ter­ests, five years of free ac­com­mo­da­tion and be­come an owner of an over­priced prop­erty.

This plat­form brings to­gether de­vel­op­ers, in­vestors and buy­ers all on a prom­ise of a shared com­mon in­ter­est with dif­fer­ent risks for dif­fer­ent play­ers. From a ze­ro­sum game, it will fi­nally be de­pen­dent on a game of chance, the fi­nal val­u­a­tion of the prop­erty af­ter five years.

So bring out your crys­tal ball, let the de­vel­op­ers be­ware, the in­vestors be­ware and the house buy­ers be­ware. Your guess is as good as mine.

My Star­Biz ed­i­tor asked me whether I will in­vest as an in­vestor when the Se­cu­ri­ties Com­mis­sion ap­proves the peer-to-peer lend­ing plat­form for pub­lic in­vestors. Tough ques­tion, as my son now man­ages fam­ily in­vest­ment.

This might lead to an­other ar­gu­ment with him, so I have to be more pre­pared this time by read­ing the fineprint when the scheme is launched. Based on math­e­mat­i­cal prob­a­bil­i­ties, I am due to win one ar­gu­ment soon. Bet­ter late than never.


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