Homes: concern over deferred payment plans

Published April 12, 2007

Homes: concern over deferred payment plans

Fears that such schemes are shifting financing burden from households to developers and builders

By SIOW LI SEN


(SINGAPORE) Deferred payment schemes - said to be one of the factors fuelling the local property market - are drawing the attention of the Monetary Authority of Singapore (MAS).

Such schemes are so popular with buyers that while the property market is red hot, it has not translated into healthy home loans growth.

Instead, deferred payment schemes have shifted the burden of financing to developers and construction companies, and away from households. The schemes also encourage speculators to buy property they have no intention of hanging on to.

And MAS is taking notice. Some bankers say it has been raising questions about banks' exposure to deferred payment schemes.

'MAS recognises that such deferred payment schemes may pose additional risks to the developer and its bank, and expects banks which finance such property developers to take this into account in their management of exposure to the developer,' an MAS spokeswoman said in response to BT queries.

According to MAS data on bank loans, building and construction loan growth rose a sizzling 18.1 per cent in February, following a 19 per cent gain in January. But home loans grew only 2.7 per cent in February and 2.1 per cent in January.

Among the local banks, OCBC and DBS grew their building and construction loans 27 per cent and 21 per cent respectively in 2006. UOB increased its building and construction loans 4 per cent.

OCBC spokeswoman Koh Ching Ching said the increase was due mainly to new drawdowns and loans to finance property development in Singapore, Malaysia and Greater China, with Singapore accounting for the bulk.

'OCBC has a traditional strength in real estate financing,' said Ms Koh. 'We have dedicated real estate departments within our business banking division for both large and small and medium real estate companies.

'The property sector is an important part of the Singapore economy and there are regulatory as well as internal guidelines to ensure that our exposure to this sector does not exceed certain limits.'

Citigroup economist Chua Hak Bin said deferred payment schemes have become prevalent in the local property market, accounting for more than 90 per cent of transactions at recent new Marina and downtown projects.

And he feels there is growing concern that this may be fuelling speculation and eventually will have a material impact on system-wide banking loans.

'Price increases in new home sales which offer deferred payment hit much higher levels,' Dr Chua said. This is because buyers on such schemes have time to flip or resell the property for a profit.

'The returns on capital can be substantial because of the implicit leverage,' he said. 'A 20 per cent increase in property value, for example, generates a 100 per cent return on the initial capital outlay.'

Deferred payment schemes that allow buyers to fork out only a 10-20 per cent downpayment, with the balance due on completion usually three years later, are not new. They were introduced in the early 1990s and offered again in the early 2000s. 'But it wasn't prevalent then,' Dr Chua said.

Not all developers offer deferred payment schemes. And some banks say overall progressive payment schemes are still more popular. This could be due to the higher cost of a property of at least 2-3 per cent if deferred payment is offered.

UOB head of loans Kevin Lam said: 'Progressive payment borrowers, while more, are not significantly more, than deferred payment borrowers.'

But an HSBC spokeswoman said that among its customers who have bought properties under construction, 60 per cent have opted for deferred payment schemes while 40 per cent have chosen progressive payment schemes.

Citibank business director Tan Chia Seng said: 'For those properties where deferred payment schemes are made available, we have seen an increase in interest from home buyers. 'The nature of the deferred payment scheme generally makes new projects more attractive to investors. However, home buyers who intend to occupy the properties may be interested in deferred payment schemes as well if the property they purchase is priced at an imputed interest rate lower than the home loan rate.'

Dr Chua warns though that buyers may be biting off more than they can chew, especially if the market tanks or the economy falters. The prevalence of deferred payment schemes suggests a mortgage surge will come eventually, he said. 'The day of reckoning will likely occur in 2009 when completions are expected to soar to 18,447 - more than double the typical annual supply.'

Maybank's head of consumer banking Helen Neo said deferred payment loans are more risky.

'Yes, as repayment only starts from TOP (temporary occupation permit),' she said. 'There could be changes in the borrower's income prior to TOP.'

April 12, 2007

Manage risks of deferred payment schemes, banks told

They should bear higher risks in mind when lending to developers: MAS

By Fiona Chan & Grace Ng


THE Monetary Authority of Singapore (MAS) wants banks to manage their exposure to property developers which sell homes under deferred payment plans.

These schemes have grown increasingly popular in recent years and are now offered by almost all developers. They allow a home buyer to put off paying the bulk of a new property's price until the construction has been completed.

This means that in extreme cases, a home buyer could put down the minimum deposit - 10 per cent of the property's price - and not pay the balance until two or three years later.

In response to queries yesterday about the growing use of deferred payment plans, MAS said banks should be mindful of the higher risks involved.

'MAS recognises that such deferred payment schemes may pose additional risks to the developer and its bank,' it said in an e-mail.

It added that it 'expects banks which finance such property developers to take this into account in their management of exposure to the developer'.

It is not known how many homes have been bought under deferred schemes, but some projects have reportedly seen up to 90 per cent of buyers using these plans.

The main risk of deferred payment schemes lies in the timing of cash flows from the home buyer to a developer.

Normal payment plans require home buyers to make payments regularly throughout a project's construction. In contrast, deferred payment schemes mean that a developer may get most of the payments only after the whole project has been built.

If the market goes south in the meantime and buyers default on their payments, developers could find themselves strapped for cash.

Banks told The Straits Times yesterday that they are well aware of these risks.

With the property market well on its way to boom time, home purchases - under both deferred and normal payment schemes - are surging, and bankers are becoming more alert to signs that the market may be overheating.

One banking executive said his bank is now 'looking more closely' at deferred payment schemes when reviewing its risk exposure to a particular developer.

But he added that there are many other factors the bank considers, including the borrower's financial condition and outlook, management strength, and the prevailing economic conditions.

OCBC Bank also said that one of the things it takes into account when lending to property developers is 'the timing of receipt of their cash flows'.

This determines how fast and how much the developer can repay the loan in cash.

Industry experts also told The Straits Times that some smaller developers have been edging closer to the credit risk limit. If they pass this threshold, banks will generally stop paying out the loan, which is given out in phases.

But the overall credit of property developers is still good, they noted.

Banks are not the only ones affected by deferred payment schemes. Property speculators tend to be the main users of such plans.

Genuine home buyers typically opt for normal payment plans because developers often charge higher prices for units sold under deferred payment schemes.

This has led economists such as Citigroup's Dr Chua Hak Bin to voice concerns that deferred payments may be fuelling speculation and hiding a deeper problem of whether home buyers can really afford their purchases.

Deferred schemes enable buyers to put off taking loans for their new homes, which explains why mortgage levels have remained low despite a spike in home sales and construction loans, said Dr Chua.

'The concern here is that buyers may be taking on more than they can chew.

'But we won't know the extent of that until they actually take the mortgages. These will probably spike in 2009, when a lot of projects are expected to be completed.'

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It seems like all the recent media releases on property were carefully orchestrated. The impression they want to give us is: "Tycoons coming in and buying up property. Tycoons no need deferred payment. Therefore developers must scrap deferred payment scheme. To all Singaporeans, if you got no money, don't buy." Sounds good. At least it will prevent a bubble.