Undervalued properties result in a lower loan

By Yanika Liew

When it comes to the valuation of potential development, property valuators use a method of comparison, by evaluating a development to its surrounding property prices without taking into account the new infrastructure and amenities the development put into place.

So when developers contribute to the roads, public facilities, amenities and parks, this might not be reflected in the valuation. With the value of the property standing proportional to the loan home buyers are eligible to receive, an undervalued property is subsequently provided with a smaller loan amount. 

“It’s not about the current rating but more on the potential of the future rating, that will be very helpful in terms of getting them a better margin in terms of the housing loan,” Gamuda Land chief operating officer Wong Siew Lee said.

“We feel that the housing valuation from the bank can be more holistic, in terms of evaluating potential development without comparing to what has been existing there,” she added.

As an example, Wong pointed to Gamuda Gardens in Rawang. She noted that units in the development were valued as compared to the average transaction prices in Rawang, despite the changes made to infrastructure and utilities. 

In agreement, FIABCI World Council of Developers and Investors president Datuk Seri Koe Peng Kang noted that during his time with SP Setia, there were similar issues with property valuation. 

They refused to give loans because the valuation compared with the surroundings did not require it, even with the enhancements. When pressed for answers, Koe noted that the valuers he spoke to told him that these were instructions from the bank, to ensure that there would not be too much risk.

“Eventually we brought the banks in, demonstrating that we add value, [that] you have to see the future, but it works,” Koe said.

Matrix Concepts Holdings Bhd group managing director Ho Kong Soon said that even if developers could negotiate for a better value through meetings, the entire process would take a long time. The issue could not be solved without a holistic policy, allowing for an efficient valuation process from the beginning.

“I had a lot of arguments with them because I couldn’t move. Especially [as] I’m selling the price like that, and they only give so little loan. End-purchaser just walks out,” Koe said.

Even during these discussions, developers had to take into account the situation other than KL, Klang Valley, Johor and Penang, as well as M40, Glomac Bhd chief operating officer Zulkifly Garib said.

“If you want to make a proposal to the government, it cannot just be for the urban population of urban buyers because, when they put it in the budget, it’s gonna be for the public,” he said.

“When I was Rehda Selangor chairman, and I was on the board of Lembaga, the state government was looking at ways of working with the commercial banks to help out with the financing,” Zulkifly explained.

“I can remember last year, because I was on the board until last year, and they were talking to Maybank on record. It did happen. Maybank did a presentation, [but] what the state government wanted and what the banks presented for it to be viable to them, it just didn’t meet. So there is the intention by the state to look into it to allow for easy financing, but it just doesn’t match,”

He pointed out that even before a project’s completion, valuers already begin to evaluate the project. The mismatch makes it difficult for buyers to get a suitable loan.

New era of work

Ways of earning have also changed and therefore the valuation of the debt service ratio needs to take into new ways of measuring, so it cannot be just a firm wage earner in that sense, OSK Property chief operating officer Seth Lim Sow Wu said.

Scientex executive director Beh Chun Chong agreed with Lim, noting that age group-wise, about 50% of Scientex buyers are below 35 years old or fresh graduates who have just entered the economy. These buyers were in Grab, real estate and other non-traditional careers.

“Currently, our loan rejection rate probably stands around 70%, because all those buyers who can afford to buy an RM300,000 [home] belong to a lower income group,” Beh said.

In March, Beh had taken note of a particular bank that decided to raise their risk appetite. 

“I wouldn’t want to name the bank, but… they actually increased the debt service ratio (DSR) in order to cater for this group of people who don’t have a fixed income. They relaxed their Central Credit Reference Information System (CCRIS) requirement, even up to two missed payments, but in return, they increased the interest rate by 0.15%,” Beh said. 

After the programme, Beh noted that his projects had seen a 60% take-up rate and some banks have begun to take part in these initiatives. 

“The yardstick that we use to see whether per person qualifies for a loan and how much loan, what we’re seeing here is actually archaic,” Sime Darby Property Bhd group managing director Datuk Azmir Merican said.

He pointed out that a review of the process was necessary to further enhance the experience of the Malaysian public. Solutions needed to be substantiated with statistics.

“All the more reason why we should be addressing it honestly, head on and saying, right, these are people who need help,” Lim added.

Through step-up financing programmes, home buyers have been able to afford their purchases. Several banks and developers have offered such programmes, however developers pointed out that these solutions remain short-term.

“I’ve been arguing with them [the banks] to do the DSR computation,” Lim said.

During the construction period, Lim noted that buyers would only pay interest, instead of the full mortgage repayment. In the same vein, he pointed out that banks would be able to base the DSR computation on that lower repayment, rather than a full-blown mortgage repayment during that period of time. With that, buyers might be able to afford a higher loan.

“That will also help in line with what we have said, we always tell people to buy a property that is beyond your current affordability. Why? Because everybody grows. House prices grow faster than income, so you should actually hedge in first,” he said.

The developers listed out several examples of loan rejections from buyers across varying careers, with some banks giving an 85% DSR, while some provided 40%. Developers call on the government to create an improved valuation process for properties, providing better home financing options for both the B40 and M40.