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Property crowdfunding kicks off

TheStar Sat, May 18, 2019 08:15am - 4 months ago


A NOVEL way for first-time house buyers to fund their purchase without a bank loan will soon hit the market.

Enter property crowdfunding (PCF). This is where individual investors have the option to finance a new home buyer’s purchase, with the hope that all will reap the benefit in, say, five years’ time when the property is sold.

On Friday, at a launch event officiated by Finance Minister Lim Guan Eng, the Securities Commission (SC) issued a set of guidelines that set out what needs to be done by parties seeking to operate PCF platforms.

Lim is hopeful that PCF will address the oversupply situation in the property market.

“I think what we want is to be able to offer more options and alternatives. The market is all about choice and what we want is to give more choices.

“When you give more choices, people will have more confidence. So, it’s not only about variety, but also about diversity and depth for the market.”

These platform operators will facilitate the meeting of seller, buyer and investor in the PCF scheme.

The guidelines, however, leave it open as to how the platforms actually structure their offerings.

In a nutshell, this is how PCF will work.

Firstly, the scheme is only available to first-time Malaysian home buyers looking to purchase properties below RM500,000. These properties have to be built up with a certificate of fitness and include brand new properties and sub-sale ones.

The platform’s role is to find a list of such properties and encourage the sellers to post these properties on the platform.

Once these properties are on the platform, buyers are then encouraged to pick one which they are keen to purchase.

The guidelines stipulate that buyers can seek up to 90% funding from the “crowd”. Hence, in such a case, the buyer’s profile will be uploaded along with the property concerned and investors now will be offered a chance to fund this buyer.

The scheme will have an exit point when the buyer has the option to buy the property or sell it. This tenure will be determined by the platform for each property listed.

Using the example of a five-year tenure, investors getting into the deal will be going in with the hope that the property will be worth more after that period. Hence, this is why the platform operator is likely to only select attractive properties to list on their site. Otherwise, there may be no takers.

The price of the property in the fifth year will be determined by an independent valuation.

There are multiple scenarios that could take place at the year of exit. The buyer, if he decides to buy the property, will have to pay its new price.

If he decides to sell, then the platform operator puts the property up for sale and any profits from the sale will be split between the buyer and his investors in accordance with the formula the platform has set.

The same will apply if the property is sold at a loss. The platform will also likely stipulate what would happen if there are no takers for the property after that tenure. For example, the platform can stipulate that it would absorb the property at, say, a 20% discount to the market price.

Platform operators are free to make their offerings as innovative and attractive as possible and some would be striving to offer a yield to investors. However, it isn’t clear who will end up paying that yield.

Viable investment scheme?

Recall that in Budget 2019 last year, it was announced that a peer-to-peer (P2P) financing framework to be regulated by the SC would go live within the first half of this year for first-time home buyers.

The scheme was initially proposed by The Edge Media Group’s chairman, Datuk Tong Kooi Ong, before being approved by the government.

In November last year, EdgeProp Sdn Bhd, a subsidiary of The Edge Media Group, launched FundMyHome, Malaysia’s first privately-driven, house-buying crowdfunding platform.

Under this scheme, the buyer would be able to acquire a selected property with 20% of the price of the premises. The remaining 80% will be funded by financial institutions. It is likely that upon being granted a PCF licence by the SC, the FundMyHome scheme will open up the investment part to retail investors.

P2P lending success

The PCF scheme comes after the SC had in 2016 granted licences to platforms that had helped SMEs raise debt from crowdfunding. As at end-March, the six licensed P2P platforms had helped 847 small firms raise a total of close to RM300mil of debt.

P2P lending has become a sought-after form of alternative investment, particularly among the country’s Millennials.

With the SC set to issue the second batch of licences by mid-year, it looks as though the growth momentum enjoyed by the industry will continue.

What has attracted investors to the P2P platforms has been the high interest rates offered in the short-term debt deals. The rates can range from around 7% to 12%. The default rate of the SMEs borrowing on these platforms is negligible, although this should be tempered with the fact that these platforms are still new.

Unlike the high yields of the P2P platforms, the PCF ones may be promising capital appreciation more than anything else. Will investors bite?

Leong, an investment banker, is eager to invest in a PCF platform. However, he admits that finding other like-minded investors may not be easy.

“Like any form of investment, it comes with its own set of risks and uncertainties. Many come into it with the misconception that it’s a get-rich-quick scheme, but it isn’t. Your money is going to be locked for a set number of years and not many people like waiting that long.”

Malaysia’s version of PCF is likely to be the first in the world although other countries have attempted different versions of it, especially in Europe.

For instance, Spain has a crowdfunding platform called “Housers” that allows investors to invest in properties both locally and in other European countries. The properties consist of high-end investments, mostly in big cities.

Meanwhile, UK-based “Property Partner” focuses on larger deals that may involve more than 20 properties.

Addressing home-ownership woes?

The PCF concept is aimed at helping first-time home buyers own their very first property.

The escalating home ownership and overhang conundrum in the country has become a top agenda for the government to resolve, with various housing policies and measures being implemented to spur buying and boost the current property market.

According to the Valuation and Property Services Department, the total unsold residential units (including service apartments and SOHO units) total over 45,000 units.

The figure for properties below the RM500,000 price mark which remains unsold numbers close to 23,000.

Apart from being an alternative property investment platform, PCF will also look to improve the level of home ownership in the country.

CBRE|WTW managing director Foo Gee Jen says PCF will help “in one way or another”.

“We should not create any scheme just to help a developer solve their problems. The objective of this PCF scheme is to provide an easier entry level for the home buyer.”

He adds, however, that there needs to be some clarity in how the scheme is being promoted.

“It is more of an investment scheme rather than a home-ownership scheme, because at the end of the day, there is no guarantee that there will be home ownership at the end of the tenure.

“The PCF is another (albeit creative) form of alternative investment. With home ownership, you pay for the property and you end up owning it. With this scheme, there are many variables. It’s difficult to draw a fine line.”

PPC International managing director Datuk Siders Sittampalam is more optimistic that PCF will spur home ownership.

“Ultimately, I think the PCF platform will help to boost home-ownership, as it is for those who can’t get homes via conventional means. The SC’s involvement in launching this PCF scheme is the best thing that can happen. With a regulator in place, it will be good for the market, the buyer and the investor.

“It will also complement the existing means of trying to acquire property. There is no risk to the buyer, as he buys it at market price and gets to live there for free for five years. If you’re fresh out in the market and looking to buy a home for the first time, this is a good alternative platform to have.”

Foo emphasises that the level of governance is crucial for PCF to work.

“One of the criteria for this scheme is that there will be an independent valuer appointed, but by whom? The buyer, developer (seller) or the promoter? In this case, it will most likely be the promoter and it must be ensured that strict governance is adhered to, and that the interest of the buyer is protected.

“It would also be advisable that the same valuer be appointed at the start of the tenure and at the exit point. This will ensure a high level of responsibility is placed on the valuer, and prevent any bias towards any party.”

Siders does not feel that PCF will spur speculation.

“I don’t see how, as they (the speculators) won’t be allowed to sell it for five years. Speculators buy and sell it off quickly to make overnight gains. For a speculator, it would be easier to just buy a property, wait for two years when it’s built and then sell it off.”

Foo shares a similar sentiment: “It will not. The investor is not the 100% owner of the property and he would need to share the profits with the promoter of the scheme. It could attract speculators, however, if the market is experiencing a bull run.”

Khazanah Research Institute director Dr Suraya Ismail reckons that PCF is too focused on house prices rising.

“The fact that there are investors in the scheme means that there is an assumption that the price will go up. And there being an exit point means that this is more about investment than it is about home ownership. The two, investment and home ownership, do not equate. Both have different motivations.” Suraya says. “In some countries, house buyers partner with a local council. They co-own and it makes sense for the local council to make sure in the end, the house buyer will get a house. Otherwise, he will be homeless and this will be a problem for the local council. Both have the same objective and motivation,” Suraya explains.

She adds, “Furthermore, the trend of rapid price escalation of homes since 2009 has created the affordability woes we are witnessing now. A scheme that has the motivation to support rapid price escalations (for short-term gains) will only worsen the problem of unaffordability in the future. Society needs to be aware of the schemes they get themselves into.”

Another detractor, who is from the property industry, recommends that the PCF scheme have a limit as to the number of deals to study its wider implications.

“PCF is outside the banking system and will create a hidden layer of risk within the economy. While these initiatives are good to help people own a home, we need to consider the longer-term implications on the economy. It is, therefore, suggested that for the first few years of implementation, the number of homes sold under these schemes are capped and the situation assessed before opening the floodgates.”

A property consultant also expresses his concern as to whether investors stand to lose money in this scheme.

“The premise of a continuing rise in house prices may not pan out because of the massive oversupply of residential properties today. Other factors are the slow drivers of economic growth, external pressures, slow income growth and the steep rise in house prices over the last 10 years,” he points out.

Others, though, are more positive. “The scheme seems market-driven. The guidelines have left it open as to how the platforms structure the deals. If there is a suitable property on the terms that I like, I am more than happy to fund my son’s 10% or 20% portion of the purchase. He gets to stay in a place he likes for the next five years and his downside is limited to an erosion of that initial capital. Seems sweet enough because in five years’ time, he gets to decide what he wants to do next and he’s not locked into a long-term loan with a bank,” says a corporate lawyer.

Related stories:

PCF is a great innovative financing scheme

Why PCF is considered a sham

   

On Friday, at a launch event officiated by Finance Minister Lim Guan Eng, the Securities Commission (SC) issued a set of guidelines that set out what needs to be done by parties seeking to operate PCF platforms.

Lim is hopeful that PCF will address the oversupply situation in the property market.

“I think what we want is to be able to offer more options and alternatives. The market is all about choice and what we want is to give more choices.

“When you give more choices, people will have more confidence. So, it’s not only about variety, but also about diversity and depth for the market.”

These platform operators will facilitate the meeting of seller, buyer and investor in the PCF scheme.

The guidelines, however, leave it open as to how the platforms actually structure their offerings.

In a nutshell, this is how PCF will work.

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Firstly, the scheme is only available to first-time Malaysian home buyers looking to purchase properties below RM500,000. These properties have to be built up with a certificate of fitness and include brand new properties and sub-sale ones.

The platform’s role is to find a list of such properties and encourage the sellers to post these properties on the platform.

Once these properties are on the platform, buyers are then encouraged to pick one which they are keen to purchase.

The guidelines stipulate that buyers can seek up to 90% funding from the “crowd”. Hence, in such a case, the buyer’s profile will be uploaded along with the property concerned and investors now will be offered a chance to fund this buyer.

The scheme will have an exit point when the buyer has the option to buy the property or sell it. This tenure will be determined by the platform for each property listed.

Using the example of a five-year tenure, investors getting into the deal will be going in with the hope that the property will be worth more after that period. Hence, this is why the platform operator is likely to only select attractive properties to list on their site. Otherwise, there may be no takers.

The price of the property in the fifth year will be determined by an independent valuation.

There are multiple scenarios that could take place at the year of exit. The buyer, if he decides to buy the property, will have to pay its new price.

If he decides to sell, then the platform operator puts the property up for sale and any profits from the sale will be split between the buyer and his investors in accordance with the formula the platform has set.

The same will apply if the property is sold at a loss. The platform will also likely stipulate what would happen if there are no takers for the property after that tenure. For example, the platform can stipulate that it would absorb the property at, say, a 20% discount to the market price.

Platform operators are free to make their offerings as innovative and attractive as possible and some would be striving to offer a yield to investors. However, it isn’t clear who will end up paying that yield.

Viable investment scheme?

Recall that in Budget 2019 last year, it was announced that a peer-to-peer (P2P) financing framework to be regulated by the SC would go live within the first half of this year for first-time home buyers.

The scheme was initially proposed by The Edge Media Group’s chairman, Datuk Tong Kooi Ong, before being approved by the government.

In November last year, EdgeProp Sdn Bhd, a subsidiary of The Edge Media Group, launched FundMyHome, Malaysia’s first privately-driven, house-buying crowdfunding platform.

Under this scheme, the buyer would be able to acquire a selected property with 20% of the price of the premises. The remaining 80% will be funded by financial institutions. It is likely that upon being granted a PCF licence by the SC, the FundMyHome scheme will open up the investment part to retail investors.

P2P lending success

The PCF scheme comes after the SC had in 2016 granted licences to platforms that had helped SMEs raise debt from crowdfunding. As at end-March, the six licensed P2P platforms had helped 847 small firms raise a total of close to RM300mil of debt.

P2P lending has become a sought-after form of alternative investment, particularly among the country’s Millennials.

With the SC set to issue the second batch of licences by mid-year, it looks as though the growth momentum enjoyed by the industry will continue.

What has attracted investors to the P2P platforms has been the high interest rates offered in the short-term debt deals. The rates can range from around 7% to 12%. The default rate of the SMEs borrowing on these platforms is negligible, although this should be tempered with the fact that these platforms are still new.

Unlike the high yields of the P2P platforms, the PCF ones may be promising capital appreciation more than anything else. Will investors bite?

Leong, an investment banker, is eager to invest in a PCF platform. However, he admits that finding other like-minded investors may not be easy.

“Like any form of investment, it comes with its own set of risks and uncertainties. Many come into it with the misconception that it’s a get-rich-quick scheme, but it isn’t. Your money is going to be locked for a set number of years and not many people like waiting that long.”

Malaysia’s version of PCF is likely to be the first in the world although other countries have attempted different versions of it, especially in Europe.

For instance, Spain has a crowdfunding platform called “Housers” that allows investors to invest in properties both locally and in other European countries. The properties consist of high-end investments, mostly in big cities.

Meanwhile, UK-based “Property Partner” focuses on larger deals that may involve more than 20 properties.

Addressing home-ownership woes?

The PCF concept is aimed at helping first-time home buyers own their very first property.

The escalating home ownership and overhang conundrum in the country has become a top agenda for the government to resolve, with various housing policies and measures being implemented to spur buying and boost the current property market.

According to the Valuation and Property Services Department, the total unsold residential units (including service apartments and SOHO units) total over 45,000 units.

The figure for properties below the RM500,000 price mark which remains unsold numbers close to 23,000.

Apart from being an alternative property investment platform, PCF will also look to improve the level of home ownership in the country.

CBRE|WTW managing director Foo Gee Jen says PCF will help “in one way or another”.

“We should not create any scheme just to help a developer solve their problems. The objective of this PCF scheme is to provide an easier entry level for the home buyer.”

He adds, however, that there needs to be some clarity in how the scheme is being promoted.

“It is more of an investment scheme rather than a home-ownership scheme, because at the end of the day, there is no guarantee that there will be home ownership at the end of the tenure.

“The PCF is another (albeit creative) form of alternative investment. With home ownership, you pay for the property and you end up owning it. With this scheme, there are many variables. It’s difficult to draw a fine line.”

PPC International managing director Datuk Siders Sittampalam is more optimistic that PCF will spur home ownership.

“Ultimately, I think the PCF platform will help to boost home-ownership, as it is for those who can’t get homes via conventional means. The SC’s involvement in launching this PCF scheme is the best thing that can happen. With a regulator in place, it will be good for the market, the buyer and the investor.

“It will also complement the existing means of trying to acquire property. There is no risk to the buyer, as he buys it at market price and gets to live there for free for five years. If you’re fresh out in the market and looking to buy a home for the first time, this is a good alternative platform to have.”

Foo emphasises that the level of governance is crucial for PCF to work.

“One of the criteria for this scheme is that there will be an independent valuer appointed, but by whom? The buyer, developer (seller) or the promoter? In this case, it will most likely be the promoter and it must be ensured that strict governance is adhered to, and that the interest of the buyer is protected.

“It would also be advisable that the same valuer be appointed at the start of the tenure and at the exit point. This will ensure a high level of responsibility is placed on the valuer, and prevent any bias towards any party.”

Siders does not feel that PCF will spur speculation.

“I don’t see how, as they (the speculators) won’t be allowed to sell it for five years. Speculators buy and sell it off quickly to make overnight gains. For a speculator, it would be easier to just buy a property, wait for two years when it’s built and then sell it off.”

Foo shares a similar sentiment: “It will not. The investor is not the 100% owner of the property and he would need to share the profits with the promoter of the scheme. It could attract speculators, however, if the market is experiencing a bull run.”

Khazanah Research Institute director Dr Suraya Ismail reckons that PCF is too focused on house prices rising.

“The fact that there are investors in the scheme means that there is an assumption that the price will go up. And there being an exit point means that this is more about investment than it is about home ownership. The two, investment and home ownership, do not equate. Both have different motivations.” Suraya says. “In some countries, house buyers partner with a local council. They co-own and it makes sense for the local council to make sure in the end, the house buyer will get a house. Otherwise, he will be homeless and this will be a problem for the local council. Both have the same objective and motivation,” Suraya explains.

She adds, “Furthermore, the trend of rapid price escalation of homes since 2009 has created the affordability woes we are witnessing now. A scheme that has the motivation to support rapid price escalations (for short-term gains) will only worsen the problem of unaffordability in the future. Society needs to be aware of the schemes they get themselves into.”

Another detractor, who is from the property industry, recommends that the PCF scheme have a limit as to the number of deals to study its wider implications.

“PCF is outside the banking system and will create a hidden layer of risk within the economy. While these initiatives are good to help people own a home, we need to consider the longer-term implications on the economy. It is, therefore, suggested that for the first few years of implementation, the number of homes sold under these schemes are capped and the situation assessed before opening the floodgates.”

A property consultant also expresses his concern as to whether investors stand to lose money in this scheme.

“The premise of a continuing rise in house prices may not pan out because of the massive oversupply of residential properties today. Other factors are the slow drivers of economic growth, external pressures, slow income growth and the steep rise in house prices over the last 10 years,” he points out.

Others, though, are more positive. “The scheme seems market-driven. The guidelines have left it open as to how the platforms structure the deals. If there is a suitable property on the terms that I like, I am more than happy to fund my son’s 10% or 20% portion of the purchase. He gets to stay in a place he likes for the next five years and his downside is limited to an erosion of that initial capital. Seems sweet enough because in five years’ time, he gets to decide what he wants to do next and he’s not locked into a long-term loan with a bank,” says a corporate lawyer.

Related stories:

PCF is a great innovative financing scheme

Why PCF is considered a sham








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