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-to-peer lending property platform powered by digital technologies managed by EdgeProperty.com.
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), EdgeProperty.com 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 zero-sum 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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