Property sector

Maintain neutral: S P Setia Bhd has launched a differential sum loan scheme called Setia Express Advance Loan (SEAL), that offers purchasers of its properties lending rates as low as 5.5% per annum and loan amount of up to 30% of the intended property’s purchase price. The move is aimed at helping eligible purchasers of completed S P Setia properties to bridge the financing gap between the purchase price and the purchaser’s end-financing loan amount.

S P Setia will offer SEAL only for its completed properties. Funded by the company’s cash flow and bank borrowings, SEAL offers a 36-month repayment period with no penalty charge on buyers should they choose to settle their loan amount earlier.We understand that this scheme is the first of its kind in Malaysia, and is eligible to all S P Setia’s completed properties. We also understand that the purchasers under this scheme will still have to pay the 10% down payment amount for the purchase, with S P Setia providing up to 30% of the end financing, while the banks will provide the remaining of the end financing.We understand that legally, the bank has a standard charge on the property (for the 60% financing it provides). To protect its interests, S P Setia has a private caveat on the property (to prevent the buyer from selling the property without its consent) and will ask the buyer to sign a letter of attorney which will enable S P Setia to liquidate the property in the event of a default; and to consent to the assignment of the residual sum (after the settlement of amount owed to the bank) to S P Setia in the event of a foreclosure.

As this is the first time any property developer in Malaysia has introduced this scheme, we understand that S P Setia is limiting the total gross development value of the properties to be sold through this scheme to RM500 million for now. Assuming S P Setia provides the maximum 30% end-financing amount for all these properties, this would translate into RM150 million total financing amount to be provided by S P Setia.

On the positive side, we believe this scheme will help S P Setia sell some of its completed but unsold units, and reduce its unsold inventories in its book. This would translate into better sales and earnings for the group. It will also improve the cash flow of the group, as once the properties are sold under this scheme, S P Setia will enjoy a cash inflow of up to 70% of the sale amount, while for the balance of the purchase consideration that it will finance, there will be no cash outflow, as these are all completed properties.

On the negative side, there is a risk that purchasers under this scheme might not be able to fully settle their loans to S P Setia by the end of the scheme’s tenure, that is after three years. However, this may be mitigated by potentially: i) easier credit conditions three years down the road and the buyer may be able to refinance the property at a higher loan-to-value ratio; ii) appreciation in the value of the property thus making it easier to be refinanced; and iii) a part settlement and part loan extension with S P Setia — assuming it is not in the best interest of the buyer and S P Setia if the loan is to go into default.

Overall, we believe that this scheme would be positive towards S P Setia, as it might help the company sell its properties in this challenging market conditions. If successful, we would not be surprised if other property developers with strong balance sheet follow suit with similar schemes of their own. — AmInvestment Bank, April 21

Property sector

This article first appeared in The Edge Financial Daily, on April 25, 2017.

For more stories, download TheEdgeProperty.com pullout here for free.

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