Banks cautious on bridging loans for commercial projects

By IZZAT RATNA / Graphic by DAYANG NORAZHAR

Financial institutions have become increasingly stringent on giving bridging loans to commercial businesses involving retail and office developments, in the wake of the glut of such properties in the market.

Banking sources said most banks are now cautious and asking for more details on bridging loan applications for commercial developments to guard against non-payments, as a combination of problems hit the construction industry.

“Banks need to access several criteria before providing end-financing for new retail or office development in terms of project value, take-up rate, anchor clients and most importantly, the location,” said one source.

He said, however, that developers with good credit history proposing projects with long-term potential and promising positive growth within three years, should not have trouble securing these loans.

He said banks will only consider loans on viable prospects with good cashflow.

With the more stringent criteria, the industry expert said businesses now have to produce a forward earning plan, and prove their credibility and sustainability to get loans.

PE Research Sdn Bhd economist and research advisor Azrul Azwar Ahmad Tajudin said this segment of the property market has seen a glut for some time due to continuous overbuilding of retail spaces — primarily in the central business district.

He said any banker would make the same decision based on the acute glut that is faced by the aforementioned segment of the property market.

“I won’t be surprised if most of the leading financial institutions in the country are rein-forcing their lending policy as a hedge against this rising overbuilding,” he added.

According to the Association of Valuers, Property Managers, Estate Agents and Property Consultants in the Private Sector Malaysia (PEPS), about 1.58 million sq m (or 17 million sq ft) of shopping space would be introduced into the Klang Valley alone between 2016 and 2018.

Rahim & Co Research’s Property Market Review 2016/2017 report said the office space supply in Kuala Lumpur grew 0.6% from the same period in the previous year, with additional new space of 47,287 sq m.

By 2020, more than 929,030.4 sq m of retail space is expected to be completed.

However, Malaysian Retail Chain Association VP Datuk Liew Bin said genuine development with good market viability would have no problems.

He said banks still need to lend and they would extend bridging loans, if the businesses proposed are forward- looking and not selling obsolete products.

“Industry players need to embrace the e-commerce and information technology business model to ensure that banks are comfortable to pump money into their businesses.

“If a business owner refuses to embrace the digital revolution in the ever rapid market transformation period right now, it would be hard for them to secure additional financing for any new developments,” he added.

Despite a more cautious approach taken by financial players, retail giant AEON Co (M) Bhd chairman Datuk Abdullah Mohd Yusof said banks would not have a blanket policy and would look at each application on a case-to-case basis.

He said banks would not shut down completely in giving out bridging loans, as retailers will constantly require end-financing for new projects.

“Businesses need to trim down their expenses and be very careful with their cash management in order to be positioned in a positive light among the banking system.

“The performing ones will still be able to obtain some borrowings from the banks for new commercial developments, as they are considered temporary debts.

“Those that constantly generate healthy cashflow would normally be able to reduce their borrowings within just a year,” he added.

Bank Negara Malaysia’s (BNM) June 2017 monthly highlights stated that the growth of outstanding loans extended by the banking system increased to 5.7% in June from 5.5% in May.

The improvement in business loans growth, buoyed by higher growth in loans, extended to businesses other than the small and medium enterprises (SMEs), reporting a growth of 6.3% in June com- pared to 4.1% the month before.

The central bank said the loans were given particularly to businesses in major sectors — such as construction, manufacturing, wholesale and retail trade, as well as restaurant and hotels.

“For total business loans, 50.6% was extended to non-SMEs and 49.4% to SMEs,” BNM said in a statement yesterday.

In June, the asset quality of the banking system also remained sound. The level of impaired loans continued to be stable at 1.2% of total loans, net of individual impairment provisions.

As it is, Malaysia’s headline inflation declined to 3.6% in June from 3.9% in May. It was due mainly to the lower fuel prices during the month.

Real estate firm CBRE-WTW Sdn Bhd noted in its Market Outlook 2017 report that the completion of several retail malls last year continued to push the occupancy rate slightly downwards, from 88.5% in 2015 to 87.6% in 2016.

Currently, there are 927 shopping centres around the country, offering 147 million sq ft of area.