Property crowdfunding platform depends much on property cycle

Dr Mahathir says the property crowdfunding mechanism will become an alternative solution to correct the property market situation in the long run


The success of the newly launched property crowdfunding initiative by the government would highly depend on the country’s property cycle, which is projected to be on the uptrend within the next five years.

VPC Alliance (KL) Sdn Bhd MD James Wong said the whole scenario of property crowdfunding would especially succeed if the property market improves within the period.

“There is a guaranteed yield of 5% for the investors if the buyers do not vacate the property after five years, but the 5% will only work if the market is on the uptrend.

“But if the property market drops by 20% after five years, the house buyers who opt for this will tend to lose all the 20%, and there is no way for investors to get the 5% yield,” he told The Malaysian Reserve.

Nevertheless, Wong said there is a strong indication that the property cycle would see an upward trend as a result of the market’s current consolidation, following the downturn that had been observed for the past four years.

The government launched the property crowdfunding initiative early this month as the authority seeks to empower more people to buy homes and reduce the RM22 billion property glut, which could dent the country’s financial system.

It’s like the REIT where anyone who wants to invest can do so…investors just claim ownership to the level they have invested, but the house fully belongs to the buyer, says Dr Mahathir

Prime Minister Tun Dr Mahathir Mohamad said the property crowdfunding mechanism would become an alternative solution to correct the property market situation and push the agenda to build one million affordable houses in the next 10 years

“They can borrow money from banks and the money will be their contribution for the purchase…just 20% of the price of the house, the balance (80%) will be bought by investors.

“It’s also like the REIT (real estate investment trust) where anyone who wants to invest can do so.

“This does not mean the investor will enter the home…they just claim ownership to the level they have invested, but the house fully belongs to the buyer,” he told the media.

Wong said the initiative is a very innovative home-ownership programme that would enable first-time homebuyers who do not qualify for conventional housing loans to occupy the properties for a period of five years without paying rental.

Nevertheless, he said there should be some stringent conditions to be imposed, including the qualifications of both buyers and investors, among others.

“Overall, there will be more benefits than drawbacks, and the drawbacks probably can be managed via proper regulations. In addition, the likelihood for it to succeed is much higher than convenient property sales,” he added.

Knight Frank Malaysia Sdn Bhd MD Sarkunan Subramaniam said such an innovative financing to increase the country’s home ownership rate is laudable.

“The availability of property crowdfunding platforms will make property more accessible for first-time homebuyers who may not easily qualify for bank loans.

“However, there is concern that this may fuel overly lenient lending policies, potentially leading to a future subprime situation, a lesson drawn from the US where homebuyers with inadequate financial capacities were able to secure mortgages,” he said.

He added that there is also a need to prevent fund managers who may be tempted to quickly build a portfolio by lending to borrowers with compromised credibility, possibly disrupting the property crowdfunding platform.

Laurelcap Sdn Bhd property valuer Kit Au Yong said while the scheme is a new innovative way of funding the housing buying process, more details on the mechanism are still required with some form of control in place.

“Otherwise, this scheme can be manoeuvred by certain parties into a speculative tool, despite the scheme being initiated with well intentions,” he said.

Au Yong added that the 20% down payment seems a lot, and if buyers cannot afford to buy via conventional financing methods from banks, chances are, they still can’t afford the amount.

He said those who opt for the scheme would also be more likely to be disciplined in settling the payment as they have to stay in the houses that they opt for.

He added that the 20% could also be “financed” by the developers in various forms, including discounts or by pricing the properties slightly higher and label it as “zero down payment”.

“For example, developers can sell a RM100,000 house, priced at RM120,000. Buyers can just sign up with the scheme without even the need to think about the first payment,” Au Yong said.

He said the idea is to build equity for homebuyers by paying rental or those who would like to take up an “option” to purchase the house within the next five years with some form of profit and loss sharing basis.

“Eventually, we might have to leave it to the market to decide the value. Assuming that nothing changes in market forces, the house value might drop back to RM100,000. Thus, the cost of financing still comes from the buyer with a shortfall of RM20,000,” he said.

As such, the scheme may not be suitable for the simple-minded house buyers as they won’t be able to gauge and plan ahead, unlike the conventional financing plans.

“For the more sophisticated buyers, I believe it is just like another investment, knowing that there are possible risks and returns attached with it,” Au Yong added.