Manage risks of deferred payment schemes, banks told

The Monetary Authority of Singapore (MAS) wants banks to manage their exposure to property developers which sell homes under deferred payment plans.

These schemes have grown increasingly popular in recent years and are now offered by almost all developers. They allow a home buyer to put off paying the bulk of a new property’s price until the construction has been completed.

This means that in extreme cases, a home buyer could put down the minimum deposit - 10 per cent of the property’s price - and not pay the balance until two or three years later.

In response to queries yesterday about the growing use of deferred payment plans, MAS said banks should be mindful of the higher risks involved.

‘MAS recognises that such deferred payment schemes may pose additional risks to the developer and its bank,’ it said in an e-mail.

It added that it ‘expects banks which finance such property developers to take this into account in their management of exposure to the developer’.

It is not known how many homes have been bought under deferred schemes, but some projects have reportedly seen up to 90 per cent of buyers using these plans.

The main risk of deferred payment schemes lies in the timing of cash flows from the home buyer to a developer.

Normal payment plans require home buyers to make payments regularly throughout a project’s construction. In contrast, deferred payment schemes mean that a developer may get most of the payments only after the whole project has been built.

If the market goes south in the meantime and buyers default on their payments, developers could find themselves strapped for cash.

Banks told The Straits Times yesterday that they are well aware of these risks.

With the property market well on its way to boom time, home purchases - under both deferred and normal payment schemes - are surging, and bankers are becoming more alert to signs that the market may be overheating.

One banking executive said his bank is now ‘looking more closely’ at deferred payment schemes when reviewing its risk exposure to a particular developer.

But he added that there are many other factors the bank considers, including the borrower’s financial condition and outlook, management strength, and the prevailing economic conditions.

OCBC Bank also said that one of the things it takes into account when lending to property developers is ‘the timing of receipt of their cash flows’.

This determines how fast and how much the developer can repay the loan in cash.

Industry experts also told The Straits Times that some smaller developers have been edging closer to the credit risk limit. If they pass this threshold, banks will generally stop paying out the loan, which is given out in phases.

But the overall credit of property developers is still good, they noted.

Banks are not the only ones affected by deferred payment schemes. Property speculators tend to be the main users of such plans.

Genuine home buyers typically opt for normal payment plans because developers often charge higher prices for units sold under deferred payment schemes.

This has led economists such as Citigroup’s Dr Chua Hak Bin to voice concerns that deferred payments may be fuelling speculation and hiding a deeper problem of whether home buyers can really afford their purchases.

Deferred schemes enable buyers to put off taking loans for their new homes, which explains why mortgage levels have remained low despite a spike in home sales and construction loans, said Dr Chua.

‘The concern here is that buyers may be taking on more than they can chew.

‘But we won’t know the extent of that until they actually take the mortgages. These will probably spike in 2009, when a lot of projects are expected to be completed.’

Source : Straits Times - 12 Apr 2007