Introduction of Property Crowdfunding Concept
On 2 November 2018, Finance Minister Lim Guan Eng announced the Budget 2019 themed “A Resurgent Malaysia, A Dynamic Economy, A Prosperous Society”. One of the key highlights was property crowdfunding. It’s a new initiative with the aim to curb the deep-seated issue of housing affordability in Malaysia. In the very same week, our Prime Minister Tun Dr Mahathir Mohamad officiated the launch of FundMyHome platform. FundMyHome unveiled a first-of-its kind homeownership scheme for first-time homebuyers. Interestingly, such innovative scheme is underpinned by property crowdfunding or peer-to-peer financing. As a result, the topic on property crowdfunding hogged the limelight and has since become a hot topic recently. Unsurprisingly, many people are debating on whether property crowdfunding is good or bad. You will get an idea after I explain how does FundMyHome work in this article.
How Does FundMyHome Work?
Before we delve into the main topic of the day, let’s have a thorough understanding on how does property crowdfunding work. Or rather, how does FundMyHome work…
Who is FundMyHome?
FundMyHome is operated by The Edge Property Sdn Bhd, a subsidiary of The Edge Media Group. Datuk Tong Kooi Ong, the incumbent chairman of The Edge Media Group currently leads the operations of the property platform.
FundMyHome serves as a peer-to-peer property crowdfunding platform. Essentially, it acts as an intermediary connecting between the home buyers, investors and property developers. The property developers put a wide range of properties up for sale through the platform with prices up to RM500,000. FundMyHome then helps facilitate the home buyers to purchase these properties that are partially funded by the investors.
How Does the FundMyHome’s Scheme Work?
Under the scheme, first-time house buyers can buy a house by paying only 20% of the property price. The investors comprising participating banks and institutional investors will fund the 80% remaining balance. The investors, in exchange will get a 5% guaranteed return p.a. for 5 years.
Among other basic requirements, any first-time house buyer is eligible for the FundMyHome’s scheme. Based on the scheme, the buyer is technically the legal and beneficial owner of the property. Besides, buyers can also jointly buy a house so long both are first-time house buyers.
What appears to be most captivating is that the buyer doesn’t need to pay any repayment in the first 5-year period. (You may have a burning question to ask right now. “What happen after 5 years then?” Don’t worry. I will cover that part in detail shortly.)
The buying process is relatively straight-forward. Imagine now you want to buy a house for the first time using FundMyHome. Once you’ve chosen your dream home on the platform that is fully funded, you’ve to pay a 2% booking fee. Next, you need to pay the remaining 18% balance and other related fees within 14 days. The end-to-end process will take approximately less than 1.5 months.
Not sure whether that gives you an Aha moment, or not? On the surface, it does sound like an incredible win-win formula for all parties. First-time house buyers can finally own a house without paying instalments for 5 years. Investors can get a steady return of 5% for 5 consecutive years. Property developers can get rid of their unsold inventories in the prevailing oversupply property market.
HOWEVER, this sounds too-good-to-be-true homeownership scheme does raise a lot of questions…
Let’s take a closer look at the mechanism.
What Are the Buyer’s Options in the First 5 Years?
Since the buyer is the legal owner of the house, the buyer has to bear all the ancillary costs. These costs generally include management fees, quit rent and assessment, insurance, etc. And of course, repair and maintenance. Moreover, the buyer and investors have no rights to sell the house during the initial 5-year lock-in period.
Let’s use an example to illustrate the whole journey of the first-time homebuyers buying a house under FundMyHome’s scheme.
Peter and Jane are both first-time homebuyers. Recently, they got married to each other. Peter and Jane get really excited about this sweet deal. So, they decided to buy a unit via FundMyHome platform.
Purchase Price: RM300,000
Amount paid by Peter and Jane (20%): RM60,000
Amount paid by Investors (80%): RM240,000
Option 1: Buyers choose to stay
Peter and Jane have been dreaming of buying a house to stay since forever. After pooling their hard-earned savings together, they can’t wait to pay RM60,000 and move in. (Let’s ignore the legal fee about 1.5% of property price for simplicity sake). Of course, they have to fork out another sum for renovation as well. RM20,000 renovation cost for 1,000 square foot sounds reasonable?
They are squeezing every penny out of their pocket to build their dream home. And finally, everything is done. Now, they can move in to stay happily forever. Correction, for 5 years. But they think it’s definitely worth it.
Option 2: Buyers choose to rent
Peter and Jane are living comfortably together with Peter’s parents. Both of them have very low financial literacy. They never invest other than placing their money as fixed deposits, earning a marginal 4% fixed interest p.a. But after reading Rich Dad Poor Dad, they got inspired.
So, they decided to buy their first house for investment purpose. Coincidentally, this FundMyHome’s scheme comes into picture. As though it’s a once-in-a-lifetime opportunity, very quickly they make their first move. They renovate the house hoping to fetch a better rental yield. But, wait a second. They don’t know that the project has such high density with more than 1,000 units. After praying god damn hard at Thean Hou Temple, finally they get to rent it out at a monthly rental of RM1,200. It’s slightly above market price, they feel very satisfied.
“Oops!” They just realise that first month rental goes to property agent. At the end of the 5-year period, Peter and Jane receive (60 months * RM1,200) – (Agent fee RM1,200 * 5 years) = RM66,000. They make a profit of RM6,000 after 5 years. “Wow! It’s a positive number!” Peter and Jane are very bad at maths, they’ve not included the monthly maintenance fee and quit rent assessment. Let’s assume monthly maintenance fee is RM150 and quit rent assessment is FOC. Please help Peter and Jane to re-calculate.
What Happens After 5 years?
Before the end of the initial 5-year period, FundMyHome will appoint an independent valuer to perform a valuation on the property. The buyer has two months’ time to arrange for inspection. Further, the valuation must be completed 6 months before the end of the period at the buyer’s cost.
After living happily for 5 years, Peter and Jane have two options to choose again. They wish that coin tossing could help them to make the decision. Unfortunately, it’s far more complicated than they’d thought before buying their first house. Now they have two kids after getting married for 5 years.
Since Peter and Jane have two months’ time to arrange for inspection, they quickly spring-clean their house. “Hopefully it gives a good impression to the valuer to give a higher valuation.”
The housing index in Malaysia has been trending down for the past 5 years from 2013 – 2018.
And God knows what happen. There’s a sudden turnaround in the property market albeit increasing oversupply of properties in Malaysia. After 5 years, the house that Peter and Jane bought appreciates by 20% in value! It’s a MIRACLE!
Option 1: Buyers choose to stay on
After proper deliberation, Peter and Jane decided to stay on. They feel that it’s so cumbersome to move around with two kids. Now, they have two choices.
Peter and Jane can refinance their house via FundMyHome based on the new valuation. Based on the table above, the amount to refinance is RM300,000 for their house which has appreciated 20% in value. (Why isn’t it 80% of new valuation RM360,000? I bet you’re pretty confused now. But, hold your thoughts for a moment.)
Peter and Jane are now thinking… If they were to refinance the amount, they’ve to fork out another RM60,000 cash (RM300,000 * 20%). They will be left with nothing. Who pays the kindergarten fees for their kids?
(Note: At first thought, I was thinking if refinance based on RM300,000 original purchase price after 5 years, does it mean that buyer doesn’t need to top-up any amount? It doesn’t make sense because if that’s the case, who continues to pay the 5% return to the investors?)
After proper consideration, it seems that refinancing is not a good option for Peter and Jane. That leads them to the second choice below.
Peter and Jane can acquire the remaining 80% share of their house from the investors. Either using their own funds or via bank borrowings. Obviously, they don’t have enough cash. Peter and Jane then pay a visit to the bank to apply for a bank loan. To their surprise, the bank approves their loan application even though they’ve exceeded the maximum Debt Service Ratio. It’s another MIRACLE again!
After 5 years with the happening of two miracles, Peter and Jane obtain a loan amount of RM300,000. (RM360,000 – RM60,000 as per table above). Ironically, the loan amount is the same as their original purchase price 5 years ago. And now, they have to start servicing the debt for the next 30 years…
On the other hand, the investors can choose to roll over their investments and continue to enjoy 5% return p.a. Or to sell their share to other investors.
Option 2: Buyers choose to sell
After renting it out for 5 years without idle time, Peter and Jane are thinking about next move. They think they’ve made a good profit of RM6,000 with their investment as calculated above.
In their minds, there’s an appreciation of 20% in property value. Peter and Jane think that it’s time to realise their capital gain by selling off the property.
But, hold on! Based on the table above, Peter and Jane will only get back their original portion of RM60,000 even though the property has appreciated by 20%. “It’s a SCAM!” Nah…it’s not a scam.
Let’s use the example from the table above. When the property appreciates by 30% (RM90,000) after 5 years, the buyer will only get a capital gain of RM6,000.
The calculation is shown below:
A question that everyone should ask. “Who gets the preferential share of RM60,000 (20% of the original purchase price) after the sale?” Personally, I doubt the investors are entitled to the RM60,000 gain. In fact, it only makes perfect sense if the sum goes back to the property developers.
When the property developer sells a property with a price tag of RM300,000, the 20% paid by the buyer goes into a trust account. The amount is set aside for payments to the investors as their 5% returns p.a. In other words, the property developers only get 80% of the purchase price at inception. Doesn’t it make sense that property developers should get the upside to the extent of 20% appreciation in property value?
Let that sink in for a moment…
Getting back to the story, FundMyHome helps advertise the property for sale on the open market. Peter and Jane need to hand over vacant possession by the end of 5th year. Orelse they’ve to pay a rental rate of 5% if they fail to sell the property by then.
Fortunately, Peter and Jane manage to source a buyer within 3 months before the end of 5th year. “Phew!” They heave a huge sigh of relief. Peter and Jane seem to be really lucky. They manage to get rid of their house in just few months’ time in Malaysia’s property market. God really blessed them!
What Does the Buyer Get Back from the Sale?
Until they start looking at the real numbers, the nightmare begins. They’ve to pay 5% Real Property Gains Tax (RPGT). On top of that, they have to pay 2% agent commission to sell their house as well. When they press the calculator, it goes like this…
“Holy Shit!” After forking out their hard-earned savings of RM60,000 to invest in their first ever property, they get back only RM49,800? How about legal fees? Renovation cost?
Peter and Jane hug each other tightly and start crying in despair. They are both filled with a deep remorse for making the worst investment decision ever in their life…
Sharing My Two Cents
The scenarios that I’ve walked you through above are hypothetical. But I believe you will agree with me that the pain points underlie the scheme are real issues.
I’m no expert but only here to share my two cents. And these are my other thoughts…
For First-time Homebuyers Who Want to Stay
It was reported this year that the maximum affordable house price in Malaysia is estimated to be RM282,000 according to Bank Negara Malaysia’s data. Even then, The Edge Property, the owner of the property platform recently reported that the unsold properties under RM300,00 are on a rise.
I am just wondering if most of the Malaysians can’t even afford a property that is priced under RM300,000 currently, how is it possible that these Malaysians can fork out 20% cash to purchase a property under FundMyHome’s scheme?
Of course, a short-term solution may be getting a 5-year personal loan to make the purchase. But, what’s next after the first 5 years? Should the buyer refinance the amount with another 5 years at a rate of 5% p.a.? Currently, the average interest rate for a bank housing loan is approximately 4.6% p.a.
Based on my back-of-the-envelope calculation, the buyer does not benefit if the property value doesn’t appreciate at least 50% and above after 5 years. This is due to the profit distribution structure under the scheme, where 20% preferential share will be deducted before apportioning between the buyers and investors at a 20:80 ratio. This is also after taking into consideration that the buyer has to bear the RPGT, agent commission and other related costs as the legal owner of the house.
A Chicken & Egg Situation
For a property to appreciate 50% in 5 years’ time based on the prevailing trend seems to be too far-fetched. Even if the property does appreciate but without hitting a certain threshold, the buyer is still at the losing end. Because the buyer needs to top-up the amount to refinance based on the latest valuation.
Essentially, it’s a chicken and egg situation. The buyer would rather the property not appreciates if he/she genuinely wants a house to stay. Whether the buyer can obtain a housing loan or not from the bank to acquire the remaining 80% is another question. Looking at it carefully, the buyer may be trapped into a never-ending rat race.
For First-time Homebuyers Who Want to Invest
Under the FundMyHome’s scheme, it allows the buyer to rent out the house to get rental income. This only works if the buyer is able to fork out 20% cash to buy the house in the first place. However, there’s limited upside as the buyer will start sharing the capital gain beyond 20% appreciation in value. Further, it poses a high liquidity risk to the buyer.
It’s definitely not a wise move if the buyer gets a 5-year personal loan to buy a house as investment.
For me, I would rather consider other alternatives to invest if I’ve the cash. Let’s say I place RM60,000 into Amanah Saham account for non-bumiputera or EPF account for 5 years. With an average yield of 6% p.a., RM60,000 will grow to RM80,294 with 5 years compounding. (RM60,000 * 1.06 * 1.06 * 1.06 * 1.06 * 1.06) That’s about 34% return after 5 years.
Alternatively, I can also invest in P2P lending that yields an average of 10% return p.a. (Refer Peer-to-Peer Lending in Malaysia – Quick Guide and A Complete Review of P2P Lending Platforms in Malaysia for better understanding.)
In my humble opinion, the biggest winners under the scheme are the participating banks or institutional investors. As well as the property developers.
For the Participating Banks:
Previously they may not approve the housing loans for the first-time homebuyers due to low credit score or insufficient income. In this case, the 20% will be paid upfront by the first-time homebuyers. This sum is set aside for payments to the banks as investors with 5% return p.a. This essentially eliminates the credit risk of the investment, thus improving the banks’ assets quality.
And this is not the worst yet.
Imagine that you get a personal loan of RM60,000 from Bank A at a rate of 5% p.a. And Bank A is the participating bank that funds RM240,000 of the scheme. At the end, the RM60,000 goes back to Bank A in the form of interest for the RM240,000 funding. On top of that, Bank A earns another 5% interest on your personal loan over the 5 years!
For the Institutional Investors:
It’s essentially a credit risk-free investment for 5 years with 5% guaranteed return p.a. 5% p.a. is equivalent to 9.15% effective interest rate p.a. for monthly repayment. The investors also enjoy potential unlimited upside on capital gain. Not only that, the downside is protected even if there’s a downfall in property price. Because the investors have the priority to get back their capital before the buyer in the event of a sale.
For example, if the property price depreciates by 20% after 5 years, investors will get back their entire capital. Unfortunately, the buyer will absorb all the losses based on the table above.
For the Property Developers:
Obviously, the introduction of such scheme will be of great help to the property developers. They can take the opportunity to get rid of their rising number of unsold properties that continuously putting a downward pressure on their cashflows.
Further, the highlight of the property crowdfunding concept during the budget announcement and the launch of FundMyHome’s scheme officiated by our Prime Minister might be far more effective than the property developers throwing millions to do advertising themselves.
In a Nutshell
Many may think that the emergence of property crowdfunding concept would be a watershed moment in Malaysia’s property market. No doubt such innovative initiative with the objective of eradicating the deep-rooted housing affordability issue in Malaysia is not beyond the realms of possibility. However, it may be too soon for everyone to relish a moment of joy to celebrate the good news.
The mechanism of property crowdfunding may evolve over time. It’s wiser to have a careful consideration on the potential implications to the first-time homebuyers, investors, property developers and Malaysia’s economy as a whole before implementation.