The concept of Peer-to-Peer Housing Scheme was announced by the Finance Minister during the Budget 2019 tabling few days ago, quickly followed by the news that the FundMyHome.com (owned by EdgeProp Sdn Bhd) is up and running. It was meant to tackle the housing affordability issue for the first-time homeowners in our country.
Let’s take a look at what FundMyHome is and how does it impact you and me.
How FundMyHome Works?
Basically, the notion is that Homebuyers only need to fork out 20% of purchase price (either through savings or loan from a bank), while Investors put up the subsequent 80% of the capital needed to finance the deal, in exchange for the opportunity to profit from the capital appreciation of the property.After 5 years, the Homebuyers will either have to (i) SELL THE HOUSE or (ii) REFINANCE if they choose to stay.Refinance can come in 2 ways: (i) Get a loan from a bank OR (ii) refinance on FundMyHome again (from an entirely new set of investors). No matter how, there is a confirmed exit for the investors after 5 years.How’s the Profit Distributed After 5 Years?
*The actual scheme is much more complex than the explanation above. To keep things simple, I have omitted the role Developers play in financing the deal.
To understand how the profit distribution works, please take a look at the chart below.
Chart from FundMyHome.com FAQ page
From the chart, the main points are as follow:
Assume that after 5 years, the house increases in value. The rights to receive the profit goes in the following order: Developer (limited to the amount of money they put in), Investors, Homeowners. After Developer takes the share, the rest of the profit is split accordingly between the investor (80%) and the homeowner (20%).Assume that after 5 years, the house decreases in value. The burden of loss will go in this order: Homeowner, Investors. The losses will come from the 20% capital by Homeowner, which acts as a cushion for the investors. After that, Investors will start to see losses on their capital.*I am not sure why the Developer has to chip in 20% as well. Their capital doesn’t help the deal in any way, don’t understand why Developer has the right to take the profit first. Maybe it is to entice Developer to list their project on FundMyHome.com? But that would require Developer to park 20% of the revenue here, which is bad for their cashflow. Why should they do that? Don’t understand. I have contacted the customer service of FundMyHome.com for further clarification. Will update again.
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Perspectives of Different Players
Let’s take a look at the deal from different players’ perspectives
1. Homebuyer
Upside:
I can buy a house right away, even if I am not qualified to get a conventional housing loan from banks.During the 5 year period, I do not have to pay any rent/interest at all.I can still benefit from the appreciation of the house, albeit very limited.Downside:
In conclusion, according to how the deal is set up, I personally think that Homebuyers is the party that take the biggest risk out of all. Not only do they receive profit last, they bear the losses first.
If you look at the chart above, you would probably notice that under the 5-year sell or refinance limitation, homebuyers never actually own the house. If you cannot get a loan from the banks, and have to refinance the house through P2P over and over again (you only own 20% of the house), you are just in the illusion that you own the house, but in fact you are in the never-ending rat-race. To add salt to the injury, you are still responsible for the insurance, maintenance fee, agent fee etc for the house. This looks more like Homebuyers subsidizing Investors to own their investment than Investors helping the Homebuyers to own their house.
To be fair, if the Homebuyer makes the deal in his/her 20s, the income will rise faster than housing price, then maybe they are able to refinance the house through the bank at a later date to truly own the house. And don’t forget, Homebuyer gets to stay in the house for free during the 5 years. This 5-year rent-free benefit is irrefutable, though you might never reach the ultimate goal of owning a house. I just want to point out the good and bad of the deal. There is a probability that you’ll reap the benefits short-term, but pay the price long-term. So make your decision wisely.
2. Investors
Upside:
I get to participate in the potential capital appreciation of the real estate without having to own the house, pay the insurance, maintenance etc.I don’t have to spend time managing the investment. The homebuyers and FundMyHome.com will manage the property.Downside:
I will only profit from this deal if the house appreciates by more than 20%.If the house prices change is between +20% and -20%, I get nothing in return after 5 years. That’s a lot of opportunity cost. If I just put money in FD, I will get around 20% after 5 years.If the house price drops by more than 20%, I start to incur losses.In conclusion, just looking at the reward dynamics, I personally think it is not a good investment. From 1990-2017, Malaysia housing price increase by 6.5% annually on average. Compound that and you get 37% over 5 years. 20% belongs to Developers, and you only get 17%, a CAGR of 3.2% (Lower than some Fixed Deposit).
One interesting to note, the website states that investors will get a guaranteed annual yield of 5%. I suspect that this money will come from the 20% capital set aside by the developer (4 annual payments of 5% each, then exit on the 5th year). This means that developers actually give a discount of 20% upfront that they would re-coup over time. Nevertheless, if this is true, then 3.2% + 5% = 8.2%. That is still a decent return.
3. Developers
Upside:
I have problems to sell my houses, because banks just don’t want to approve loans. If I list my projects on FundMyHome.com, I get to sell my properties quick.Downside:
Limited downside. If there is one, it might be that I have to park 20% of the revenue in a trust fund that I will recoup after 5 years. Since I won’t be able to sell the property anyway, parking 20% of my revenue is still so much better than not getting the revenue in the first place.4. EdgeProp (FundMyHome.com)
Upside:
I get to pick what developers to list on my website. This will increase my bargaining power with fellow developers, further strengthening the company’s competitive advantage in the property, finance, tech and media sector.I create value by selling houses which were initially very hard to sell. By creating value, I can make some money for sure!Downside:
Not much downside. If fail, might tarnish EdgeProp brand if people label the company as fraud. But hey, the platform has a different name, creating some shielding effect for the EdgeProp brand.5. The Malaysian Economy
Would this P2P solves the affordability issue? Personally, I think yes, but only to an extent. The issue is just the symptoms of a larger problem with our policy and economy, which I will discuss at another day if I have the chance. But to solve this issue, one of 2 things has to happen: House prices drops, or Malaysian income increase.
The way FundMyHome.com set up the deal kind of fulfil the first criteria: dropping the house price. Remember that in the previous section, I mentioned that Developers are required to set aside 20% of price, which I suspected is used to sweeten the deal for Investors so everything can happen. Developers put aside 20%, only to recoup the same amount after 5 years. Take into account the Malaysia’s average inflation rate of 3% a year (you can think of this as time value of money), that represents a >15% discount for houses.
Overall, I think the downside of this scheme is that if Homebuyers Income Growth cannot outpace the Housing Price Increase, Homebuyers will fall into the illusion that they have owned a house, while in fact they are still in the rat race.
In my humble opinion, this solution will help remedy the affordability issue to an extent, but will not be enough to solve the problem to its roots. And if applied at large scale, this solution might give rise to some new systemic risk as well. Only time will tell whether this would cause anything like the 2008 crisis.
Anyway, we should all applaud the brave Malaysians who work hard to solve the problem through innovation. Thank you to the government for being open-minded and willing to try out new solutions. Innovation doesn’t always succeed, but without innovation, we will never succeed as a nation.
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Feel free to share this article or share your opinions about P2P housing scheme, but only construstive discussion please. I will keep on updating once I get new information. FundMyHome is just one of the many yet-to-come P2P platforms. Let's see what is coming next.
Source: NeoZach
