Denied: Banks cut lending to shoe-box buyers

PropertyGuru
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Uncertainty reigns as banks decline finance applications for small units.

By Andrew Batt (courtesy of PropertyGuru)

With the prospect of a drop in property prices looming large on the horizon, Singapore banks are already tightening their lending criteria. Prospective buyers of so called shoe-box units are already discovering that access to funding is proving to be a challenge.

PropertyGuru understands that at least one bank in Singapore is now declining all finance applications for properties under 500 sq ft in size — the generally recognised measure for shoe-box units in Singapore. Other banks remained tight-lipped about their individual policies and declined to comment on the record when contacted by PropertyGuru.

An employee of CIMB who declined to be named told PropertyGuru that financing for shoe-box units is simply no longer being offered. "It's just too risky right now" he said, adding that he understands most banks are not even considering applications from individuals with a substantial deposit and perfect credit history.

For Getty Goh, whose company Ascendant Assets released research about Singapore's shoe-box property market late last year, this news was expected. He said, "It doesn't come as a surprise that banks are slowing down on their lending, especially when the economic outlook for the next few months remains highly volatile."

Why are banks deeming these smaller units to be more risky that other parts of the property sector? Goh believes the answer is simple.

He said: "It's because some shoebox units are asking for unsustainably high per-square-foot prices. In light of the impending property market slowdown, these high priced units will be the first to be affected by any drop in valuation. This drop in asset valuation will, in turn, affect the banks — especially when the value of the collateral is significantly less than the loan."

Arun Mambully, director of research and editorial at The Asian Banker, echoed Goh's comments. He told PropertyGuru, "The prospects of lower economic growth in Singapore for 2012 coupled with macroeconomic uncertainties are pushing banks to focus on the quality of their asset base. This same trend is reflected in banks globally, as we can see European banks stashing away excess liquidity with central banks across the globe. Add the rise of property price index to this mix, and you get all the ingredients necessary for banks to pull back lending to riskier asset classes."

Buyers of these smaller properties are typically investors, and unlike those properties which are purchased for owner occupation, the risk of the buyer defaulting is much higher. Buyers of shoe-box units also rely heavily on the rental market to repay their financing, and this will also be impacted during any prolonged slowdown.

Goh added, "Banks are ultimately in the business of making money through lending money. The last thing they want is to see their loans go bad. Any rational and responsible bank would naturally not want to make risky loans - especially when the market outlook has become highly uncertain."

Andrew Batt is Regional Group Editor at PropertyGuru.