A Challenge for Real Estate Developers
    Category: Column By : Eddy Leks Read : 1504 Date : Sunday, January 12, 2014 - 06:05:06

    Starting from September 30, 2013, the Circular Letter of Bank of Indonesia No. 15/40/DKMP on Implementation of Risk Management for Banks Providing Loans or Financing for Property, Loans or Property-backed Consumer Financing, and Loans or Vehicle Financing (CL) when into force. This column will only discuss the aspect of property financing in the CL.

    The intention of the promulgation of CL was to enhance prudential aspect of banks in facilitating loans for property. It becomes more important since even though the loan to value ratio (LTV) or financing to value ratio (FTV) has been applied since June 15, 2012, the growth of home ownership loan (KPR)/condominium ownership loan (KPRS) with building area more than 70 sqm has reached 26% and 63% respectively in July 2013.

    To fulfill the requirements of LTV or FTV under the CL, the bank must request to the prospective debtor some additional documentation. If the prospective debtor is not willing to provide this information, then the bank must decline the loan application. Other new stipulations that created problems to real estate developers are the prohibition for the bank to provide loan for down payment and ruling a facility can only be provided if the property is physically existed and ready to be delivered.

    However, there are some exceptions to this rule if the facility is the first facility to the debtor, and there is a cooperation agreement between bank and developer stipulating commitment by the developer to complete the property, a corporate guarantee by the developer, the gradual disbursement of facility according to the construction progress, and the devaluation of credit quality of the developer if it cannot complete the property construction within a specified delivery date.

    To understand it better, BI provides some examples of the calculation of LTV or FTV. One sample says, in June 2013, A intends to purchase a condominium with a building area of 80 sqm of Rp 1 billion. A has signed a conditional sale and purchase agreement with the developer and has paid the down payment. A applies for KPRS for Rp 700 million (70% x Rp 1 billion). The bank obtains information that A has already obtained KPR for Rp 500 million from other bank (therefore, the application is A's second facility), the property construction will be commenced in December 2013, and delivery date will be in July 2016. According to that information, the bank may not provide facility to A until the physical condominium is ready or the first facility has been fully paid.

    Real Estate Indonesia stated that the CL may result in the termination of employees, hinder consumers' access to housing, and increase the housing backlog. One thing for sure, BI allows a consumer to obtain facilities from the bank, provided those facilities are subject to the requirement of LTV or FTV. This requirement may decrease the ability of consumer to purchase many properties at the same time. However, it may not necessarily impact on the increase of housing backlog since for the first time buyer, the LTV or FTV is not applicable for housing with an area from 22 to 70 sqm. Despite debates, CL is already operative. Accordingly, supporting BI's policy is essential to safeguard Indonesia's economy.