‘Pawnshop’ approach of banks rapped

Architect and real estate development consultant Gilbert Yu is urging local banks to "professionalize" their real estate loan divisions to be able to help the real estate and construction sector more efficiently and effectively.

Yu said local banks still maintain a "pawnshop" mentality and are not progressive in their approach in providing financing for the real estate sector.

In other countries, Yu said banks are able to provide bridge financing to home buyers and engage in the "supervised release" of funds to developers.

Such an arrangement ensures cash flow to the developers, protects the buyer’s interest and results in a more productive real estate market, Yu said.

At present, Yu complained that banks tend to have a "pawnshop mentality" wherein they will only lend money if they are able to hold on to a piece of collateral.

Once they release the funds, the banks often do not go the extra mile in ensuring that the developer uses the funds properly.

Yu said such an approach has led to the massive accumulation of non-performing assets by the banking sector.

At the same time, Yu batted for the creation or designation of a bank specifically to handle housing developments funds.

According to Yu, many housing development projects are subject to abuse due to the fact that the developers handle all the funds directly.

Yu said that government has no supervisory body that oversees developers to ensure that they complete their projects.

Most developers, Yu said, are able to get big lump sums by mortgaging their projects to the banks and at the same time are able to get advance payments from buyers.

Since the developers are not subject to any check or supervision, they oftentimes use the funds to start other projects even though they have not yet completed the project for which the funds were originally intended.

Thus, when something goes wrong and the project is not completed, the buyers end up with nothing and the lending banks merely foreclose on the land.

In other countries, Yu pointed out, all funds for a housing or development project are placed in an escrow bank which carefully monitors and disburses funds to the developer.

Such practice ensures that the project is completed and the interest of the buyers is also safeguarded.

With all the funds safely kept and handled by the escrow bank, buyers would have some recourse in case the project is not completed, Yu said.