Article: Pros & Cons of DIBS

DIBS stands for Developer Interest Bearing Scheme, where the developer pays the interest payments for the buyers’ loans during construction of a project.

Usually, when a developer offers a DIBS package, the buyer only has to pay the down payment (say, 10%) and associated legal fees, but nothing else until completion.

The monthly instalments being paid are just interest payments, and do not include capital repayment of your loan.

Pros of DIBS

Many speculative property investors like DIBS because with a down payment, they can secure a property which they hope will increase in price upon completion. Upon completion, they can then “flip” this property for a significant profit, without having had the “pain” of paying for the loan for the first two, three or four years of construction.

When asked to comment about the possibility of Bank Negara curbing such schemes, a developer who prefers to remain unnamed said that DIBS encourages the property market, which stimulates the economy as a whole.

“The whole economy benefits from the property market in so many ways, so if you were to kill it off, the whole economy would suffer,” he said. “Then again, if it’s not DIBS, developers will probably come out with some other way to promote their projects like rebates or credit notes anyway.”

Cons of DIBS

Many say that DIBS projects are usually priced higher than other non-DIBS projects, so even if you pay nothing immediately, you end up paying more in the long run.

“Bank Negara is planning to remove DIBS, and this is a good move as DIBS is actually distorting the property market,” says property consultant and VPC Alliance (Malaysia) Sdn. Bhd managing director, James Wong. “The cost of bearing the interests and other costs by the developer is actually added on to the final selling price by the developer.

“You can see that in places like Bukit Jalil, the difference between non-DIBS and DIBS schemes can be different in pricing by between 20% to 25%,” adds CH Williams Talhar & Wong Sdn Bhd managing director Foo Gee Jen. “These kind of prices do not reflect the general appreciation of market values in the locality. You are paying future prices, and it is misleading; it misrepresents the market.”

Also, because the developer has not paid off any of your loan–just the interest–much of the capital repayment is deferred until a later date, which results in higher total interest payments.

At the same time, you are legally already paying the loan because the loan is in your name. Therefore, your loan has already “kicked in” after you sign the sale and purchase agreement, and should the developer abandon the project and stop paying interest payments, you have to step in and continue paying the interests as well as for whatever loan that has been disbursed to the developer.

“DIBS is something we have been concerned about,” adds Foo. “It was in fact banned in Singapore two years ago. When you buy, the perception is that it is build-then-sell, but it’s not. When you sign the sale and purchase agreement, you have to sign it back-to-back with a housing loan, which will become a problem if the project is abandoned.”

On a holistic level, DIBS also distorts the perception of demand within the property market. “DIBS schemes give a false sense to the property market,” adds Wong. “Without them, a lot of purchasers would not buy some of the properties launched by the developer. DIBS schemes make it so attractive for buyers and speculators to buy the properties launched by the developer.”

Potential ramifications of Bank Negara curbing DIBS

“There are rumblings that Bank Negara may want to do without the DIBS (interest bearing) scheme as part of property lending curbs,” comments Kenanga Research analysts. “However, our quick checks with developers under our coverage indicate that they don’t extend this scheme to many projects at the moment because banks are also discouraging developers from undertaking this scheme as it is spurring speculation. Notably, Hua Yang and Crescendo projects do not use this scheme, so they will be least affected in terms of demand.”

“It will affect stock sentiment in the short-run, so do expect further sell-downs if the news materializes – not even the high dividend yielding ones will be left spared. In the medium term, we do not expect prolonged sell-downs; as it is the government is already talking about implementing the Build-Then-Sell model which will restrict future supply (smaller players will be wiped out) – this should lend strength to demand and larger players e.g. SP Setia, Mah Sing, IJM Land, UEM Sunrise will prevail.”

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