FINANCING of property developments has taken on a new form recently in Malaysia with the wholesale selling of a development to a financial institution which then helps to market the property.
With Kuwait Finance House (M) Bhd (KFHMB)'s innovative Islamic way of funding a project called Mudharabah, it has revolutionised real estate development financing by applying the Islamic principle of sharing risks as well as profits.
To be offered such a facility is a stamp of trust of the project's success with KFHMB being associated with projects such as The Pavilion and The Avare in Kuala Lumpur.
Mudharabah is a common structure in Islamic financing where a partnership is formed with a party providing capital and the other party managing the project.
In the case of real estate projects, this enables a developer to concentrate on developing a property leaving the lender with the marketing.
Take the recent signing of a Mudharabah agreement between Corner Side Realty Sdn Bhd (CSRSB), a member of the Prima Prai Group and KFHMB as an example.
Under the Mudharabah financing facility KFHMB will provide a capital of RM74.7mil to CSRSB to underwrite the sale of 30 bungalows in Phase 1B of the RM500mil, The Sanctuary, a freehold development in Batu Uban, Penang.
When the bungalows are eventually sold to the end-purchasers, the profits from the sale would be distributed to KFHMB and CSRSB, based on a profit sharing ratio.
Mudharabah ensures that the project is guaranteed completion as the developer has locked in his sales.
It also gives purchasers confidence as they know that the project will be completed and this in turn attracts more potential buyers and boost property values.
Besides having the financial muscle, KFHMB through its parent company Kuwait Finance House has a vast international network of potential customers.
Its financing structure is not only in real estate but also in various Islamic banking services including lease financing, trade finance, direct investments and portfolio investing.
Being the first to offer such a facility in Penang, it also reflects the commitment of KFHMB in increasing its investments in Penang and in developing its presence in the state.
KFHMB managing director Datuk K. Salman Younis, who described Mudharabah as a “very fair form of banking”, sees good potential in doing business in Penang, given that the government plans to spend RM23.8bil on the northern region under the Ninth Malaysia Plan.
This allocation among others would go into major infrastructure projects such as the Penang Outer Ring Road, Penang monorail system and Second Penang Bridge.
“Penang also stands to benefit from the influx of tourist arrivals which will invigorate activities in the hospitality sector.
“All these factors will act as catalysts for the economy in Penang and revive the property and construction sectors,” Salman said, adding that KFHMB would work with Prima Prai Group for future strategic alliances and co-operation.
Prima Prai Group managing director Datuk Mohd Ramzan Ibrahim said it was the group's first Mudharabah facility.
Phase 1 of The Sanctuary comprising 21 detached and 11 semi-detached houses worth RM68mil has been completed and occupied.
Phase 1B with 35 (including the 30 in the Mudharabah deal), three-storey detached houses will be launched early next year.
By S.C. CHEAH