Property slowdown more evident in Johor

Country Garden's project site in Danga Bay. Property agents say country Garden hasn't raised its maximum discount beyond 21% since launch day.

CRACKS are starting to show in Iskandar Malaysia’s once-booming property market.

UEM Sunrise Bhd, considered a bellwether to Iskandar, this week slashed its sales target for 2014 to RM2bil from RM3.2bil, citing weakness in the market for homes in the economic corridor south of Johor.

This comes as a slew of high-rise apartments – many of them from the China developers, and many of them on the waterfront – are set to flood the market.

And things could get worse before they get better.

A report in the Financial Times on Wednesday says China Vanke Co, the country’s biggest developer, is offering up to US$325,000 (RM1.02bil) in discounts via e-commerce site Taobao, to entice homebuyers amid slackening demand.

Sluggish sales and an oversupply in the second and third-tier Chinese cities are driving prices lower, Bloomberg reported.

Here, the talk among property circles is that Country Garden Holdings Co, which last year rolled out a record 9,000 high-rise units on the coastline enclave of Danga Bay, could follow suit.

It is believed that about half of the condominiums in Country Garden Danga Bay remain unsold, and the Guangdong-based property giant is now looking increasingly desperate to unload its stock by either hiking discounts of dropping prices, although the exact quantum is unknown.

Company officials did not respond to text messages from StarBizWeek seeking comment.

The Danga Bay project was launched with much fanfare last year at an average of RM900 per sq ft.

Most of the real estate firms in Johor Bahru have been roped in to sell homes for Country Garden Danga Bay, and it is dangling commissions of up to 8% versus the typical 2%-3% as an added incentive, brokers tell StarBizWeek.

In fact, says an agent, three people were spotted carrying sandwich boards near a bank in Johor Bahru last month advertising units in Country Garden Danga Bay. It is not clear who they were representing, but property executives speculate they could be acting for Country Garden’s foreign buyers.

Channel checks with agents reveal that the Phase 2 units are going for the same price for all floors, a departure from the usual practice of pricing the topmost levels at a premium.

Buyers can opt for the promotion price, which in some instances adds up to a 40% discount, provided they pay for the property in cash over several transactions. Doing so will shave RM300,000 off the price of a single-room unit measuring between 400 to 500 sq ft, which would normally cost RM800,000.

Country Garden hasn’t raised its maximum discount beyond 21% since launch day, say agents familiar with the matter, but it may not be long before the company has to dump prices.

Right next door, China’s state-owned Greenland Group will soon launch 2,478 units of apartments and townhouses, according to PA International Property Consultants Sdn Bhd executive director V. Sivadas.

R&F’s Princess Cove project will introduce about 3,000 units of apartments in the first phase, and another 30,000-plus units thereafter.

“There are also a few other projects in the Danga Bay area being prepared for similar types of developments,” he tells StarBizWeek via e-mail.

The problem here is clearly one of mismatch between demand and supply, Sivadas points out.

Demand remains strong for affordable homes costing below RM400,000, yet much of the new supply is heavily skewed towards high-rises.

“Our records indicate that slightly more than 100 high-rise projects scattered throughout Johor Bahru and Iskandar Malaysia, comprising a little over 100,000 units, are expected to come onstream in the next few years.

“One third of that is within the R&F site, and another 10% within known projects at Danga Bay, where Country Garden and Greenland are based.

“We expect more high-rise projects to be planned within waterfront areas in the Danga Bay region, such as Stulang Laut, Bayu Puteri and Puteri Harbour. The proposed Forest City at the Second Link in Nusajaya is another huge project on the horizon,” he quips.

All that has led to a visible slowdown over the past 10 months.

“Many investors, particularly foreigners (the main target for high-rise projects in the waterfront areas), appear to be adopting a wait-and-see attitude.

“We have not helped ourselves by changing policies and the price threshold limits. We, however, do not expect to see a crash in the market unless there is a catastrophic failure at the national, regional and global levels,” Sivadas notes.

“In property development, success is predominantly driven by demand, not supply. There is an urgent need to boost demand and facilitate ease of purchase by locals as well as foreigners.

“There needs to be more employment generators in Iskandar Malaysia and facilitated migration and immigration to ease or solve acute labour shortages across many sectors. There is also a need to seek a balance to ensure controls on speculative activity, which were prevalent for the past few years up to end-2013.

“In the meantime, the question almost everyone is asking is, who will occupy the vast numbers of high-rise, high-priced waterfront units which were mainly purchased for investment?” he asks.

“We are not sure at the moment.”

But there are bright spots, says Landserve (Johor) Sdn Bhd executive director Wee Soon Chit.

“I believe that value-for-money products will still see demand. For example, Botanika@Bayu Puteri (by Tebrau Teguh Bhd) is doing well because their prices range from RM430 to RM500 per sq ft.

“We expect the industrial sector to grow further due to demand from Singapore industrialists, especially the Jurong area. The Singapore government recently announced that the Jurong area will be re-zoned, and the victims will be industrial companies who have no choice but to relocate,” Wee reasons.

A number of recent Iskandar launches, like Sunway Bhd’s Citrine office suites and Eastern & Oriental Bhd’s Avira Terraces, were snapped up.

But sentiment could get worse in 2015-2016, when a large number of the high-rises sold during 2012 and 2013 are handed over, according to Maybank IB Research analyst Wong Wei Sum. The problem is especially acute in hotspots such as Nusajaya, Medini and Danga Bay.

“We welcome foreign direct investment into Johor, but not at the expense of the local players,” laments one industry executive.

“It was going so well until a couple of years ago. Now they seem to have killed the goose that laid the golden egg.”

While the Chinese may be accustomed to building thousands upon thousands of apartments, the Malaysian market simply can’t take that kind of volume, the executive says.

“I hope the market will cool just enough to make them realise that. The state government also needs to take a good, hard look at the situation.” - The Star

A new lease of life

A file piture showing boats plying the Singapore river under a bridge near the financial district of the city-state. It become one of the models for the RoL project/ - AFP

THE multi-billion ringgit River of Life (RoL) project to clean up, beautify and redevelop a 110km stretch of the rivers in Greater Kuala Lumpur by 2020, if done holistically, will shore up Kuala Lumpur’s global liveability index and open vast tracts of river-front land for development.

The decade long anchor project under the Government’s Economic Transformation Programme, initiated under the Greater Kuala Lumpur National Key Economic Area, is to breathe new life into dirty and polluted rivers which have been rendered lifeless after years of neglect and exploitation.

Some RM3.4bil has been allocated for the clean-up of the rivers alone, and RM1bil more for the beautification programme.

The rivers are currently classified as class four which is considered toxic and unsuitable for public use, and the aim is to clean them up to at least class 2B which is deemed suitable for public and recreational activities.

Khong says the RoL is a worthy initiative.

This will be a daunting task that needs the full co-operation of all the stakeholders including the federal and local authorities, the public and the business communities to see the costly project realising its true potential.

Sharing enthusiasm for the RoL project, property consultancy CB Richard Ellis Malaysia group executive director Paul Khong says the project is a worthy initiative by the Government to clean up the polluted rivers and make them functional through value adding.

Khong cites some of the iconic river beautification programmes around the world that include River Thames in London, Singapore River, and River Sienne in Paris that can become models for the RoL project.

Wong: 'The JDC can draw up a blueprint.

The other examples involve transforming the river and giving it a new identity like Clarke Quay in Singapore; raising the economic value of the river in Chicago; revitalising the social and cultural heritage of the river as in the Haihe River embankment in China; river beautification in Melbourne; promoting transit nodes in the San Diego Waterfront; and raising environmental awareness in Jinji Lake, Suzhou, China.

“Cleaning up dirty, murky rivers and beautifying them with nice river front spaces, parks and facilities will breathe new life into them and turn them into useful and viable attractions.

“Kuala Lumpur city will be a more liveable place; the public can now appreciate and visit the river side for recreational purposes. Residential and commercial elements can also be incorporated,” Khong tells StarBizWeek.

Fernandez says the details of the project are important.

He says developments should be planned to face the river front, and refocusing developments back to the riverbank will be a good start.

“Residential developments, commercial shops facing river front, hotels with river front view, parks and greens around the river, river front water activities, picturesque views and public facilities such as pedestrian and bicycle walkways, retail outlets, eateries and other attractions for the public to appreciate and enjoy will be among the suitable developments,” he discloses.

Khong says currently most of the developments have their backs to the rivers. “Flooding is a terrible experience for many developments nearby, as riverbanks become natural dumpsites and squatters colonies,” he adds.

VPC Alliance Malaysia Sdn Bhd managing director James Wong says as the RoL project stretches along Sungai Batu, Sungai Gombak, Sungai Ampang and Sungai Klang that meander through Kuala Lumpur and Selangor, there should be a Joint Development Council (JDC) to play a co-ordinating role for overall planning and development of the river cleaning and beautification, marketing, site master planning and packaging of development sites to developers, enhancement of heritage and cultural components of the redevelopment, community consultation processes, and removing squatter houses around the riverbanks.

“The JDC can draw up a blueprint to invite the private sector to participate in the RoL project. The National Sewerage Department, Department of Irrigation and Drainage, the local authorities and the JDC should conduct detailed studies on the river clean-up exercise,” Wong says.

Civic consciousness

Wong raises concern whether the timeline allocated for the RoL project is adequate saying that according to Kuala Lumpur City Council deputy director-general Datuk Mohd Najib Mohd, the RoL Precinct Seven alone is expected to be completed in 2017. “So, the initial estimation for the RoL to be completed in 2020 will not be achievable. We estimate the entire project is likely to be completed in 10 to 15 years,” Wong says.

He is also sceptical about the budget allocated for the river cleaning and beautification exercise given the long stretch of rivers involved.

“As the river cleaning will be conducted along a 110km stretch, it is quite difficult for the Government to clean it up with a budget allocation of RM4.4bil for the entire project which includes the cost of river cleaning and river beautification over the 10 year project.

“Datuk Mohd Najib said the cost for the RoL project in Precinct Seven (Masjid Jamek to Central Market area) alone will incur RM130mil. The river cleaning and beautification of the 10.7km of Sungai Klang are divided into 11 precincts from Gombak to Brickfields. Assuming, if the cost of each precinct is about RM130mil, the total cost for river cleaning and beautification of the 10.7km will reach RM1.43bil or 36% of the total cost,” he says.

Project feasibility

Khong & Jaafar Sdn Bhd managing director Elvin Fernandez says while the RoL project is necessary, its feasibility will depend on the details.

“If the funding of the project and its maintenance after completion is too dependent on the property market (for viability as well as for the required level of income) particularly at a time when there are many other projects that are also looking to secure returns out of property profits and income such as the mass rapid transit and mega commercial projects, then it may be difficult.

“There may be a need to differentiate the project and see if viability can be secured by looking more towards property with a recreational bias and the needed market study should show positive and adequate returns. Management of the project will also become a key aspect of viability,” Fernandez says.

CB Richard Ellis’ Khong says the cleaning up of the river physically does not pose an issue but the main challenge is to keep the river clean.

The RoL project will be a costly exercise and the Government has to mete out hefty and mandatory penalties to maintain the cleanliness of the rivers after the clean-up.

“Enforcement must be efficient, strict and impartial with penalties statutorily enforceable; stiff and painful to deter perpetrators. There must be a strong commitment from all the government authorities and the Kuala Lumpur City Hall. All city dwellers should be committed to keeping the rivers clean and ensure no one pollutes it.

“It is no point to spend billions to undertake the project if it is going to be polluted again down the road. The main challenges shall be to get the public educated and also to commit to ensure continuity and sustainability for a clean river, and to ensure efficient strict and impartial enforcement to keep the river clean. Everyone must truly buy into this project and keep a watchful eye on the rivers for the people and for our next generation,” Khong stresses.

He expresses the hope that the RoL project will change the mindset of the public to create an environmentally friendly and sustainable living for the urban communities.

“We must remind ourselves to be civic minded to keep our rivers clean and uncontaminated. All these must be in place before the RoL project can be successful. There is currently no life in our rivers,” he concludes. - The Star

Thorn in the flesh for consumers

The frequent setting aside of the Housing Tribunal's awards is not likely to gain the confidence of the people.

Buyer’s perspective: Having won the case at the Tribunal for Home Buyer Claims, commonly known as the Housing Tribunal, and having been granted an award of RM7,500 as compensation for late delivery, the defaulting developer has refused to abide by the award. The developer wants to challenge the award by filing for judicial review (JR) at the High Court. I checked with several lawyers and they say the legal fees and expenses to represent the client would be approximately RM20,000 at the level of the appellate division of the High Court.

The lawyer is uncertain whether he would be able to win the case. Thus, why take a risk?

Developer’s perspective: Yes, the completion of the building has been delayed because of several factors beyond the scheduled completion date. But we must fight the case for the sake of delaying tactics. We can’t afford to pay all the 350 apartment buyers.

We will go bankrupt when each unit’s compensation (for late delivery) costs us RM7,500. It will run into the millions. We will get our lawyers to adopt delaying tactics, by whatever means, to frustrate the awards by filing for JR proceedings.

With the JR proceedings, the owners will drop their claims and “beg” to settle out-of-court.

It will not be worth their while to pursue the matter. It’s an expensive game and time-consuming at the High Court stage.

Having set the above scenario, I have written three articles vis-à-vis the Housing Tribunal, namely, Damages for late delivery, Jan 25, 2014, Is the Housing Tribunal effective? Feb 15 and Vital to act against errant developers, Feb 22, in which I praised the Housing Tribunal for a job well done. However, this issue of JR proceedings has been a thorn for both house buyers and the Housing Tribunal, as both parties are cited as a party to the JR proceedings.

Need for representation

Perhaps the need for representation ought to be seen beyond a just and reasonable outcome of JR cases and the protection of house buyers. Statutory laws have been passed, case law must be developed. Bad precedents lead to bad case law. Representation in JR cases is an effective way to shape the development of case law.

My initial thoughts basically cover three points:

(A) The far-reaching effect of one adverse JR outcome sets a precedent and affects many,

(B) The need for positive development of case law, and

(C) An alternative option.

A. One adverse JR outcome affects not one but many purchasers.

The number of JR cases is small only if they are considered as a percentage of the total number of cases filed. When there are 1,200 cases, the number is not small.

More importantly, the implication/ramification of 1,200 cases goes far beyond 1,200 purchasers. One adverse outcome affects the purchasers in the same housing project and other projects as well.

So, we are looking at potentially hundreds of purchasers who can be affected by just one Tribunal award being quashed.

The ramifications

– The Tribunal cannot ignore a High Court decision, which will remain binding until and unless set aside by the Court of Appeal.

– The purchaser is unlikely to appeal against the High Court decision. So, a High Court decision remains and has to be followed. If it is not followed, then the developer will take it on JR again.

– The developer will also use the decision to pressure purchasers into settling for a fraction of what they are entitled to, or even avoid making any claims.

– Purchasers become afraid to file claims at the Tribunal for fear of being taken to the High Court on JR. Or they may think that it is just not worth the while going to the Tribunal.

– The public loses confidence in the Tribunal.

– Developers have a battalion of lawyers to go all the way to the higher courts.

– Developers’ lawyers will practically do the JR for free in exchange for future legal work.

Developers have nothing to lose by going on JR because their arguments are unilaterally heard without the presence of the “opposing parties, or respondents”. They may not even be ordered to pay the cost if their application is dismissed because there is no opposition.

The Housing Tribunal cases are supposed to be straightforward cases, so why is there the need for JR? Many developers go for JR just to buy time, to frustrate house buyers and for cash-flow purposes.

They must be stopped or at least discouraged and that cannot be done without opposition. Opposition has to come from the law enforcers. Otherwise, the Parliament’s efforts in setting up the Tribunal are wasted.

In Hazlinda Hamzah V. Kumon Method of Learning Centre (Court of Appeal, Putrajaya [Civil Appeal No. W-04-78-2004] – March 6, 2006, Gopal Sri Ram JCA remarked that the Tribunal for Consumer Claims has several provisions to protect consumers from the provision of defective goods and services and to give claimants speedy relief.

The Parliament in establishing the Tribunal conferred it with extraordinary powers to do speedy justice for consumers. As such, its awards should not be struck down save in the rarest of cases, where it has misinterpreted some provision of the Act in such as to produce an injustice. (http://www.hba.org.my/laws/CourtCases/H/hazlinda)

Frustration of Parliament’s intention

Despite this strong statement, too many Tribunal awards are taken on JR and some are quashed (or varied) as can be seen above. It makes one wonder if the above and other relevant cases and statutory provisions related to housing laws and the Parliament’s intention to protect house buyers are ever brought to the judge’s attention at the JR proceedings.

(B) Legal representation a positive way forward for the development of housing laws

Good precedents can be set

If the Tribunal were represented, then the cases before the High Court can be better argued, the housing laws can be better presented and understood, contradictory decisions are more likely to be scrutinised and good precedents can be set and followed. This will contribute positively towards the development of case law, which is just as, if not more, important as statutory laws for the housing industry.

Bad precedents lead to bad case law. With no opposition, the developers’ presentations are, at best, one-sided and at worse, intentionally misleading. There can be no positive development in the case law in such an environment. In fact, it has already led to some undesirable precedents.

If left unchecked, it will have far-reaching effects. Examples of such “bad” precedents include Liquidated Ascertained Damages (LAD) cases being set aside, cost being ordered against unrepresented buyers and even the Tribunal.

Tribunal scope of cases – Technical and non-technical

There are so many LAD cases involving car parks being sold separately, cases involving inflated purchase prices, connection of utilities, and issues with regards to vacant possession. Case law needs to be put in the right perspective.

Otherwise, we will have to amend the statutory laws again and start over again. The Tribunal ought to be able to deal with such cases instead of the purchasers having to go to the civil court for an order.

Technical claims relating to latent defects and defects discovered after the developer’s liability period is over are among some of the cases that come up for mention.

The Tribunal must want to put the law in its right perspective and set some precedents.

Law enforcers, by representing the Tribunal, can contribute positively to the development of case law and help shape the legal environment for the housing industry. With developers now having three months instead of 40 days to file their application for leave (for JR proceedings), more developers are likely to go for JR and something must be done now.

(C) An alternative solution

Legal officers of the Attorney-General’s (AG) chambers who are most conversant in the functions, law and specific objectives of the housing laws applied by the Tribunal are those in the Housing Ministry.

It is suggested that they be required to defend the awards made by the Tribunal.

Even if the AG’s chambers is not keen for there to be representation in all JR cases, there must be a system with sufficient qualified personnel, whereby the merits are looked at, a system whereby the Tribunal’s decision can be defended, where deemed necessary, by the Tribunal.

Conclusion

The frequent setting aside of the Housing Tribunal’s awards is not likely to gain the confidence of the rakyat in the Housing Ministry’s commitment to service house buyers.

This may lead to serious consequences which will put a greater strain on the Government.

Chang Kim Loong, AMN, is the secretary-general of the National House Buyers Association: www.hba.org.my, a non-profit, non-governmental organisation manned purely by volunteers. - The Star

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Secondary market continues to be stable

THE primary market for real estate was healthy when various incentives, such as the developer interest bearing scheme (DIBS), were available. However, after the abolition of DIBS and the tightening of housing loans, people have been holding back on purchasing new homes, say property consultants.

The primary market, which accounts for 70% of total property transactions, started to slow down after the federal government announced the cooling measures in November last year to reduce speculative activity, and weakened further after Bank Negara Malaysia recently increased the base lending rate (BLR) to 3.25%.

“Although the secondary market also saw a slowdown, it was marginal. This segment of the market continues to be stable,” says Zerin Properties CEO and founder Previndran Singhe.

Metro Homes Sdn Bhd director See Kok Loong believes the 0.25% rise in BLR is too small to adversely affect the market. “There has been no movement in the BLR for about three years. I believe the impact is minimal. Moreover, the secondary market has always attracted owner-occupiers and long-term investors.”

Sub-sale home prices

Property consultants expect transactions on the secondary market to increase 10% to 15% from last year.

Siva Shanker, CEO of PPC International Sdn Bhd and president of the Malaysian Institute of Estate Agents, notes that in 2012, the transaction volume nationwide was 427,520 with a total value of RM142.8 billion. Last year, the volume dropped about 10% to 381,180, although the value increased 7% to RM152.4 billion. “From this, we see that even though demand is slowing down, the average asking price increases about 10% per annum.”

According to Siva, secondary market homes are popular in Puchong, Cheras and Kajang. “Although these places are known for their heavy traffic, people still want to move there because the prices of 2-storey homes are much more affordable than elsewhere in the Klang Valley. In Puchong and Cheras, 2-storey terraced homes are going for between RM600,000 and RM700,000, but in places that are closer to the city, like Bangsar and Mont’Kiara, such homes are priced above RM2 million.”

He believes that with more people migrating to the city, homebuyers are willing to tolerate long distances. “Look at Semenyih. It wasn’t a well-known place a few years ago, but now with S P Setia, EcoWorld and several other big developers entering the market there, people are crowding their showrooms.”

However, Previndran says homebuyers are keener on Bangsar and Damansara because of the “primary home address”, although he notes that these places are becoming pricier. “The asking price for condominiums in Kuala Lumpur, such as Suria Stonor, is as high as RM1,000 psf now compared with RM750 psf three years ago.”

Metro Homes’ See says the asking price for condos in Petaling Jaya has risen to RM600 to RM700 psf from RM450 to RM500 psf three years ago while Previndran notes that at Bangsar’s One Menerung, the asking price is as high as RM1,600 psf. “However, in Bangsar, most older condominiums are going for between RM600 and RM800 psf, depending on age, facilities and demand,” he adds.

Linked houses in Medan Damansara are being transacted at between RM1.6 million and RM1.8 million compared with RM1.2 million three years ago while in Taman Desa, they are being sold at RM1.4 million compared with RM1 million over the past three years.

According to Previndran, the latest transaction at Suria Stonor was above RM850 psf. “Units in Suria Stonor are generally larger in size. Also, a unit with a view in One Menerung was transacted at RM1,600 psf. This may not reflect the actual price level there, but it is a good gauge as some homebuyers are willing to pay steep prices. Three years ago, prices there were generally between RM1,000 and RM1,300 psf.”

Outlook and impact of GST

Overall, property consultants are optimistic about the secondary market despite the low volume of transactions over the past three years because the prices are healthy and stable and will not be much affected by the implementation of the Goods and Services Tax in April next year. 

“Potential purchasers may turn to the secondary market for bargains. With the same outlay, you can choose better locations and see the finished product. Some may even enjoy immediate yield from rent,” Previndran says.

When asked if the secondary market will be a more popular option for home purchases after the implementation of GST, Metro Homes’ See says, “Genuine investors will definitely buy homes on the secondary market as a lot of them are brand new and in good locations. Besides, financing for end-users is still easy.” 

The consultants agree that the secondary market may not be affected by speculators. Siva, for example, believes the market will be more popular with genuine homebuyers than speculators because it does not give the latter enough time to speculate on the prices. 

Homes on the secondary market may not be directly affected by GST, but the services provided by the lawyers and banks will be. “Still, we don’t see a big impact because the cost of purchasing properties on the market is relatively low,” says Previndran.

He advises homebuyers to consider terraced homes as developers can no longer afford to build them, no thanks to steep land prices. He suggests areas such as Taman Desa, Bangsar, Sri Hartamas, Medan Damansara and some parts of Petaling Jaya.

This article first appeared in The Edge Malaysia Weekly, on August 4, 2014.

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51,000 apply for affordable housing

A TOTAL of 51,238 people have applied for the low-cost, low medium-cost (LMC) and affordable housing units in Penang to date, said state Town, Country and Housing Committee chairman Jagdeep Singh Deo.

Jagdeep said 24,399 people applied for low-cost units, 23,582 for LMC and 3,257 for affordable units.

“The deserving applicants will be selected by the election Process Enhancement Committee (SPEC),” he said at the first ‘Mission: Home Possible’ roadshow by the state government at the concourse on Komtar’s Level 3, on Saturday.

He added that the work on the first phase in Bandar Cassia, Batu Kawan, consisting of 149 LMC units and 371 affordable units already started last year.

“This is the first of 12 affordable housing unit projects in the state. The other projects in Teluk Kumbar, Jalan S.P. Chelliah, Ban- dar Cassia Phase Four and Kam-pung Jawa in Butterworth are expected to start by the end of this year.

“The projects in Jelutong, Pintasan Cecil, the Sandilands foreshore in Jalan C.Y. Choy, Bandar Cassia Phase Seven, Ampang Jajar, Mak Mandin and Bukit Mertajam are expected to start next year. The remaining two projects and other phases in Bandar Cassia will start in 2016,” he said.

Jagdeep said the roadshow would be held on Saturday every two weeks at 13 parliamentary constituencies in Penang.

The public can submit their forms and check their application status at the roadshows.

Chief Minister Lim Guan Eng, who launched the event, said the state was committed to increasing public awareness on the housing projects through the roadshows. - The Star

How will the GST affect rental income?

There is bound to be some confusion on the effect of the goods and services tax (GST) on the rental income of properties once the value-added tax takes effect on April 1, 2015.

It has been announced that the sale or leasing of residential property will be spared the value-added tax as it is categorised exempt-rated, while the leasing of commercial property will be subject to GST at a standard-rated 6%.

But it may not be that straightforward as some residential properties could be used for commercial purposes, and vice versa.

Currently, the Government is still pending a decision on the treatment of GST on rental income.

“This is because the Royal Malaysian Customs requires the landlord to determine the actual usage by the tenant in deciding whether GST is applicable, which in practice will be very difficult to do,” Moore Stephens executive director Chow Chee Yen tells StarBizWeek.

Chow, who is also executive director at Advent MS Tax Consultants Sdn Bhd, urges the government to issue guidelines specifically on rental income to clear the air on the uncertainties.

Property title vs usage

“The Government should obtain feedback from professional bodies and the (property) industry before issuing guidelines,” he says.

According to him, participants at GST seminars are in favour of Customs qualifying GST on rental income based on the title of the property rather than usage.

“I concur. That would be more practical,” Chow says.

Meanwhile, other tax consultants disagree on the matter, asserting that levying GST based on actual usage instead would simplify the process.

“Consider carefully the usage of the property. If it is to be used solely as residence, that would be clear cut – no tax. But the anticipated interpretation is that the GST will be applied according to its usage, not title, as published previously. The public must be clear on this,” Tax Advisory And Management Services Sdn Bhd executive director Yong Poh Chye says.

“We need to know for sure if the rental and sale of properties will be assessed based on usage rather than title. The matter is still being discussed by the government. Hopefully, a decision will be announced at the upcoming Budget 2015.”

An apartment that is rented out to a dweller will not incur GST. The first criteria that qualifies a commercial property for GST of 6% is that the owner’s total rental income exceeds RM500,000.

The RM500,000 is the total rental derived from of all the properties registered under an individual’s name or that of his company’s.

Similarly, the rental of small-office-home-office (SoHo, SoVo and others similar concepts), which bear a commercial title, will be subject to GST. However, if the owner can prove that the unit is used as residence rather than commercial use, the tax won’t apply.

This is an instance in which units within a building with a commercial title may be exempt from GST.

“Look at the tenancy agreement, its resident or user, and activities. If purely residential, then there is no charge,” Yong says. “But if the unit is used as an office, the owner is responsible for declaring for GST if his rental income from commercial properties exceed RM500,000.”

Serviced apartments, which bear either residential or commercial title, will also be assessed based on their usage.

This is due to the fact that serviced apartments are naturally a dwelling place. Even the sale of a serviced apartment that is used as a residence will not incur GST.

Ultimately, it helps to remember the direct co-relation between the rental and sale of real estate when it comes to GST.

Tenant bears the GST

Although the onus of registration and filing for the value-added tax is on the property owner, the GST is borne by the tenant. As long as the former qualifies and registers, he can impose GST on the buyer or tenant.

GST for total rental income or sale of commercial properties exceeding RM5mil is to be paid at the end of the month.

For instance, GST for April 2015 is payable May 31, 2015. But if the total amount is below RM5mil, then GST is payable quarterly.

“If possible stipulate in the rental agreement the purpose or usage of the property rented out to minimise disputes with Customs. If you are still unclear after GST kicks in, write in to them,” Chow says. - The Star

Build-then-sell in 2015?

Potential homebuyers looking at models of housing units at the Country Garden Danga Bay sales gallery in Johor Baru.

WE are close enough to 2015 that the market is already speculating on Budget 2015. April 1, 2015 will see the introduction of the consumption-based goods and services tax (GST).

While we are hopeful of a reduction of the corporate and personal income tax rate and even more hopefully for the adjustment to the real property gain tax in light of the imposition of the 6% GST, there are something else looming in the backdrop of all real estate investors and home buyers alike.

Guided by the then minister’s speech in the parliament, 2015 is suppose to be the year where the build-then-sell (BTS) model shall be made mandatory for all housing developers to replace the ever-popular sell-then-build (STB) model that has certainly played a significant role in the rapid nation building in the last two decades.

In fact, the STB model of housing development is so significant to the extent that real estate investment has captured the imagination of the nation and abroad as the preferred tool in gaining wealth, hedging against inflation and shielding against any potential economic downturns.

Even with the allegedly less secured STB, a lot of liquidity has flown into real estate that drives up the house prices and effectively drive out the BTS to the back burner with affordability becomes a more pressing issue of our young population.

The newsworthiness of PR1MA and the various efforts by the State Governments in constructing affordable housing seems to suggest that Malaysians can no longer own the roof over their heads without governmental interventions. It seems like a natural progression in joining the rank of developed nations where public housing is common.

Many would argue that there is still merits in implementing BTS as it will stamp out completely the risk of incompletion and abandonment by incapable housing developers to offer the ultimate protection for genuine homebuyers. The question remains whether such risk that BTS aim to address is one that is manageable.

Granted that the frequencies of such news were high in the late 1980s, late 1990s as well as some isolated cases of mismanagements, it seems no surprise that the frequencies coincide with the global recession in the 1980s and the Asian financial crisis in the 1990s. On top of that, house purchase and development can never be separated from the financing regime at the material time.

Learning from these painful but valuable experiences, Malaysia seems to “survive” the global financial crisis in 2008 where real estate remains the most resilient sector in comparison with its pale relatives worldwide.

Credit must be given to the well-regulated regime of housing development that include the tight control on the disbursement of the progressive claims under the specially opened Housing Development Account as well as the responsible lending guided by the one of the world best central bankers proudly Malaysian.

BTS as a model is nothing new and has always been there, driven by the market forces. Under the Housing Development Act, there are two instances where you do not require a developer licence to build and an advertising permit to sell. It is either the negligible development of four units of houses and below or when no payment is to be collected during construction of which sales will only take place when the houses are completed and ready for occupation.

The latter has been practiced by a handful of cash-rich developers that are committed in delivering brand new products to gain clear advantage and compete with the secondary market. Most often, there is a beeline for these new houses for its obvious scarcity in the market.

The buyer can buy the real house that they have inspected on an “as is where is” basis instead of making decision based on scaled model and pimped-up show unit that requires lots more imagination to fill up the gaps.

In 2007, the statutory regulated BTS has been introduced under the new prescribed sale and purchase agreements in the form of Schedule I and Schedule J under the Housing Development Regulations 1989. The essence is simply for the buyer to pay 10% deposit and sign the agreement, and only pay the balance purchase price when the unit is ready to be delivered.

The basis of regulation is still the fact that money is collected during construction and the rationale is to limit the exposure to just 10%. In the admission of the same minister, such statutory BTS has been unpopular for the housing developers and it is not hard to comprehend the reasons behind.

If liquidity is not a concern to the developers during construction, it is immaterial to collect the 10% deposit and then subject themselves to a stringent regulatory regime under the Act. Such regulated BTS model requires strong buy in from the financial institutions in their commitment and willing adjustments for the bridging financing during construction as well as the end financing for the purchase.

Without the security of the constant cashflow driven by the construction progress under the STB model, developers will not fancy paying higher interest for the bridging loan due to a longer repayment period until the completion of construction.

Given also that the end financing is drawing closer to the completion date, a noble valuation of the property by the banks is required and the same will be benchmarking closely to the transacted market price at the material time.

This will lead to a potential difference in the price and market values not mentioning its potential effect on the margin of financing offered to the buyers.

A mandatory BTS is a step backward and against the basis of the free market. To embrace it would be a vote of no confidence to current regulatory regime from the Housing Ministry, local authorities, building professionals to even Bank Negara. It drives out smaller developers with weak cashflows thus limiting choices in the market.

The capital costs during construction will show up in the pricing that certainly goes against affordability being the flavour of the day. This could also indirectly encourages speculation with the 10% deposit be taken as a “bet” against an unexpected market crash.

Complying with the capitalist fundamentals, we should embrace choices. Just as the water will find its level, our free market is certainly big enough to accommodate the current STB, the statutory BTS and the traditionally non-regulated BTS to the benefits of its respective admirers. - The Star