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BY NG PAU LING
Promoting rental market to address the affordable housing problem
As Malaysia’s population continues to grow (32.3 million as at 2017), the demand for more residential housing will rise in tandem. With an average of four members per family, Malaysians need more than eight million homes.
According to a recent report by the National Property Information Centre (Napic), there are only 5.398 million existing residential properties in the market as at Q3 of 2017 – which translates into a shortage of more than three million homes in the country.
Despite the substantial demand for residential properties, the biggest challenges faced by prospective homebuyer include housing price beyond their means and the stringent loan approval process.
According to Bank Negara’s Quarterly Bulletin Report (Q3 2017), houses in Malaysia remain seriously unaffordable in 2016 by international standards with a median multiple (MM) of 5.0. Under the MM approach, a house is considered affordable if it is less than three times the annual household income.
The Household Income and Basic Amenities Survey conducted by the Department of Statistics puts the median monthly household income for Malaysia in 2016 at RM5,228.
The country’s average housing affordability is, therefore, tagged at RM188,208 (RM5,228 x 12 x 3) under the MM method.
On the other hand, the average price of Malaysia’s property is RM397,190 at Q2 2017 as recorded by Napic.
After years of trying to increase the supply of affordable housing in both public and private sectors, promoting a steady rental market has become the new approach to address the country’s housing affordability woes.
Several schemes to spur the rental market have been rolled out over the past year, including the announcement of a 50% tax exemption for residential rental income below RM2,000, the launch of Maybank’s HouzKEY rent-to-own (RTO) scheme, and the proposed Residential Rental Act.
The granting of tax exemptions on housing rental was recently re-emphasised on the Barisan National (BN) election manifesto 2018, showing the attention given to encourage a reasonable property ecosystem.
Tax incentive for rental income
Under Budget 2018, the Government proposed a 50% tax exemption on rental income received by resident individuals not exceeding RM2,000 per month per residential home.
The exemption is effective from 2018 to 2020 under certain conditions, including the residential home being rented under a legal tenancy agreement between the owner (landlord) and the tenant.
The CBRE|WTW 2018 Asia-Pacific Real Estate Market Outlook Malaysia report stated that the tax exemption is expected to create a more robust rental market because those with the financial resources will be induced to invest in lower to mid-priced properties for rental purpose.
If a landlord rents out five residential properties at RM1,999 each, he or she will qualify for 50% income tax exemption on all the five houses, said Asia Business Centre head of tax and financial consulting Datuk Chua Tia Guan.
Although the system is initiated to boost residential rental investment, the computation of the tax has yet to be gazetted.
“One possible way of computation is that 50% of the net rental income is tax exempted,” said Chua.
The net rental income is derived from the gross rental income after deduction of allowable expenses such as loan interest, repair and maintenance, service charge, quit rent and assessment.
Chua added that given the current sluggish rental market, the availability of tax incentive appears to benefit the tenants as it provides an opportunity to bargain and encourage reasonable charges.
A step onto the property ladder
Given the current challenges of homeownership, the RTO scheme offers an alternative solution by providing potential homebuyers with an option “to rent a property with the intention to own it in the future”.
Launched in November last year, Maybank’s HouzKEY is Malaysia’s first RTO scheme based on the concept of “leasing a property with an option to purchase it after renting for 12 months”.
HouzKEY applicants are required to pay upfront three-month rental as a refundable deposit, and the property is locked in at a fixed rental price for the first five years.
During the leasing period, “tenants” can migrate to Maybank mortgage after one year of renting or they can continue renting with a 2% step-up on the sixth year until their tenure ends.
Currently, 28 residential projects are taking part in HouzKEY with monthly rentals starting from RM1,842.
“The RTO scheme helps lessen the burden of the customer because there is no down payment and sufficient time is given to planning for finance,” said Ayer Holdings Bhd group chief executive officer Eugene Khoo, one of the participating developers of HouzKEY.
He added that buyers could live at their preferred locations with minimal upfront cost as well as enjoy the upside if the property price increases – or choose to walk away if the price drops in the future.
Although the scheme is said to ease the homeownership challenges in Malaysia, most of the participating HouzKEY developments are middle to high-end properties with market prices above the “affordable range” as defined by the international median multiple method.
Also joining the RTO scheme is S P Setia Bhd. Its executive vice-president Datuk Tan Hon Lim explains that there is an underlying demand for middle to high-end properties because these homes fit the important criteria of accessibility, availability of amenities and recreational facilities, as well as easy commuting to the workplace.
“The RTO scheme presents this segment of the society with a solution to the current challenge of home ownership in the local market.
“Although the concept is relatively new in Malaysia, the HouzKEY RTO scheme will be well received by those looking to get a home of their own in the coming years,” said Tan.
To encourage more banks and housing developers to offer RTO schemes, BN has also pledged in its manifesto to provide tax incentives or development funds to participating parties.
Residential Renting Act
Meanwhile, based on the Real Estate and Housing Development Association (Rehda) Property Industry Survey for the second half of 2017 and Market Outlook 2018, only 16% of properties sold in the primary market during 2H 2017 are for investment.
Bank Negara’s Q4 2017 Quarterly Bulletin Report has also stated that Malaysia’s rental market is relatively small, with only 24% of households renting a property compared to Canada (31%), Australia (33%) and New Zealand (36%).
Tax incentives, rental rebates and innovative renting methods will encourage an active rental market and lower the vacancy rate.
However, a specific Residential Renting Act and Tenancy Tribunal must be in place to safeguard the rights of both tenants and landlords. Formulating this Residential Renting Act is also one of the five policy options proposed by Bank Negara to reduce the imbalance in the local property market.
The provisions on tenancies in existing laws include the National Land Code 1965, Contracts Act 1950, Specific Relief Act 1950, Civil Law Act 1956, Distress Act 1951 and the Common Law/Case Law, which has not been established to deal with issues of renting and letting specifically.
“Without a specific renting act, if any dispute between landlord and tenant cannot be resolved, the claimant party may refer to the courts for a decision. This may be costly and time-consuming,” said Messrs Amir Toh Francis & Partners legal practitioner Ivan Chan.
He pointed out that the renting regulations made sure both parties fulfil their responsibilities while restricting them from abusing their positions.
If the government’s new policies are to encourage a healthy and robust housing rental market, the rights and duties of the landlords and the tenants will need a more vigorous and in-depth debate and analysis.