This article first appeared in City & Country, The Edge Malaysia Weekly on January 8, 2018 - January 14, 2018

Jessica Ng, 35, purchased her first home — a terraced house in Shah Alam — early last year and she is pretty excited about finally owning a property. The journey was long and hard as she spent months looking for a home she could afford and it took years of saving for the down payment, legal fees, basic renovations and furnishing.

“I had to consider the monthly bank payments, other expenses and unexpected ones as well. I wish I could afford to do a massive renovation but I have to be realistic about it. Maybe in another two to three years. It’s going to be financially tight for me as it is but I’m glad to finally own a home,” Ng says.

Indeed, Malaysia’s housing market remains unaffordable to the masses despite its property prices being among the lowest in Southeast Asia.

A 2015 report by non-profit organisation Khazanah Research Institute said the housing market was “severely unaffordable” as the median house price was 4.4 times the median annual household income. An “affordable market” is one where the median house price is three times the median annual household income.

As household income has not caught up with soaring property prices, it can be a challenge for many prospective homebuyers in the country to fork out thousands of ringgit for the down payment. Without incentives offered by developers or financial help from their families, few can afford to get their own home.

A City & Country feature titled “Purchasing a property in your twenties” in February last year points out that when one buys a RM400,000 apartment and manages to obtain a 90% bank loan to be serviced over 30 years, the down payment would be RM48,800. This excludes other expenses, such as for moving, renovation and purchase of furniture and fittings.

The estimated compulsory monthly payment would be RM2,040, comprising the housing loan instalment of RM1,840 (interest rate: 4.5% per annum) and maintenance fee of RM200 (25 sen psf). Other monthly expenses would be utility and internet access bills.

Many, not just those in the low-income group but also those in the middle class, have called for more rent-to-own (RTO) housing schemes. These traditionally involve low-cost properties, such as those under the People’s Housing Project (PPR) and 1Malaysia People’s Housing Scheme (PR1MA). Both schemes are offered by the federal government.

It is generally believed that RTO schemes create a win-win situation — the developers get to clear their inventory while prospective homebuyers can afford their own house without having to pay a hefty amount of money in advance.

In its 3Q2017 Quarterly Bulletin, Bank Negara Malaysia said that the total property overhang stood at 130,690 units in 1Q2017. These include units that are completed and under construction as well as small offices/home offices and serviced apartments.

VPC Alliance (M) Sdn Bhd managing director James Wong notes that the implementation of RTO schemes will increase the demand for housing targeted at people who cannot come up with a big sum of money up front, and that it would take up the oversupply of residential units and restore equilibrium in the long term.

“The mismatch between household prices and incomes is very serious,” he says. “According to Khazanah Research, at the national level in 2014, the median house price was 4.4 times the median annual household income. According to global standards, this signifies a ‘seriously unaffordable’ housing market. An ‘affordable’ market should have a ‘median multiple’ of 3.0 times.”

According to the Bank Negara annual report for 2016, Wong adds, the increase in household incomes of 12.4% was slower than the increase in housing prices of 17.6%. Scarcity of land in the cities also increased its value, directly increasing residential property prices.

“Red tape and the high compliance cost that developers have to pay have also contributed to the high property prices, making them unaffordable,” he says. “In my opinion, there are no disadvantages to RTO schemes for Malaysians as they are given an opportunity to own their first home instead of renting, so long as they are introduced and the public is educated on the schemes.”

Developers’ own RTO schemes

Property developers such as UEM Sunrise Bhd, Mah Sing Group Bhd, Tan & Tan Developments Bhd and Selangor Dredging Bhd have come up with their own RTO schemes to facilitate easy property ownership.

Mah Sing, for example, has its own RTO scheme for the retail shops and small offices/flexible offices at its Garden Plaza development in Cyberjaya. CEO Datuk Ho Hon Sang says the scheme only requires a 10% deposit, which acts as a non-refundable upfront fee lease option.

“Apart from that, buyers can enjoy a zero-interest instalment of four months for the deposit,” he adds. “They need to sign a two-year sales and purchase agreement (SPA) with the option to buy the property at or before the end of the agreed period. All payments for rent and deposits will be considered as partial payment of the purchase price. This is very relevant for business operators because they are not required to fork out a big capital outlay to start operations.”

UEM Sunrise’s RTO scheme, meanwhile, is known as UEM Sunrise Easy Own Plan. Launched in August last year concurrently with its Third Signature Selection Campaign Road To Russia 2018, the plan has three main schemes — Easy Entry, which allows potential buyers to own selected properties at a low down-payment amount; Easy Plan, which consists of the RTO scheme and an easy financing scheme; and Easy Privileges, which offers buyers loyalty benefits, an extended defect liability period and free maintenance.

Managing director and CEO Anwar Syahrin Abdul Ajib notes that the money-lending licence the developer secured from the Ministry of Urban Wellbeing, Housing and Local Government in August last year also allows it to launch a differential sum loan scheme under the Easy Financing scheme for selected products where the developer offers a 30% loan coverage of the total purchase price (provided that the buyers secure a minimum of 60% end-financing) with an interest rate of 5.5% and loan tenure of 36 months. Interest is to be paid monthly while the principal is to be paid at the end of the loan’s tenure.

“This RTO scheme only applies to completed units of our selected properties,” he explains. “Tenants or potential buyers may rent the selected property from UEM Sunrise for two years at the rental market rate with an option to own it by exercising their right to purchase the property within the rental period. We will not sell the said property within the rental period. The price is locked upon the signing of the rental agreement and any price appreciation within the rental period is for the benefit of the potential buyer.”

Anwar adds that potential buyers will need to place a deposit of 2.5% of the property’s purchase price, which is refundable after deducting for any repair cost, if they decide not to exercise the option to purchase. Any renewal of the rental agreement will be at the developer’s discretion.

The properties offered under UEM Sunrise’s RTO scheme are Verdi Eco-dominiums in Symphony in Cyberjaya Hills (a high-rise development with 800 apartments) and Residensi Ledang in East Ledang, Iskandar Puteri (117 three-storey townhouses). Both projects were completed in 2016.

“As the products had been completed for quite a while, we felt that we needed an attractive scheme to offload them from our inventory,” Anwar says. “In both cases, there are no obligations. If potential buyers decide not to continue with the scheme, we will take back the properties. Yes, the properties will probably be added back to our inventory but this could also lead us to new business ventures and we will explore all possibilities.”

VPC’s Wong reckons that several measures can be taken to encourage more private developers to participate in the scheme, including government subsidies, a regulation that 10% of total units must be under the scheme, education on the benefits of the scheme and a waiver of stamp duty for purchasers who opt for the scheme.

“Developers could provide a certain number of residential units for the scheme and banks could partner them to provide purchasers with mortgages,” he says. “Bank Negara could also publish newsletters and statistics to educate the people in the market while government agencies could provide developers with subsidies to encourage them to take part in such schemes.”

Recently, many developers have become involved via Maybank Islamic Bhd’s RTO scheme called HouzKEY. Targeted at first-time homebuyers and upgraders, HouzKEY aims to address the challenges faced by purchasers in coming up with sufficient down payments for their new homes.

This first bank-initiated RTO scheme was officially launched by Second Finance Minister Datuk Seri Johari Abdul Ghani on Nov 23. It is available on Maybank’s fully integrated digital platform via its online portal, maybank2own.com, which will be open to the public early this year.

All about HouzKEY

HouzKEY is based on Ijarah, a shariah principle of leasing. Applicants should have a household income of at least RM5,000 and commit to a minimum rental tenure of five years. They must also have the option to purchase the property after one year at a pre-agreed price. They can terminate the agreement upon the end of the agreed tenure with no further obligations.

Developers involved in the pilot launch include S P Setia Bhd, Eco World Development Group Bhd, Mah Sing Group Bhd, Sime Darby Property Bhd and Gamuda Land, which will offer homes in the Klang Valley.

HouzKEY’s properties are priced up to RM1 million, and Maybank Islamic expects the scheme to have a portfolio size of at least RM1 billion in the first year of its launch. More developers will be added to HouzKEY and the property list will be expanded to include other states across the country.

S P Setia president and CEO Datuk Khor Chap Jen notes that the developer is showcasing three projects, namely Emersus linkhouses in its flagship Setia Alam township; Floris and Grandlis linkhouses in Setia EcoHill, Semenyih; and Isle of Kamares villa suites in Setia Eco Glades, Cyberjaya.

“HouzKEY is one of the solutions to the current challenge of home ownership in the local market and it is also our way of supporting Malaysia’s national agenda on home ownership,” he says. “We also hope that homebuyers from other regions can take advantage of it once it is extended nationwide. Although the concept is relatively new here, it will be well received by those looking to get a home of their own.”

Khor hopes that banks and financial institutions will be more flexible in their payment structure and offer suitable rental rates to make this initiative a success. It is important that all parties involved create more awareness of the benefits of RTO schemes to encourage eligible individuals to own their own homes.

He opines that the RTO participants need to make a commitment to service the monthly rent and treat the houses as their own rather than just as a social housing unit.

Meanwhile, Gamuda is offering 17 units at Jadite Suites serviced apartments in Jade Hills, Kajang, under the HouzKEY scheme. These units have built-ups of 1,206 to 1,464 sq ft.

Chief operating officer Ngan Chee Meng says the scheme is beneficial — especially to fresh graduates who plan to possess their own home from a young age to lock in the property value today to capitalise on the future value — as it helps ease the burden of having to make the down payment plus legal fees and stamp duties up front.

“Maybank Islamic Bhd has started the ball rolling. The government is supportive of the scheme, offering 100% stamp duty exemption on the SPA for such bank-initiated RTO schemes. It is definitely a good step forward and we are sure more banks and financial institutions will jump on the bandwagon with better and more innovative offerings to remain relevant to consumers.”

Sime Darby Property’s spokesperson notes that the developer is supportive of the government’s strategy to improve homeownership and, more specifically, initiatives that assist homebuyers on challenges in securing financing.

“In addition, the RTO scheme creates another channel for the public to gain access to our products, expanding our reach and customer base. We also look forward to enhance our offerings under the scheme in the near future.”

EcoWorld president and CEO Datuk Chang Khim Wah reckons that the scheme opens up opportunities for the developer to partner Maybank in line with its vision of “Creating Tomorrow & Beyond” and the bank’s goal of humanising financial services.

“This gives young couples and families a head start in life by owning a home, more so during challenging times,” he says.

Implementing RTO schemes also has its pitfalls for developers. Mah Sing’s Ho admits that developers will require a healthy cash pile if they want to implement RTO schemes and they put a lot of financial stress on the cash flow.

“Apart from that, there is always the possibility of the homeowner opting out of the agreement at the end of the rental tenure,” he says. “Other possible issues include timely rental collection, upkeep and condition of the property, higher cost incurred as well as more administrative work.”

Under the developer’s own RTO scheme, buyers will lose their 10% deposit if they opt to terminate the agreement for Garden Plaza in Cyberjaya but they can still continue to rent.

UEM Sunrise’s Anwar acknowledges that the developer’s main concern is the possibility of the tenants not exercising their right to purchase within the rental period as well as the inability to immediately recognise sales as it is renting out the properties and not selling them.

“We will also have to factor in the refurbishment costs post-rental period, prior to selling it back to the market where we may face challenges to sell. But we believe in the growth prospects of both Cyberjaya and Iskandar Puteri,” he says. “In the event the tenants default on rents, the standard clause of tenancy agreement will apply. If they don’t exercise their option to purchase the property during the rental period, the 2.5% deposit will be refunded after offsetting any costs to make good of the property. We will take back the properties.”

Private RTO schemes

RTO schemes are not necessarily deals between developers and individuals. They can also involve two individuals on subsale properties. Chur Associates managing partner Chris Tan notes that RTO schemes seek to address the cash flow efficiency of buyers due to their inability to come up with a sizeable upfront payment.

“It is just a commercial concept with no prescribed meaning legally and is not regulated by any specific legislation. Typically, it can be initiated by anyone as long as it is agreed to and accepted by the parties,” he says.

Buyers and tenants are essentially the same parties, differentiated only by the timing of the RTO arrangement. Logically, the rent collected would be higher than the market rent to cover the purchase portion and, therefore, not exercising the purchase eventually would mean financial loss to the tenant and/or buyer.”

As for maintenance and the fee, in a typical landlord-and-tenant situation, it should be the landlord that takes care of these as a commercial norm, Tan points out. But there is no hard and fast rule in an RTO arrangement as it is for the parties to fix the details.

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