This article first appeared in City & Country, The Edge Malaysia Weekly on August 10, 2020 - August 16, 2020
In the recently announced Economic Recovery Plan (Penjana), various incentives were put in place for the purchase of properties on the primary market. Themed “Building the economy together”, Penjana is set to boost the economy, which has been severely affected by the Covid-19 pandemic as well as the subsequent Movement Control Order (MCO). The initiatives related to the property market include:
• The reintroduction of the Home Ownership Campaign (HOC), which offers up to RM1 million in stamp duty exemption on the instruments of transfer for the purchase of properties priced between RM300,000 and RM2.5 million. There is also 100% stamp duty exemption for the financing agreement. The exemption is applicable to sale and purchase agreements (SPAs) inked between June 1, 2020 and May 31, 2021, for properties that include a minimum 10% discount by developers;
• The removal of the 70% financing cap for a third home loan of RM600,000 and above during the HOC period. This is subject, however, to the financial institution’s internal risk management guidelines; and
• Exemption from paying Real Property Gains Tax (RPGT) for Malaysians who sell their residential property between June 1, 2020 and
Dec 31, 2021. The exemption is limited to the disposal of three residential properties by an individual.
However, there is a lack of incentives for the purchase of properties on the secondary market. LaurelCap Sdn Bhd executive director Stanley Toh notes that the primary market seemed to be performing better than the secondary market in 2019, mainly driven by the incentives from the HOC 2019 as well as the “creative” and “attractive” packages offered by developers, especially on their balance stockpile.
Challenges of secondary market purchases
Property consultants say there are several challenges in purchasing properties on the secondary market, including the big amount of upfront cash required and the mismatch between the price expectations of sellers and purchasers.
In 2013, May bought a condominium unit of about 850 sq ft in Cheras for RM250,000 on the secondary market. The corner unit has three bedrooms and two bathrooms, and the development was almost 20 years old at the time.
The upfront cash she needed to pay was about RM40,000 over three months, for various fees such as the 10% down payment, stamping for SPA, SPA legal fee, stamp duty for loan agreement, loan agreement legal fee, fee for the transfer of ownership title and stamp duty for the transfer of ownership title.
The RM40,000 did not include the insurance and renovation cost. About seven months after she paid the down payment, she got the key to the unit. She then spent about RM10,000 for a simple renovation and rented out the unit.
Four years later, in 2017, May purchased another condo unit — this time in Bukit Jalil and off-plan from the developer for about RM590,000. The 960 sq ft unit has three bedrooms and two bathrooms and is still under construction. It is scheduled for completion in mid-2021, but the completion date is expected to be postponed due to the MCO imposed earlier.
May paid about RM30,000 for the down payment and fees such as stamp duty for the loan agreement. The developer offered a 7% discount on the down payment as well as a waiver on the SPA and loan agreement legal fees as well as stamp duty for SPA.
May only needs to pay fees related to the transfer of ownership title upon vacant possession (VP), which could amount to about RM13,000.
According to the current fee structure, stamp duty for the transfer of ownership title is 1% for the first RM100,000 of property price, 2% for the next RM400,000, 3% from RM500,001 to RM1 million and 4% for the subsequent amount. Stamp duty for the loan agreement is 0.5% of the loan amount and stamping for the SPA is RM100.
So, it is a case of a more expensive, newer unit that requires lower upfront cash payments but longer waiting time for VP, versus a cheaper, older unit that requires higher upfront cash but short waiting time to get the key.
Old versus new, RM40,000 for RM250,000 versus RM30,000 for RM590,000, seven months versus four years.
While the down payment may be one of the issues in buying properties on the secondary market, property consultants note that sellers and purchasers may pre-agree on deferring the down payment and/or the VP date.
This can include rent first with a commitment to buy at a later date — with or without a pre-agreed price.
Knight Frank Malaysia Residential Agency notes that purchasers should also be able to obtain a pre-loan assessment prior to making the deposit payment. The assessment can help potential homebuyers assess their loan amount eligibility and set the budget for property hunting and purchase.
The property valuation firm adds that exemption from or reduction in stamp duty beyond the HOC may further spur activity in the secondary property.
“Unlike the RPGT exemption that benefits the sellers, stamp duty exemption or reduction in stamp duty rates may motivate potential buyers as it reduces the cost of property acquisition,” it tells City & Country.
On the mismatch between the price expectations of sellers and purchasers, the consultancy says some of the factors that may affect the value of a property are its proximity to a sewage pond, Tenaga Nasional Bhd substation, cemetery, T-junction or flood-prone area.
“No two properties are alike, and therefore, there is no apple-to-apple comparison. Historical transactions only provide a guide to both sellers and purchasers. Many factors determine the value of a property, such as location/orientation, building layout, land size/built-up area, level of maintenance and improvements. Both vendor and purchaser may engage an independent professional valuer to determine the property’s value,” it explains.
“A common issue is that the purchaser may compare the current asking price with historical transactions in the locality while the seller may expect a higher selling price attributed to investments made to improve the property such as renovation, built-ins, fittings and extensions, as well as for capital appreciation.”
Nevertheless, Knight Frank Malaysia Residential Agency reckons that securing a loan has been a major challenge when it comes to purchasing property — whether it is on the primary or secondary market.
The loan approved to loan applied ratio for the purchase of residential property has been on a downward trend since 2015 — it is hovering between 41.3% and 48.4%. During the first four months of 2020, the loan approved to loan applied ratio fell below the 40% mark to 38.3% (see table).
“To help overcome the challenges, there is a need for innovative financing packages from financial institutions to support homebuyers — especially first-time homebuyers, as these people are younger and have just started work and therefore, may have less savings and reserves. Innovative financing should take into account their potential career progression. For example, a step-up instalment plan … in the future, with higher salaries, these borrowers will be able to afford higher monthly instalments.”
Advantages of buying secondary properties
The advantages of buying properties on the secondary market is that purchasers know the exact location and surroundings and are able to inspect the unit as well as the maintenance level and facilities.
Even though the primary market seemed to outperform the secondary market last year, Toh expects the trend to change this year as financial institutions have shifted their focus from providing end-financing for the primary market to financing properties on the secondary market.
“Most of the banks were caught by the massive rebate schemes given by some developers over the years and now they have found out that the secondary market transactions for those projects were way lower than the developer’s selling price (gross price before rebate). For the secondary market, the valuation is based on fundamentals, more realistic and therefore less risky for the banks. In addition, the current low interest rate climate has spurred interest in the secondary market,” he says.
Based on his observation, Petaling Jaya and Subang Jaya seem to be the favourite areas for those looking for properties on the secondary market. He explains that this may be primarily because of the location and demographics, and that there are no more huge tracts of land in these two areas for a new, meaningful development.
With the expected economic slowdown and the incentives put in place, property consultants reckon that sellers will be more reasonable in their asking prices and that there will be more assets for sale at a reasonable price in the next six months.
Knight Frank Malaysia Residential Agency also notes that the RPGT exemption will be an incentive for more owners and investors looking to liquidate their assets during this window period. With lower disposal cost, the firm thinks sellers may also be more flexible in negotiating sales terms and prices.
Based on its data, in the Federal Territory of Kuala Lumpur, mukim with the highest volume of residential property transactions in general are Petaling, Batu and Kuala Lumpur. Mukim with the highest volume of residential property transactions for properties priced between RM250,000 and RM500,000 are Petaling, Kuala Lumpur and Setapak.
Meanwhile, in Selangor, districts with the highest volume of residential property transactions in general are Petaling, Hulu Langat and Klang. Districts with the highest volume of residential property transactions for properties priced between RM250,000 and RM500,000 are also from these three districts.
“With the lower overnight policy rate, homebuyers may secure loans at lower interest rates and this provides savings in their monthly repayments. However, potential buyers should also be clear about the purpose of their purchase (own occupation, rental income, investment or capital appreciation), location preference and property type,” Knight Frank Malaysia Residential Agency says.
No surge in transactions
By Ethel Khoo
Valuation and Property Services Department (JPPH) statistics show that historically, more than two-thirds of residential transactions comprised secondary market transactions. Currently, these transactions hover at above 80%, with a high of 87.9% in 2009.
In 2019, secondary market transactions accounted for 82.1% of transactions, or 171,844 out of the total of 209,295.
“Buyers’ interest in the secondary market is generally due to the properties being located in mature areas with established amenities, as opposed to a new neighbourhood or township that is still maturing, in addition to the properties being ready for occupation,” says Rahim & Co International Sdn Bhd director of research Sulaiman Saheh.
PPC International Sdn Bhd managing director Datuk Siders Sittampalam concurs. “The good and bad factors of the residential area can be [known] immediately rather than viewing the off-plan development,” he points out.
However, the Covid-19 pandemic and the resulting economic downturn have affected the real estate market this year, says Siders. Various factors such as the US-China trade war and the change of government in Malaysia have further contributed to the slowdown.
With the finances of many affected by the current economy, priorities are shifting to immediate needs in the short term, Sulaiman notes. Many planned purchases are likely to be revised and postponed.
“On the other hand, for homebuyers or investors who have savings, now would be the best time to look for deals as owners may be willing to cash out of their properties at a lower profit margin,” he says.
Property consultants say the exemption from paying Real Property Gains Tax on secondary properties sold from June 1 this year to Dec 31 next year — one of the incentives to stimulate the economy and boost consumption under the government’s Economic Recovery Plan (Penjana) — may create an attractive seller’s market.
“However, unless sellers are prepared to reduce their asking prices, we do not see an upsurge in transactions taking place in the secondary market,” Siders says.
The pandemic has led to a drop in income levels, with many having to take pay cuts or losing their jobs and facing prolonged unemployment, says Sulaiman. Banks’ appetite in giving out loans is diminishing for fear of non-performing loans.
“The degree of the pandemic’s impact on transaction volumes will depend on the purpose for which the properties were purchased. For the affordable segment, demand may be rather inelastic although successful transaction rates vary according to the buyer’s ability to secure a mortgage,” Sulaiman says.
The number of overall transactions is likely to fall, he opines. “The economy is still in its recessive phase and just working back up on to a recovery pace.”
Siders says a sudden increase in transaction volume may not be seen for some time to come. He adds that the secondary market will remain slow until market sentiment and confidence return. “With the economy recovering, a gradual increase in secondary market transaction volume in the second half of next year is likely.”
Sulaiman is of the opinion that the recovery will take more than a year or two.
Overall transaction volume growth is expected to be softer this year, with both primary and secondary transaction activities likely to be moderate. Although incentives to the property sector were announced in Penjana, it is too soon to expect an impact on the market this year, as it needs time to adjust.
“The impact is more likely to be seen from next year as a longer time span is needed for both potential buyers and developers, who are still steadying themselves after the unexpected downturn, to make the necessary preparations,” Sulaiman says.
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