Rental market in the Klang Valley growing

This article first appeared in City & Country, The Edge Malaysia Weekly, on June 17, 2019 - June 23, 2019.

Tan: We don’t have any specific Act to govern the residential rental market at the moment

Foo: More people are renting rather than buying property nowadays because of the weak purchasing sentiment and low confidence in big-ticket items like residential property

Previndran: Traditional rental markets will remain popular with tenants while properties along MRT lines and in integrated developments will be in high demand, resulting in rental appreciation

See: Transit-oriented developments (TODs) are more attractive to potential tenants. Younger people, including young families, are willing to compromise on space for convenience

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With high house prices making it prohibitive for young Malaysians to buy their dream home, renting seems to be the only alternative for now. But is a renting culture something Malaysians are ready for? Does Malaysia have in place the foundations for a sustainable renting environment?

“We don’t have any specific Act to govern the residential rental market at the moment,” says Chur Associates founder and managing partner Chris Tan. “Based on the current practice, any dispute arising from the tenancy agreement shall be settled vide legal proceedings under the law of contract, which is costly and time-consuming.”

“The Housing and Local Government Ministry has proposed the Residential Tenancy Act to be developed in two years’ time to boost the rental market … in any event, unless there is a proper social safety net in place, the law will still generally favour the tenant as the landlord shares the duty with the government in housing the nation.”

For many, renting in an unregulated environment can lead to a lot of anxiety and stress. Nurul has been renting a condo for 10 years now. She recently bought her own property, which is under construction, and shares with me her renting journey.

“Family and friends advised me to get a place of my own. ‘Rather than renting for the rest of your life, it is better to pay that much of money for your own house’, they would say. To some extent, I agree because having stayed in rented apartments, I did feel a little insecure.”

She recalls an incident where she had to move out of her rented apartment even though there was still a year left on the tenancy agreement. The landlord needed the place back as his children were returning home from overseas.

“However, the landlord was a responsible person and he gave me a refund. He felt bad about the whole process, so he arranged for movers and cleaners. After that experience, I didn’t want to go through the hassle and stress of uprooting myself and living like a modern-day nomad,” she says.

Nurul is one of the lucky ones who finally got out of the renting market and onto the property ladder. But the landlord experience is not without its own problems.

SL, who has been a landlord for many years now, has not found the experience too daunting but he is looking forward to some improvement in the future.

“Overall, it has been a good experience. I believe properties remain the most viable investment for capital gain or future retirement passive income,” he says. “But I wish there were a register that could tell me the suitability of a tenant — a record of some sort of the person that I could refer to prior to agreeing to rent to him.”

He is realistic about the outlook for his rental properties. “I will retain what I can for future income. At my age and with three children in university or going to university, I need funds to pay their tuition fees. So I have to offload some of my properties,” he says.

While the authorities work out the legal and structural aspects of the residential rental market, we asked several property experts to comment on the changes that have taken place and what we can expect in the coming years.

 

Renting can be cheaper

Based on property consultancy CBRE|WTW’s research, it is estimated that out of the more than two million households in the Klang Valley, about 70% are owner-occupiers. The rest are renters.

“More people are renting rather than buying property nowadays because of the weak purchasing sentiment and low confidence in big-ticket items like residential property,” says CBRE|WTW managing director Foo Gee Jen. “Also, price saturation means little room for capital appreciation.”

Capital appreciation is key to figuring out whether purchasing or renting a property is worth your while. “For the property to be worth buying and paying for, it requires capital appreciation to come into play. If it does not, then it is relatively cheaper to rent than to buy a house,” says Foo.

“For example, a 10-year-old condo in Kelana Jaya is going for RM600,000. A buyer gets a 90% loan for RM540,000. If the interest rate is 4.5% for 25 years, the repayment per month is about RM3,000.

“If capital appreciation is, say, 20% over the 25 years, the property would have gained RM120,000, and possibly be valued at RM720,000. However, the repayment of the loan would have put you back RM900,000 ([RM3,000 x 12] x 25 = RM900,000). So mathematically you paid RM960,000, including RM60,000 as initial 10% down payment for an asset that is presumably only worth RM720,000 (assuming there is 20% appreciation).

“Rental rates for such a condo would be around RM1,800 to RM2,200 per month. In this case, the extra money, say, around RM1,000 per month, could be invested in other financial instruments to make higher profits compared with buying property for capital appreciation.” (refer to table)

Zerin Properties group CEO Previndran Singhe concurs with Foo on the weak purchasing issue. “Current household income does not match the housing prices. With stricter rules for mortgages, many people, especially young working adults, find it hard to own a property. Also, some individuals prefer to rent as they can do away with many other expenses associated with homeownership, such as quit rent, assessment fee, maintenance, insurance and so forth, apart from mortgages.”

Difficulty in getting loans and personal choices also play a part in why people rent. “People have started to rent more since 2015 because bank loans are not easy to get and the younger generation is not ready for a long-term [financial] commitment,” says Metro Homes Realty Bhd executive director See Kok Loong.

He says in the past, tenants were keen to buy property because loans were cheaper. Also, yields were attractive due to low capital value. “Today, the market has changed where renting seems to be a better solution because there are a lot of new buildings and many units are available at low rental rates.

“The younger generation’s priority in life is different where they spend more [money] on lifestyle or travelling. The majority [of renters] are from the younger generation; about 60% to 70% at the moment. Some are fresh graduates who prefer to live on their own once they get a job or are out-of-town renters. The rest are expatriates or locals who want to move closer to good amenities like schools.”

See cites the example of a friend who is renting a house near a reputable school so his children can have a good education.

In addition to more people renting rather than buying homes, the location of rental property has reoriented towards public transport hubs.

“The completion of MRT1 and the use of e-hailing services like Grab have had an impact on the rental market,” says See. “Transit-oriented developments (TODs) are more attractive to potential tenants. Younger people, including young families, are willing to compromise on space for convenience.”

Previndran agrees that TODs are now the “hot” spots for renters. “Residential properties in integrated developments or TODs, for example, are much sought after by potential tenants due to the convenience and the work-live-play concept.”

Klang Valley rental hot spots include KLCC, Mont’Kiara, Ampang Hilir, U Thant, Bangsar, Damansara Damai, Ara Damansara, USJ, Ampang, Cheras and Puchong.

“These areas are popular with the tenant market because they are established neighbourhoods, have a large expatriate population, are in close proximity to commercial and office space, have good connectivity to public transport and have a better living environment,” says Previndran.

 

Attracting tenants

The increasing number of renters and new supply of residential stock have given rise to new challenges for building managers and landlords.

“Today, tenants tend to not stay long in one place,” says See. “Thus, the building manager needs to keep the building in good condition and the landlord needs to spend a fair bit on attracting tenants.”

Many new buildings are coming into the market, offering similar rental rates as the older buildings, and enticing tenants to move. Also, landlords may need to renovate their units and fully furnish them to draw tenants.

Besides the upkeep of a property, the way to rent out property has changed, thanks to technology.

“Technology has benefited not only potential tenants but also landlords and real estate agents in marketing properties. Not only is it convenient to market properties on online platforms but potential tenants are also better informed,” says Previndran.

CBRE’s Foo adds, “Technology has bypassed the middleman, directly connecting the tenants and landlords. This has facilitated some aspects but at the end of the day, it depends on what the consumers want — do they want to do the window-shopping themselves or get assistance from someone to filter for them based on their requirements?”

 

Urgent matters

Property experts agree that the main issues faced by the residential rental market are the high number of units available and the low rental rates, both of which have subdued growth.

According to Foo, it would be helpful to have a register of landlords and tenants where both parties can be rated or flagged. “In Malaysia, neither party can check each other’s track record,” he says. “I think a register is crucial if we want transparency and security. At the moment, the tenancy law is not really governed by any Act of parliament. It is based loosely on the law of contract. It could be very one-sided and, unfortunately, in favour of the tenant.”

He adds that there is also no insurance coverage in tenancy issues, such as rental payment, among others. Moreover, there is no tribunal to deal with tenancy disputes, Foo highlights.

Chur Associates’ Tan believes a balanced legal situation is ideal for the country’s residential rental market. “Our current law is not in favour of the landlords, notwithstanding their right under the terms of the tenancy agreement,” he says. “On many occasions, the landlords incur more losses at the stage of enforcing their legal right under the tenancy agreement due to costly and time-consuming legal action.

He explains that to boost the residential rental market, the landlords must feel confident that their rights are taken care of. This could involve having their rights stipulated clearly with regard to matters like disconnection of the utilities, barring access cards, barring tenants from entering their premises or taking over their premises immediately upon the default of tenants. This could also include how to demand for rent and having a standard measurement or calculation of rental rates.

“With better and more balanced regulations in the tenancy, there will be fewer speculative ‘flipper’ investors and more ‘keeper’ investors who could then look for long-term sustainable yields,” Tan opines.

 

Stable rental market

Moving forward, what can be expected of the Klang Valley residential rental market in the future?

“People can expect the residential market to stabilise over the next few years with fewer new launches,” says See. “When you don’t have much supply coming in, the market will stabilise … now, supply is slowing as developers are launching fewer units and products.”

Foo concurs. “Rents are expected to moderate or even become stagnant unless there is reinforcement of demand, such as a pick-up in the inflow of expatriates; more innovative, flexible or short-term tenancy, such as co-living; or more rent-to-own (RTO) schemes.”

According to Previndran, while RTO schemes are slowly gaining traction, they are still in their nascent stage, which means their impact on the residential market will not be visible just yet.

“Traditional rental markets will remain popular with tenants while properties along MRT lines and in integrated developments will be in high demand, resulting in rental appreciation,” he says.

The Klang Valley residential rental market, while not robust, continues to chug along and looks likely to be a stable and sustainable industry in the long run.