Property investment is not riskless

  • Business
  • Saturday, 21 Dec 2013

EARLIER this week, a developer signed an agreement valued at about RM100mil with a company that “specialises in wealth management through property marketing and risk management.”

The investor bought 100 units of commercial suites in Petaling Jaya that will be completed in a couple of years. The 100 units make up about 40% of the nearly 300 units in the freehold development. With this agreement, the project will be 100% sold.

It was launched in June this year with an average price per sq ft of about RM970 with an 8% rebate for buyers, before the Budget 2014 measures and Bank Negara ruling which discouraged the giving of rebates, and which put the country’s property sector on the path to transparency.

A representative from the developer say the investor will buy the units with the 8% rebate, similar with earlier buyers. On a per sq ft basis, the bulk purchaser will pay between RM950 and RM1,000 for the units. Because the investor is taking over all the unsold units, they are randomly located, with sizes ranging hovering around 1,000 sq ft.

There are a couple of things about this agreement that raise some questions. First, this investing company is bulk buying only to sell the units later, as with previous investments. The company was established in 2003. It has two shareholders. In 2007, it bought 100 units of a project in Kota Damansara, Petaling Jaya for RM20mil. It subsequently sold 123 units when it was engaged by other purchasers to sell their units. In 2011, the company bought 40 units of another project in Bangsar South, Kuala Lumpur for RM20mil. They subsequently sold all its holdings.

Last year, it bought 40 units in mixed development the Mont’Kiara/Segambut area for about RM20mil. Although this project is currently under construction, the company has only three units left, the managing director of the investing company said after the signing ceremony. With this current investment, his plan is to sell the 100 units to parties on his data base. Two real estate consultants who declined to be named say the transaction is legal but may have ethical undertones, particularly at a time when the government is trying to curb speculation.

Budget 2014 with regard the property sector essentially deals with three issues - a more stringent real property gains tax (RPGT) compared with previous years, the banning of Developers Interest-Bearing Scheme (DIBS) and increased transparency imposed on developers who now have to display detailed sales price including benefits and incentives such as legal fees exemption, cash rebates and free gifts. In short, the net price minus the freebies. Its aim is to ensure sustainable and transparent pricing.

“Legally, there is a willing buyer and seller. The job of the developer is to build and sell his project. What happens after that is between the investor and subsequent buyers. A true and real investor will look on the longer term. He will not flip at the first opportunity,” says a property consultant. Both agents pose the following questions: Is the sales and purchase agreement (SPA) done in one single agreement or for 100 units? Will the 100 units be officially transferred from the developer to the investing company? Will the subsequent buyers be buying from the developer or from the investor? The developer did not respond to the emailed questions.

The consultants and two lawyers contacted also brought up the RPGT which kicks in on Jan 1, 2014.

The lawyers contacted say it will be considered as a sub-sale when the investing company sells the units to subsequent buyers.

“How the agreement between the developer and the investor is framed is important,” one lawyer says. There is no stamp duty involved because the project is yet to be built, they say.

Says one lawyer: “A property company pays tax, not RPGT. In this case, the investing company is a wealth management company which specialises in property marketing, but is not a real estate company. Does this mean it collects money from other investors? Then it will be governed under the Financial Services Act. When they resell later on, they will still have to pay RPGT. So it is a tax question.”

With the various anti-speculation measures by the government kicking in next month, the question that begs to be asked it, will there be other “wealth management companies specialisiing in property marketing and risk management” entering the scene to bulk purchase, and bulk flip?

  • Deputy news editor THEAN LEE CHENG wonders what 2014 holds for the property market.

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