RIGHT now, the property market is somewhat subdued due to restriction in lending by banks.
Properties are seen as highly priced without much upside. Only properties in the lower price point are more saleable resulting in proliferation of affordable housing and smaller condo units including “shoebox” units in the future.
Developers which are recording current year sales are mainly those who have sold the properties a few years ago and recording billings as the properties are constructed. Many property launches have been scaled back or deferred. The secondary market is equally dull.
Against this background, it is time to give the market an injection of excitement and optimism. Some fiscal or tax measures may help.
As a start, the Government can consider lowering the real property gains tax (RPGT) rate which is forbidding for disposals within the first three years of acquisition of 30%. A number of property owners are interested to dispose of their units during this time but find the RPGT rate obstructive. The stamp duty rate of maximum 3% on the transfer value is also a significant cost to the purchaser. This rate is expected to rise to 4% on Jan 1, 2018.
To improve the sentiment, which will in turn lead to more property transactions within the country, the Government can consider lowering the RPGT rate and the stamp duty rate for a certain period until the property market recovers.
More transactions will also result in a higher velocity of cashflow and allow sellers to buy other properties while releasing buyers to upgrade to better properties. All this means more tax revenue for the Government which will translate to a win-win situation for all parties.
While the market is subdued, the Government can take the initiative to lay the groundwork for new property products such as retirement villages (RVs). In Australia, where retirement villages are popular, this type of living provides accommodation to about 200,000 senior persons and contributes about A$1bil to the economy of A$1.7 trillion.
Malaysia has a warm climate that is conducive for senior living. Throw in good food and a low cost of living, Malaysia can be a haven for the retired, even those from other countries.
Based on experience in these developments, retirement village design in Malaysia is hobbled by a few factors. Examples are improvements to the National Land Code to cater for RVs to protect the interests of buyers and to provide a bankable medium for banks to give loans to buyers. Clear legislation should also be enacted to allow the RV operators and developers to charge service and management fees.
Tax rules can also be clarified to provide certainty to developers on how their income will be taxed, whether tourism tax applies in RVs with hotel features and whether RVs can qualify for capital allowances.
Without certainty, developers will likely avoid these developments or extract a high risk premium for their ventures. On this issue, it may be time for the goods and services tax (GST) for property joint ventures (JVs) to be clarified. The Customs authorities had previously issued some guidelines on the property development industry, including their views on how GST should apply to property JVs.
However, these guidelines were withdrawn and have not been re-issued. Without such guidelines, developers will need to venture in the dark and take whatever risks the JVs entail. There is now therefore the uncertainty whether one GST treatment applies to all JVs or should there be different treatments for different JVs depending on their respective JV terms.
Although it is not incumbent on Customs to provide the answers, developers and landowners will find more certainty if the GST rules are clarified by the Customs.
Another interesting product in the property landscape is mixed developments, which incorporate hotels, condos, offices, shopping centres and entertainment outlets within one site with the objective that occupants can sleep, live, work, shop, dine and entertain all within one location with minimal travel fuss.
What a wonderful concept! However, recently, mixed developments have been hampered by the provisions of the Strata Management Act which require some fine-tuning to facilitate phased development, equitable collection of service charges and less burdensome compliance requirements by developers.
In view that outlay for facilities such as shopping centres are expensive, the Government can consider allowing shopping centres to be treated as assets that qualify for capital allowances (depreciation for tax purposes) similar to the status given to hotels.
Tenants of shopping centres should also be allowed some favourable tax treatment because all of them are required to renovate their properties every few years by the shopping centre owner with the result that they have to “junk” their old renovations.
Under present tax law, most of these renovations are not allowed for capital allowances and therefore do not rank for relief against the income of the tenant.
This restrictive rule is due to the concept of “setting” which is not eligible for capital allowances as opposed to “apparatus” which qualifies for capital allowances.
Most renovations are treated as “setting” for tax purposes and thus do not qualify for this favorable treatment. However, would not these renovations qualify as a business cost? Without these deductions or reliefs, the shopping centre tenant ends up with a higher effective rate of income tax.
Although most high-rise buildings in Malaysia are relatively new, a time will come when some of them need to be “gentrified”, that is, improved by tearing down the whole block and re-building. This applies to office buildings, apartments and condos where units have been sold to individual buyers.
In order for a developer to buy over the whole building en-bloc for re-development, it is necessary to get the approval from every single buyer, which is not likely since that 100 people tend to have 100 opinions. To overcome this problem, an en-bloc provision can be made in the law whereby if, say, 80% of the owners decide to sell to a developer for redevelopment, their decision will apply to the rest of the 20%.
The Government can consider developing these rules to provide more development opportunities to developers and thus stimulate the property market. In the area of tax, the rules are quite clear and do not require improvement.
Now is also an opportune time for the Government to show house buyers that they promote house ownership. To ease the interest burden on loans obtained to finance their houses, the Government can consider introducing deduction of interest expense against the property buyer’s income to help alleviate the interest burden.
Otherwise, the property buyer has to pay for his housing instalments out of his after-tax income. No wonder, many people seem to have relatively high gross income but little disposable income. This is partly because one of their major expenditures, such as their housing loan interest, does not qualify for tax deduction.
Hopefully, some of the issues above will be dealt with in the 2018 Budget speech, which is just around the corner. It will be interesting to know then whether anything exciting will be revealed for the property development industry.
Poon Yew Hoe is managing partner and tax partner of Crowe Horwath.
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