LECTURE 7

INVESTMENT IN REAL ESTATE

 LEARNING OUTCOMES
At the end of this lecture, you should be able to:
• Explain the benefits of investing in real estate property
• Discuss the factors to consider before buying a property
• Analyze methods of property financing in Malaysia
• Analyze other costs and risks associated with property purchase.
• Discuss the application of real property gains tax (RPGT) in
Malaysia.
• Discuss potential alternatives to buying property.
 Introduction to Real Estate Investment
• Real estate investments can be in the tangible form of physical residential,
commercial, industrial and/or retail property.

• Other forms of real estate investment may be shares in property companies

(e.g. SP Setia, Ecoworld) and/or Real Estate Investment Trusts (REITs).

• A real estate investor needs to be mindful of the macroeconomic trends,

property market cycles as well as longer term financial challenges of
ownership associated with real estate investments.
Common reasons for property investment in Malaysia

• Potential hedge against inflation in the long but not in the short term
• Rental income
• If the amount of rental is more than the mortgage payments, the
mortgage instalments could be self-financed by the regular rental
cash flows.
• Tangible collateral for future loans
• Legacy
• In Asian culture, it is common for parents to bequest real estate (such
as land and houses) to their children to provide them a head start in
adult life.
 Factors affecting value of property in Malaysia
• Macroeconomic factors
• Interest rate
• Mortgage loans are typically priced based on an interest rate linked to
the Base Rate (BR). The higher the interest rate the less affordable
would be mortgage loans.
• Central Bank and government policies
• Policies on loan to value loan threshold and other lending requirements.
• Population growth and immigration trends
• Demand and Supply factors
• Different level of supply and demand factors that will affect prices of high
end relative to low cost housing properties.
• Speculative demand due to unconfirmed news e.g. Iskandar, Johor
https://tradingeconomics.com/malaysia/interest-rate
 BANK NEGARA MORTGAGE LOAN POLICY
Source : Oon, Yeah and Tan(2006)
Loan to Value Ratio (also known as Margin of financing)
For residential properties
o First and second properties → Maximum 90% financing
o Third property onwards → Maximum 70% financing
o For commercial properties → Maximum 85% financing
o For joint ownership by husband and wife (especially if one of them alone is not eligible) →
both of them are deemed to have used up one of their entitlement for 90% financing for
residential properties.
o If both the husband and wife are eligible parties they can each borrow for two residential
properties each (90%) → In total 4 properties at 90% financing .
o Potential borrower will be subject to credit rating assessment based on CCRIS
o If a property has been fully paid up, it will not be caught under this policy
o Based on Net property price = Property price – Developer’s discounts (e.g. part of
property price, legal fees, furniture and fittings etc)
 Loan to Value Ratio (cont/…)
For Commercial properties
• Generally no cap
• Normally banks more cautions (85% normal)

For foreigners
Nationality Place of Work & Residence Expected LTV ratio
Malaysians Abroad Up to 90%
Singaporean Singapore Up to 85%
Other Foreigners Malaysia Up to 80%
Other Foreigners Abroad Up to 50%
MM2H Application Malaysia My Second Home Up to 80%

Source : Loan Street.com (2018) https://loanstreet.com.my/learning-centre/mortgage-ltv-ratio-margin-of-finance-for-home-loans

Factors affecting value of property in Malaysia (cont/…)
Location Type of property Ownership Type
- Basic amenities ▪ Landed versus High Rise ▪ Freehold – Indefinite
- Surrounding area shops, banks, ▪ Leasehold – Usually up to 99
schools, hospitals etc years from State Authourity
- Public Transportation
- Distance to work
- Traffic condition
- Security

Title Developer ’s Reputation

o Individual – Landed ❑ Reputation ❑ Past customer’s satisfaction
o Strata – ❑ On time delivery ❑ Adherence to promise in
Condominiums/Apartments ❑ Quality of work advertisements

Source : AKPK 5-12

 Location, Location, Location

EdgeProp (23 September 2018). This is why we invest in property. Retrieved from
https://www.edgeprop.my/content/1428465/why-we-invest-property
 Location, Location, Location (cont/…)

EdgeProp (23 September 2018). This is why we invest in property. Retrieved from
https://www.edgeprop.my/content/1428465/why-we-invest-property
 Considerations buying a house in Malaysia (cont/…)

❖ Down-payment affordability
❖ Loan installment affordability
❖ Property Investment yield
❖ EPF – Account 2 withdrawals
❖ Debt to income ratio (< 40%)
❖ Loan to Value ratio
❖ Margin of financing
❖ Lenders can lend up to 90% of
purchase price

Should only buy a property that is within your means/that you

can afford.
5-16
 Housing Loan Monthly Instalment Calculations
Using PV of Annuity Formula

PV = PMT [((1-(1+i)-n)/i]

Substitute :

PV = 270,000 n = 300 i = 5/12 = 0.4167% Solve for PMT = RM 1,578.39

Current and previous house payment schemes in Malaysia
• Progressive payments
• The first payment of 10% would be made immediately upon signing of the Sales and Purchase
agreement
• Loan disbursements based on the Third Schedule of the Sales and Purchase Agreement which
is based on the Housing Development (Control and Licensing Act 1966).

▪ Rent to Own The RTO was introduced in 2014 to cater mainly for first-time house buyers under the
1Malaysia People’s Housing Programme (PR1MA).
▪ The potential buyer is not required to pay the 10% down-payment and transaction costs
(including legal fees, stamp duties, etc) upon signing of the Sales and Purchase Agreement
(SPA).
▪ in November 2017 Maybank Islamic Bhd introduced Houzkey, which is an extension of the RTO
scheme to other houses offered by five selected developers within Kuala Lumpur and Selangor
valued up to RM1 million.
▪ Option to buy or exit – Terms and conditions apply.
Progressive Payments for new properties
Example of the Third Schedule of the Sales and Purchase Agreement
Andria, J. (2018). Why rent to own might not be for everyone?, iMoney Learning Centre, Retrieved from
https://www.imoney.my/articles/maybank-houzkey
 Pros and Cons of RTO schemes
Pros
• Buyer/Tenant only needs to pay 3 month
upfront rent/instalments which is lesser than
the 10% down-payment.
• Buyer/Tenant can experience the property
before making the purchase decision.
• Can lock-in the purchase price
Cons
• The buyer does not own the property during
the tenancy period.→ Cannot do any
renovation during the RTO period.
• Danger of drop in property prices as the price
of property has been locked in
• Locked into long lease payments → Danger in
the case of defaults.
• Forfeit monies paid for the option to buy if the
buyer decides not to buy.
• Risk of the buyer not being able to qualify for a
loan at the time he/she wants to buy the
property
https://mypf.my/2018/05/01/rent-to-own-malaysia/
Current and previous house payment schemes in Malaysia
(continued/…)
• Build then sell (BTS) schemes
• Under the BTS scheme, the buyers would have to pay an initial 10% down-
payment upon the signing of the Sales and Purchase Agreement and the
balance upon the issuance of the Certificate of Fitness (CF) representing
the full completion of the project.
• Developers Interest Bearing Scheme (DIBS)
• DIBS is a scheme whereby the property developers will bear the buyer’s
home loan interest during the construction stage which usually stretches for
about 36 months from the project launch.
• Due to the controversies surrounding the DIBS, these schemes have been
discontinued in Malaysia since 2014.
 Developers Interest Bearing Scheme
Benefit Issues/Disadvantages
o Creates artificial demand and speculative behaviours in the property
o Buyers can use their funds to invest in market
assets with the potential to grow more o Unethical marketing practices e.g. “home buyers make no payment until
wealth during the construction period. due vacant possession of the properties” → DIBS is not the same as
Build and Sell
o Initial “Retail price” advertised do not reflect the true cost of the
o Buyers can also put their money into fixed property → The “interest charges” may be a hidden cost in the final
deposits to generate interest which could property price
be used to pay off the home loan faster or o In DIBS there are some partial loan payments released to developers
renovate the home upon completion. during the construction process → Buyers bear some risk if project is
abandoned
o Technically the loan is in effect upon signing of the S&P Agreement →
o Investors can “offload/flip” the property Developers are only servicing the interest portion on the loan disbursed
upon completion without additional during the construction period. The interest payments after this period
investment (no need to pay the loan) will be borne by the buyer. The repayment of the principal portion is the
during the construction period. buyer’s responsibility.
NOTE: If a home buyer makes absolutely no payment at all other than o DIBS projects can be priced up to 20%-30% more than non-DIBS
the initial deposit for a home during the construction period; that is
known as the Built-Then-Sell (BTS) concept. projects

Source : iMoney Editorial (2013) https://www.imoney.my/articles/dibs

Chang (2014), Why Why developer interest-bearing schemes should be banned, The Star Property (20 Sept 2014), https://www.thestar.com.my/business/business-news/2014/09/20/saying-no-to-dibs-it-should-
continue-to-be-prohibited-in-the-interest-of-first-time-house-buyers/
Skim Rumah Pertamaku
• https://www.srp.com.my/docs/pdf/Reprint%20SRP%20Brochure_Eng_011019%20(Final)-121119.pdf
 My Malaysia My Second Home

Hishamudin, A.A. (2021). Malaysia My Second Home is back but it may not last, here’s why. Retrieved from https://www.freemalaysiatoday.com/category/nation/2021/08/21/malaysia-my-second-home-
is-back-but-it-may-not-last-heres-why/
 Types of housing loans
• Conventional home loans
• Fixed or variable interest rates for a tenure of up to 35 years.
• Flexible home loans
• Usually variable rate loans that are linked to a current account.
• As the balance in the current account is used to offset the housing loan
principal, the buyer can reduce the monthly mortgage instalments.
• Islamic home financing
• Based on Shariah laws and rules of transactions (fiqh muamalat).
• Bai’ Bithaman Ajil (BBA) - Deferred sale arrangement
• Musharakah Mutanaqisah (MM) – Profit sharing (diminishing) partnership
contract
 Mortgage Loan Refinancing
• Mortgage loan refinancing is a term used to describe how a borrower can restructure and
rewrite the terms of his/her current home loan to one with more suitable terms.
• Benefits of mortgage loan refinancing include :
• To potentially lower interest charges and monthly instalments
• Obtaining additional cash flow from increase of home loan equity

• Factors to consider before undertaking mortgage loan refinancing

• Determination of personal objectives and main reasons for taking the loan
• Check the status of the existing loan agreement
• Conduct comparisons of home refinancing packages and negotiate with the bank for the
best rates
• Net potential savings on home loan refinancing:
= Interest savings due to refinancing - Early termination fees/exit fees/ lock in penalty
(existing loan) – Cost of establishing the new mortgage (Legal fees, stamp duties,
valuation fees and other charges)
https://www.imoney.my/articles/a-guide-to-home-loan-refinancing-infographic
https://www.imoney.my/articles/a-guide-to-home-loan-refinancing-infographic
https://www.imoney.my/articles/a-guide-to-home-loan-refinancing-infographic
 Other costs associated with buying a house
• Sales and Purchase Agreement (SPA)
• Legal fees and stamp duties
• Loan Agreement
• Valuation fees
• Agent’s fees
• Insurance costs
• Quit rent and assessment
• Maintenance fees for strata title owner
• Renovation costs
Things to do before undertaking home loan refinancing (cont/…)

Calculate this:

Net potential savings on home loan refinancing:

= Interest savings over term loan - Early termination
fees/exit fees/ lock in penalty – Cost of establishing
the new mortgage (Legal fees, stamp duties,
valuation fees and other charges)

Make sure it is NOT negative

 Risks of investment in property
• Large illiquid investment with long term financial commitment required.
• Risk of having bad tenants who not only default on rental but are not
responsible in properly upkeeping the property and/or engage in other illegal
and destructive activities.
• Changes in property market due to macroeconomic shocks that may affect
the supply and demand in the property market.
• The entry, exit as well as borrowing expenses can add up to be quite
substantial.
• Government regulations may be changed from time to time to regulate
imbalances in the property market.
 Taxes on property investments
• Rental Income
• Rental income is taxed when the rental is received in a year of
assessment (1 January to 31 December) for individuals.
• Direct expenses incurred can are deductible from rental income for tax
purpose (e.g. Quit rent, insurance on fire/burglary, repainting of rented
premises)
• Initial expenses or costs of obtaining the first tenant are not allowed
(e.g. advertising, commission and legal fees on first rental
agreement)

• Real Property Gains Tax (RPGT)

• Will apply if there is a capital gain arising from the disposal of real
assets/property in Malaysia.
 Buying versus Renting a property
Buy/Own Rent
o Increase net worth as you pay down your loan. o Freedom to move out anytime by giving appropriate
Loan repayment goes towards your net worth. notice
o Sense of pride and accomplishment o Major maintenance expenses normally covered by
the landlord
o Value of the house may increase o No major capital expenses required
o Investment of time – tied down to your house
o Upkeep expenses need to be borne
o If you are not satisfied with your purchase, you
have to wait till the value of the house increases to
get back initial investment.
o Unexpected circumstances can bring down the
value of your house.
 REAL PROPERTY GAINS TAX (RPGT)
RPGT Calculation
Based on Budget 2019 and with effect from 1 January 2019, the
• Gross Chargeable gains = Disposal price – RPGT rates are as follows:
Acquisition price

• Net chargeable gains Sale of property : Citizen/Permanent Non- Resident Companies

Resident
= Gross chargeable gains (ie. your profit) – Individual
exemption waiver (RM10,000 OR 10% of the Within first 3 30% 30% 30%
chargeable gains whichever is greater) years

In the 4th year 20% 30% 20%

• Tax payable
In the 5th year 15% 30% 15%
= RPGT Rate (based on X years of property
ownership) X Net chargeable gains In the 6th year 5% 10% 10%
onwards

There is a once in a lifetime exemption on the chargeable gain on disposal of 1 private residence by
a Malaysian citizen or Permanent Resident (PR).
REAL PROPERTY GAINS TAX (RPGT)
RM RM
Disposal price

Sales consideration received X

Less :
Incidental Costs (X)
Permitted expenses (X)
Final disposal price (A) X

Less: Acquisition Price

Purchase consideration paid (X)

Add: Incidental costs (X)
Final acquisition price (B) (X)

Chargeable gain (C ) = (A) - (B) XX

Less : Individual exemption (D) (X)
Net chargeable gain (C) –(D) XX
 REAL PROPERTY GAINS TAX (RPGT)
▪ The individual exemption (i.e. 10% of chargeable gain or RM10,000 whichever is
greater) applies to each and every disposal of property.
▪ However, there is a once in a lifetime exemption on given to an individual for the
disposal of a private residence.
▪ Also transfers of property as a gift between husband and wife, parent and child,
grandparent and grandchild is considered a no gain-no loss transaction for the
purpose of RPGT. However, the donor must be a Malaysian citizen, The recipient of
the property is deemed to have acquired the property at the acquisition price incurred
by the seller.
Incidental and Permitted Cost allowed to be deducted from Disposal
Price
• Incidental costs
▪ Fees, commission or remuneration paid for professional services of any surveyor,
valuer, accountant, agent or legal advisor
▪ Cost transfer (e.g stamp duty)
▪ Cost of advertising to find a buyer

• Permitted expenses
Any expenses wholly and exclusively incurred at any time after its acquisition :
▪ for the purposes of enhancing or preserving the value of the asset
▪ establishing, preserving or defending the owner’s title to, or a right over the asset
 Acquisition Price

• Incidental costs to be added

▪ Fees, commission or remuneration paid for professional services of any surveyor, valuer,
accountant, agent or legal advisor
▪ Cost transfer (e.g stamp duty)
▪ Cost of advertising to find a seller

Other deductions to purchase price

▪ Compensation for damages, injury, destruction, risk of depreciation etc
▪ Receipts under insurance policy for damages to property
▪ Deposits forfeited in respect of the property
INVESTMENTS IN REAL ESTATE INVESTMENT TRUSTS (REITS)

▪ REIT represents the collective investment vehicle that pools money from
various investors to raise capital to buy and manage real estate assets
ranging from office and apartment buildings to shopping centers and
warehouses.
 Real Estate Investments Trusts (REITs)
• Type of collective investment scheme that pools moneys from investors to invest in a
diversified portfolio of properties ranging from retail, industrial, office, commercial,
apartments, hotels and/or hospital properties.
• The investment in listed REITs are broken down into shares which are then traded in the
stock exchange (e.g. Bursa Malaysia).
• Advantages of investment in REITs include):
• Professional Management
• Small initial outlay than buying property outright and Liquidity
• Convenience – No need S&P Agreement, legal fees, stamp duties and for mortgage
loan.
• Potential tax savings
• If a REIT distributes at least 90% of their yearly income as dividends to their
shareholders, the REIT will not have to pay the corporate tax (25%) under
Section 61(A) of the Malaysian Income Tax Act 1967. However, a 10% will be
applicable for distribution to individuals as the final tax on the distribution. This
withholding tax is considered a small price to pay as compared to the 25% tax
on levied on corporation which is subsequent paid out as dividends.
Factors to consider before investing in REITS:
• Dividend payout
o Is the yield able to cover the rising cost of living?
o Typical yields are between 6% to 8%
o Future growth in payouts

• Diversification of portfolio
o Professional management by the managing company should include properties across
different industries (e.g. industrial, commercial, residential and healthcare)
o Potential to stabilize returns.

• Gearing of the management company

o High debt levels of the management company can affect its profitability to generate income for
investors.
 Real Estate Investments Trusts (REITs)…cont/…
• Risks of investment in REITs include :
• Returns are not guaranteed
• Loss of control and management risk
• Risk of insufficient cash flow of the investment management company
due to high leverage.