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Can I convert commercial title property to residential title?

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There are distinct differences between commercial-titled properties and residential-titled properties. This includes their purposes, legal protection, taxes, and utility fees. 

Can you convert a commercial property into a residential property
© Titipong Sukpaiboonwat/ 123RF

Converting a commercial title to a residential title is not straightforward, but it’s possible.  One of the many solid reasons homeowners are converting their commercial property to residential property is due to the higher assessment rates and utility charges. There are also activities that you can and cannot do in each property type.

1. What are commercial-titled properties?

Commercial real estate is developed for business activities or business-related activity purposes. Therefore, commercial rates and tariffs (utilities and taxes) are applied to these properties, which are higher than the fees charged for residential-titled properties. Also, these properties do not fall under the jurisdiction of the Housing Development Act (HDA), and the owners are not entitled to Real Property Gains Tax (RPGT).

Serviced apartments, SoHos, SoVos and SoFos, are all commercial-titled properties. Serviced residences and SoHos are largely marketed as residential properties, whereas SoVos, SoFos, and SoLos are not designated for dwelling. As service apartments and SoHo are mainly used for residential purposes, they are protected under the HDA, and buyers of these units will be signing a standard Sales and Purchase Agreement (SPA).  

On the contrary, SoVos and SoFos are essentially offices and not regulated under the Housing Development (Control and Licensing) Act 1966 (HDA). Hence, they do not have a standard SPA.

2. What are residential-titled properties?

what are residential properties
© jamesteohart/ 123RF

Residential properties include landed houses, condominiums, and flats. Property owners can live in the property, buy them as an investment or rent them out for extra income. A residential property holds either a Leasehold or a Freehold tenure. There are also other property titles that homeowners and potential buyers must be aware of. For example, Master Title, Individual Title, Strata Title, Malay Reserve Land, and Bumi Lot. Each of them has its pros and cons thus, understanding them is crucial. This will affect your ownership, transfer of ownership, land conversion, price appreciation, and even marketability.

READ: How to set up water, electricity, IWK and other utilities in your new home after receiving Vacant Possession (VP)?

3. Can you convert commercial title to residential title?

A commercial title can be converted to a residential title, but the owner must be able to prove that the property is mainly or wholly used for dwelling.

4. Why is commercial property more expensive than residential property?

Malaysian Institute of Estate Agents (MIEA) President-Elect Tan Kian Aun said that commercial properties tend to be more expensive because of several factors.

Tan-Kian-Aun
MIEA President-Elect Tan Kian Aun

“If the land is located within a commercial zone, it generally costs more than residential land in the same area. If the land has been converted from industrial or agricultural land, land owners or developers have to pay a higher premium to convert the land for commercial use, and this contributes to the higher land cost,” he said.

Planning permissions for commercial properties also comes with a lot more requirements compared to residential properties.

“For example, a developer needs to put in more car parks in a commercial development. This will reduce the usable floor area within the development. There is also a higher requirement for facilities within a commercial development, such as escalators and lifts. These facilities also cost more to maintain,” he said.

Tan cautioned that the price comparison should only be done between residential and commercial properties located within the same area with comparable land value. For example, a commercial property in the town of Kuala Selangor might cost less than a residential property in the Kuala Lumpur City Centre (KLCC) area.

While it is generally true that commercial properties command better rentals than residential properties due to the longer-term rental agreements, commercial rentals can be easily affected by market conditions.

“When we experience periods of uncertainties like economic downturns or the Movement Control Order (MCO) due to COVID-19, most businesses can’t sustain the rentals. We saw a glut of commercial spaces during the MCO. Residential units, on the other hand, remained stable because people would still need a place to stay even if they can’t run their businesses,” said Tan.

5. What can residential and commercial properties be used for?

As suggested by its name, properties with residential titles can only be used for residential purposes. Whether it is a landed property (terrace, semi-Ds, bungalows) or a stratified property (flats, condominiums, apartments), it is for living in and not for any business purposes.

Serviced apartments usually come with a commercial title, but these are also meant for residential use. One of the reasons serviced residences are marketed as such is because the land it is built on is commercial land and typically involves a mixed development with retail units, offices and hotels.

Properties with commercial titles such as offices, retail units and shopping malls are meant solely for business activities. Things get a bit confusing when units are marketed as Small Office Home Office (SoHo), Small Office Versatile Office (SoVo), Small Office Flexible Office (SoF) and Small Office Lifestyle Office (SoLo). With the exception of SoHos, which can be used for residential, the rest of them are intended for business purposes.

READ: What is Strata Title and why is it important for homeowners?

6. What are the differences in assessment rates, taxes and utility fees differ for residential and commercial properties?

For assessment and utility fees, domestic rates apply to all properties with residential titles, including stratified properties. Serviced residences, SoHo, SoVo, SoFo and SoLo units are commercial properties, and the higher commercial rates apply. However, owners of serviced residences and SoHos can apply to convert their utility fees (water and electricity) to a domestic rate.

Residential properties, including serviced apartments, are entitled to a once-in-a-lifetime RPGT exemption. SoHo, SoVo, SoFo and SoLo units, on the other hand, are not entitled to this exemption.

7. What legal protection do buyers of residential and commercial properties have?

The purchase of residential properties, as well as serviced apartments and SoHos, falls under the purview of the HDA and uses the standard SPA. Disputes can be brought to the Tribunal for Homebuyer Claims. The purchase of all other commercial properties is not protected under the HDA. Any disputes have to be settled in court based on the signed SPA. 

8. Residential title vs commercial title 

 Residential-titledCommercial-titled 
TypeCondominiumServiced apartmentSoHo, SoVo, SoFo, SoLo

 

 

Use of building

 

 

For residential only For residential only, development may comprise commercial units such as retail units, offices, and hotels.
  •  SoHos can be used for residential or business purposes.
  • SoVos, SoLos and SoFos are designated for business purposes only and not for dwelling.
  • Development may comprise commercial units such as retail units, offices and hotels. 
Assessments rates, taxes and utility fees
  •  The domestic rate is applied for assessment rates and utility fees.
  • Entitled to once-in-a-lifetime RPGT exemption.
  • The commercial rate (higher than the domestic/ residential rate) is applied for assessment rates and utility fees.
  • Entitled to once-in-a-lifetime RPGT exemption. 
  • The commercial rate (higher than the domestic/ residential rate) is applied for assessment rates and utility fees. 
  • Not entitled to once-in-a-lifetime RPGT exemption.
Legal protection and SPAIt falls under the HDA’s jurisdiction, and it uses the standard SPA regulated under the HDA. A  homebuyer can bring disputes to the Tribunal for Homebuyer Claims.

It falls under the HDA’s jurisdiction, and it uses the standard SPA regulated under the HDA. A  homebuyer can bring disputes to the Tribunal for Homebuyer Claims.

  • These developments do not fall under the HDA’s jurisdiction except SoHos. Hence disputes between two parties will be settled in court based on the SPAs signed by the parties.
  • For SoHos, unit owners can bring disputes to the Tribunal for Homebuyer Claims.
Building densityLower density 

Higher density

 
Housing Loans   Up to 90% on first and second properties. Up to 70% on third property onwards.Up to 90% on first and second properties. Up to 70% on third property onwards.
  • Between 80% and 85% loan margins.
  • Interest rates are typically higher for commercial titles, while the loan terms are typically shorter.
What you can do
  •  It is for residential purposes only.
  • Homeowners can bring disputes to the Tribunal for Homebuyer Claims.
  • Homeowners or buyers can claim defective workmanship from the developer during the 24-month defect liability period.
  • It is for residential purposes only.
  • Homeowners or buyers can bring disputes to the Tribunal for Homebuyer Claims.
  • Homeowners can claim for defective workmanship from the developer during the 24-month defect liability period.
  • Conversion of electricity tariff from commercial to residential is subject to approval.
SoHo
  • SoHos are for residential or business purposes.
  • Owners or buyers can bring disputes to the Tribunal for Homebuyer Claims.
  • Owners or buyers can claim for defective workmanship from the developer during the 24-month defect liability period.
  • For SoHos, the conversion of electricity tariff from commercial to residential is subject to approval. 

SoVos, SoLos, and SoFos

  • SoVos, SoLos, and SoFos are for business purposes only.
What you cannot doOwners may not carry out business activities/ set up an office unless with special permissions. Using the unit for residential purposes brings disputes to the Strata Management Tribunal (SMT).Using the unit for residential purposes brings disputes to the Strata Management Tribunal (SMT).

9. Is it legal to run a business from a residential property in Malaysia? 

short term rental airbnb
© Denis Koltsov/ 123RF

It is illegal to run a business from a residential property in Malaysia. You need to convert your residential property to commercial property and apply for a business permit or business licence for purposes like kindergartens, old folks’ homes, and caring homes. This includes renting it out for commercial purposes. 

As for short-term rentals like Airbnb, currently, there’s no licence required for homestays and home-sharing in KL. Owners and operators of Airbnb are only required to register their short-term rental properties through the Kuala Lumpur City Hall (DBKL)’s licence portal.

However, in Penang, running a short-term rental business is a violation of the Municipal Council of Penang Island (Trades, Businesses, and Industries) By-Laws 1991 and the Town and Country Planning Act 1976 as it is against residential purposes. 

The rules and regulations differ for every state or area. Speak to your local authorities or local government’s planning office before you start a short-term rental business.

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10. How to convert a commercial property into a residential property?

Different areas may have different regulations and requirements for converting commercial property to residential property. It is best to consult your local authorities if you’re planning for a property conversion. Besides financial planning, time, necessary documents, and other challenges, it also depends on local authorities rules, regulations, and approvals. Once approved, you will enjoy residential rates for taxes, assessment rates, and utility fees.

Change in the category of land use

Under Section 52 of the National Land Code 1965, all alienated lands are divided into three categories of land use –  Agriculture, Building and Industry. Valuation for the change of land title or use is normally carried out by the Valuation and Property Services Department (JPPH)

If a landowner intends to use his land for other use than the category stated in the title, the owner must apply to change the category of land use accordingly.  Sections 124 and 124A of the National Land Code and the respective State Land Rules allow landowners to apply for such changes. The State Authority will charge an additional premium on all applications approved for change of use.

Application for conversion of land title

The landowner must submit his application to the Land Office/ Land and Mines Office and must comply with all the requirements. The landowner must be able to provide:

  • Copy of the title;
  • Address of the property (if any);
  • Site plan;
  • Location plan;
  • Development proposal;
  • Feasibility study (if any); and
  • Valuation report (if any)

If an applicant fulfils all requirements, JPPH will then report the valuation to the Land Office/ Land and Mines Office within 10 working days of receiving the application from the office.

11. How to change TNB tariff from commercial to residential 

You’re paying a much higher utility bill if you live on commercial property, as it is charged based on the commercial tariff. But don’t worry, as you can request and apply for it to be changed to a domestic tariff via the myTNB portal or myTNB app. According to Tenaga Nasional Berhad (TNB), ‘domestic consumer’ means a consumer occupying a private dwelling which is not used as a hotel, boarding house or used to carry out any form of business, trade, professional activities or services. Do note that TNB  deserved the right to change the consumer’s tariff based on actual activity at the said premise.

Step 1: Log in to myTNB portal. After that, go to the menu and click ‘Apply’.

How to change TNB tariff from commercial to residential 
© myTNB Portal

Step 2: Then select ‘I want to do something else’.

How to change TNB tariff from commercial to residential  2
© myTNB Portal

Step 3: After that, select ‘I want to find out more about other services’.

How to change TNB tariff from commercial to residential 3
© myTNB Portal

Step 4: After that, select ‘Change My Tariff’ and fill in the online form. For the premise type, select ‘Domestic’ and select the residential type. 

Step 5: You are required to submit your MyKad (IC) copy. The name printed on your electricity bill must be the same as the one on MyKad. 

Once you confirm the submission of the application, RM10 stamp duty will be charged and will be reflected in your upcoming bill. You will receive an email upon successful submission. 

12. How to change the water rate from commercial to residential?

How to change water rate from commercial to residential
© nadtochiy/ 123RF

If the entire development is for dwelling purposes, the Joint Management Body (JMB) and Management Corporation (MC) may apply for a change of water tariff from commercial to residential with Syarikat Bekalan Air Selangor (SYABAS)

Step 1: The JMB and MC must apply for conversion Master Title to residential purposes at the land office.

Step 2: The JMB and MC of development must apply for the migration of bulk water meters to individual meters. These bodies must complete and submit the following: 

  • Migration from Bulk Water Meter to Individual Water Meter Account Application Form
  • Meter information/ Checklist form

Usually, in KL and Selangor, water bills for some highrise residences or developments were issued to the JMB and MC. Then, these statutory bodies will bill it to unit owners. This is because the bulk water meters have not been migrated to an individual water meter.

You may also check Air Selangor Migration Guidelines and FAQs for Account Migration for further information. 

Disclaimer: The information is provided for general information only. iProperty.com Malaysia Sdn Bhd makes no representations or warranties in relation to the information, including but not limited to any representation or warranty as to the fitness for any particular purpose of the information to the fullest extent permitted by law. While every effort has been made to ensure that the information provided in this article is accurate, reliable, and complete as of the time of writing, the information provided in this article should not be relied upon to make any financial, investment, real estate or legal decisions. Additionally, the information should not substitute advice from a trained professional who can take into account your personal facts and circumstances, and we accept no liability if you use the information to form decisions.

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FAQ: Residential Title Vs Commercial Title

A residential title includes both landed and multi-level properties such as bungalows, townhouses, and condos, while a commercial title encompasses office spaces, storefronts, retail units, hotels, and various elements of mixed-use developments.
Generally, no. It's illegal without converting the property title and obtaining proper permits. For short-term rentals, the regulations vary by region.
The process depends on local rules but generally involves providing documents, feasibility studies, and undergoing evaluations by the Valuation and Property Services Department (JPPH).
Yes, commercial-titled properties often have higher interest rates and shorter loan terms than residential-titled properties.