Despite the overall slowdown in the Malaysian property sector, house prices continue to climb – NAPIC’s latest data for the residential market in Q32016 recorded a year-on-year decline in transaction volume and value by 13.9% and 12%, respectively. What is worrying is the lower drop in value – when measured up against the transaction numbers, the math shows that there has in fact been a 1.91% increase in the average property price.
Accused of being too profit seeking, should some developers be held accountable to a certain extent for spiralling property prices? Is it possible for them to provide more affordable prices by reducing their profit margins?
Grappling Over High Development Costs
James Tan, Associate Director of Raine & Horne International says that there is no denying that developers are answerable to their shareholders and therefore they would seek to maximize profits. However, we have to consider the various costs involved, most of which are not known by the general public. According to him, property developers used to make huge margins before but are now being squeezed financially from every angle.
Industry players have expressed concern over unnecessary impositions that are causing development costs to pile up. The two main ones being utility contribution costs as well as compliance costs, which are incurred when developers surrender part of their land for construction of social and community facilities and for the provision of open space.
This argument holds weight based on statistics by REHDA Malaysia that details a list of escalating development costs. Land, which contributes 20-30% of construction costs, have increased drastically, especially in the city centre. For instance, the price of land surrounding KLCC has increased approximately 300% over the past 7-8 years.
Besides that, the premium for land conversion, which are charges for converting the status of the development land, from agricultural to residential has increased by 100% in the previous 5 years itself in Selangor.
There is also the whopping contribution costs to be paid to private utility companies such as Tenaga Nasional Berhad (TNB), Indah Water Konsortium (IWK) and Syabas. Developers have to submit capital contributions to the state government or the local authorities amounting to 3-30% of their project’s Gross Development Value (GDV) in order to obtain approval for the development.
Why Are Homebuyers Paying Higher Price Tags?
Developers are also required to surrender a portion of their development land for the construction of social and community facilities, road and drainage as well as infrastructure and facilities including TNB substations, water reservoirs, wire cabling and pipe trunking.
Further compounding their financial burden, Datuk Anthony Adam Cho, JP, Immediate Past Chairman of REHDA Malacca & EXCO Member of REHDA Malaysia shared that developers have to pay consumption tax for the infrastructure built on their land, such as roads and drains.
Besides that, for years, developers have picked the bone over the contribution requirement – why private, profit-making service providers such as TNB and SYABAS are not required to chip in for the compliance costs? It seems unfair that these companies benefit from the utility payments, yet the cost of building the said infrastructure has to be borne by developers.
The bigger issue at the end of the day, however, is that these costs are then passed on to homebuyers as part of the property’s selling price. Datuk Anthony laments that these factors which are not market-driven push-up property prices artificially – which is counter-productive to the government’s agenda of making homes more affordable for the rakyat.
Legislation Complexities & Overregulation Dilemma
Adding to the list of developers’ challenges is the complexities they face during the planning stages of their projects, especially in obtaining approvals from the respective state governments.
A local research paper, Unveiling the Challenges Faced By Malaysian Housing Developers through Government Policy Changes published in the Journal of Construction in Developing Countries, 20(2), 37–52, 2015 states that the role of government in shaping the housing industry is especially pertinent because most land matters involve dealing directly with local and state authorities.
The researchers from University Sains Malaysia’s School of Housing, Building and Planning interviewed 10 housing developers on the myriad of challenges faced. Interestingly, the most notable challenge revealed by the respondents is related to the vagaries of the government rules and processes. Among the gripes mentioned were late approvals, sudden changes of rules, non-uniform compliances and other similar issues.
The researchers deduced that the regulations governing the housing and property industry imposed by the government are perceived as imbalanced and serve only to increase the challenges confronted by housing developers to maintain their survivability.
James Tan agrees that this is the case – he shared that developers face numerous challenges during pre-construction stages, especially considering the current stagnant market. Some of the local authority bodies can be sometimes inefficient and there are a lot of conditions and delays in getting approvals.
Developers have to deal with the following challenges, among many – allocation of a certain percentage of affordable and low-cost housing; the requirement to get a developer’s license and advertising permit to sell properties; the approval for land conversion and subdivision; the imposition of levies on ownerships; the Bumi quota issue and the ever changing requirements for approvals.
In addition, developers are not allowed to claim Goods & Services Tax (GST) incurred for the construction costs of residential properties. Many industry experts have recommended that the sale of residential properties costing RM500,000 and below should be zero-rated instead of the current categorisation as an exempt supply – this would help bring down the property cost and in turn, its selling price, increasing the chances for low and medium income earners to own a home.
Simpler Approval Process Needed
In 2007, the government established the One Stop Centre (OSC) – to coordinate the applications for planning permissions, building plan approvals and land conversions, subdivision and amalgamations; with the main objective to shorten the approval process.
However, James Tan shared that the OSC’s efficacy is far from satisfactory – the centre face a shortage of skilled technical staff and it still takes considerable time to get through the 10 plus departments.
Newer models of the system have since been established, the latest one being OSC 3.0 in June 2014. Nevertheless, industry players feel that there is still room for improvement and have proposed that the approval procedure should be made more efficient.
According to Datuk Anthony, prior to submitting their applications, developers are required to attend pre-consultative sessions with the local authority. The arising issue is there is no proper timeline for these sessions and much valuable time is wasted during this phase. All the extra time spent puts a strain on developers’ wallets as they will have to bear additional expenses in terms of the land holding cost.
A Balancing Act
How can the local government strike a deal with developers to provide more cost-effective and affordable homes while simultaneously ensuring that developers will still attain the required returns on their investment?
At the REHDA 2016 half year review held in September last year, Datuk Seri FD Iskandar, REHDA’s President voiced out that if the government wants developers to build more affordable housing, they should be given cheaper premiums, if not charged at all.
REHDA Malaysia is seeking the government’s cooperation to reduce or waive development charges and compliance costs. This is to help bring down property prices as it is too challenging for private developers to do it alone, taking into account current high land prices. REHDA believes that there will be more stability, if development charges and all sorts of other charges imposed on developers are reduced.
Besides that, the developers’ association have proposed to the Federal Government that the requirement for developers to build low-cost housing should be converted to building affordable homes, which are much higher in demand. Also, unutilized government land should be accorded to developers to build affordable housing and not just to GLCs and and PR1MA, as announced in the 2017 Budget.
James Tan further suggests that developers should be given GST exemptions and waiver of development charges for the construction of homes which falls within the affordable segment. Also, the allowed density or plot ratio for the remaining land should be increased to enable developers to build more units on their plot of land.
As homeownership remains a grave concern, the government should review and revisit certain regulations deemed unfairly disadvantageous to private housing developers. Ultimately, all stakeholders, especially the rakyat, stand to gain from progressive, fair and balanced policies. The establishment of innovative approaches and procedures will certainly augur well for the growth of the country’s economy.