Let’s face the elephant in the room, shall we? For most Gen Ys out there, obtaining a home loan in the current economic condition seems like ‘Mission Impossible’. When you cannot purchase a house, rent instead, some people would advise. However, unbeknown to many Malaysians, there is a third option available – the rent-toown (RTO) scheme.
The RTO concept operates based on a lease-purchase contract, between a buyer and developer. The buyer will first rent a property from the developer with an option to purchase at the end of the contract period, which could range from 20-30 years. There is also an option fee involved which must be paid by said buyer; a typical figure is roughly 5% of the property price.
In RTO deals, a certain percentage of the monthly rent paid will be credited to the property (future) purchase, i.e savings accrued for the property’s down payment. Provided the tenant (buyer) does not breach the terms of the RTO, the unit shall legally belong to the tenant at the end of the period.
Currently, though, only a handful of developers are offering homebuyers such a scheme. Most who are trying to assist home buyers are only providing loan bridging for the end financing (down-payment) of the property purchase.
Chang Kim Loong, Secretary-General of National House Buyers Association (HBA) is championing the scheme’s extensive adoption, particularly for mid-priced homes.
Why is RTO necessary?
Traditionally, a RTO house is designed for those in the lower-income groups who could not afford to buy a house or would not be eligible for any form of housing loan. Such houses were normally low-cost or medium-cost housing units including the Program Perumahan Rakyat (PPR) homes.
However, it is glaringly obvious that even the medium income segment in Malaysia are finding in difficult to buy their own homes. This position is documented in the latest 2016 Bank Negara Report which stated, “Since 2012, the increase in house prices in Malaysia has outstripped the rise in income levels. Consequently, prevailing median house prices are beyond the reach of most Malaysians.”
HBA believes that a wider and more holistic RTO is required to include even the middle-income segment in Malaysia. The new RTO segment must accommodate the needs of up to 80% of the population {low-income segment (B40) + middle-income group (M40)}.”
Benefits of RTO
A typical RTO is supposed to provide a lower entry cost to own a unit and a lower monthly cost of homeownership as the
• Tenant does not need to pay a hefty 10% down-payment to secure the unit.
• Legal fees and stamp duties for tenancy are typically cheaper compared to that of loan agreements and Sale and Purchase Agreement (SPA).
• Monthly RTO rentals should be cheaper compared with prevailing market rentals and/or equivalent monthly loan instalments for a similar non-RTO housing unit.
This scheme provides long-term homeownership to the wider population and various economic benefits could be derived from developing RTO units including employment opportunities throughout the supply chain besides ensuring long-term economic prosperity.
RTO is the knight in shining armour, not loan bridging
On a side note, HBA is strongly against developers being allowed to provide loan bridging financing or Differential sum Financing (DF) to house buyers as it is really just “A wolf in sheep’s clothing”.
This financing scheme will only encourage some developers to further sell properties at higher prices to naïve first-time buyers and property speculators as these developers will have additional avenues to ‘assist’ buyers who cannot get the full 90% financing. The government should not encourage such a scheme; otherwise, they may be accused of being the developers’ biggest marketers.
The terms of DF only require the borrower to service interest for the first 3 years of the loan followed by a bullet repayment of the entire DF at the end of the third year. By only having to service the interest and not the principal amount, such a scheme only encourages speculation and not genuine homeownership.
Besides that, the DF adds additional systematic risk to the banking sector as such additional financing does not appear in the Central Credit Reference Information System (CCRIS) maintained by Bank Negara Malaysia (BNM).
Comparatively, the RTO if correctly implemented with sufficient units being offered at the right place and at the right price; and with the right selection process can there be a viable solution to the current lack of affordable homes plaguing the property market. RTO is definitely the more suitable financing option as it both protects homebuyer’s interest and mitigates speculation.
How can we make RTO work?
Admittedly, the RTO model will require a few supporting policies to facilitate its effectiveness and sustainability. RTO can only be undertaken as a form of government initiative as it will be too big a burden to shoulder even by big developers. There is the high cost involved and lower returns presented as RTO must offer both lower entry cost and monthly ownership cost compared to non-RTO units.
The government could partner with state-level economic agencies, like PKNS and government-linked companies such as MRCB, Sime Darby and Glomac. Private developers will require some sort of partnership too or tax incentives to enable them to accommodate the RTO scheme into their purchase offering.
Moreover, the RTO must have the right selection criteria to ensure that such units will not be abused by recalcitrant owners who will rent them out for profits instead. Already, there have been reports of wide-scale abuse of PPR units that are being rented out to foreign workers.
Alternatively, the government could just build RTO units on their own without having to partner with private developers. In fact, PR1MA is already embarking on the RTO to a certain extent.
A single umbrella under the Ministry of Urban Wellbeing, Housing & Local Government should be initiated to keep tabs on RTO initiatives and to establish an official framework to protect the interests of all parties. In the interim, HBA recommends the establishment of a task force comprising representatives from the following Government bodies namely:
- Bank Negara Malaysia
- Employees Provident Fund’ Board
- Ministry of Urban Wellbeing, Housing and Local Government (KPKT)
- Ministry of Finance
- Ministry of Works
- State Gov Representatives
A special committee must be quickly formed to spearhead the best mechanism for a nationwide implementation of RTO. Make no mistake, Malaysia is facing a Homeless Generation where a substantial percentage of the Rakyat cannot afford to buy their own home.
This is not merely to solve the issue of putting a roof over citizens’ heads. Housing is a basic need and if it goes unfulfilled, there will be numerous domino effects, the biggest one being many unwanted social issues. It is a Pandora’s Box that once open, will be very difficult to solve. The Government must do all it can to prevent this box from being opened in the first place.
Housing is a basic need and if it goes unfulfilled, there will be numerous domino effects, the biggest one being many unwanted social issues.
Walking the RTO talk
iProperty.com spoke to Eugene Khoo, CEO of TAHPS Group Berhad. TAHPS Group Berhad recently announced the Stay & Own Scheme for the purchasers of their Foreston project.
What prompted TAHPS to offer the RTO scheme?
In view of the current tightening of bank loan approvals margin and softening of the property market, we decided to make homeownership easier via the RTO scheme whereby purchasers who are not able to obtain their desired loan amount can rent a unit from us for a period of time.
Once the external environment improves and income levels increase, the probability of securing the desired loan amount will be higher thereby increasing affordability for homebuyers to own their home. In addition, the RTO will also allow homebuyers to convert some of the rental paid as a partial downpayment.
We would like to work closely with banks to promote RTO to their customers as the banks would be familiar with their customer’s ability to borrow and repay home loans.
What are the pros and cons of implementing RTO?
We are assisting home buyers to move into a home of their choice immediately with a view to ownership. The homebuyer can also enjoy living in the house and the option of purchasing it in future at a pre-determined price today.
The disadvantage is that the developer will only be able to recognize a sale once the SPA is signed. However, the developer will be able to collect rent from the homebuyer.
Did TAHPS implement any risk management exercise to mitigate the cons of RTO?
Yes, we did. We screen the buyers prior to accepting them into the scheme to ensure that only genuine homebuyers of good repute are accepted to participate. If the buyer did not end up purchasing the home, whatever monies that have been paid will be considered as rental income to the developer and will not be refunded.
What should be done to encourage the implementation of RTO among developers especially for properties that cater to first-time homebuyers?
Banks should be encouraged to participate in RTO. We would like to work closely with banks to promote RTO to its customers as the banks would be familiar with their customer’s ability to borrow and repay loans. This will be a win-win situation where the customer will have the assurance of securing a loan in the future and the developer will have comfort that financing can be obtained.
Developers should assess their development objectives as not every project may be suitable for RTO. For TAHPS, we decided to offer our gated and guarded residence Foreston as we felt that this project was suitable to meet the objectives of the RTO scheme. RTO should be market-driven taking into account the requirements of developers, house buyers and bank financing.