The construction of price-controlled affordable housing has been an ongoing challenge for developers, as its development cost is typically higher than the capped selling price. This leads to cross-subsidisation in the housing market, where buyers of free-market housing will have to absorb these additional costs. In this article, we take a look at how efficient the new Rumah Selangorku Harapan is in incentivising developers to build more affordable homes in Selangor.
A growing number of stakeholders are urging the government to address the housing affordability problem in Malaysia via the building of more affordable houses. These voices have gotten more urgent following the COVID-19 outbreak – where numerous Malaysian households are experiencing sagging finances, leading to house prices decoupling from income. Now on the government’s end, there has been some commitment toward providing affordable housing, namely the announcement of building 500,000 affordable houses in the 12th Malaysia Plan (RMK-12).
The Majlis Perumahan Mampu Milik Negara (MPMMN), chaired by our Prime Minister and consisting of 15 implementing agencies including all state governments – was reactivated to oversee and coordinate the construction of these 500,000 affordable houses by end of 2025. On top of that, RM5 billion was allocated for the building of affordable houses under Budget 2022.
One can foresee that building more affordable houses would continue to be the priority of the national housing policy. However, the effectiveness of solving the housing affordability issue through supplying more affordable houses needs to be taken stock by looking at the high unsold unit of the existing price-controlled affordable housing – mainly because the take-up rate of these houses is lower than expected.
Houses below RM300,000 main contributor toward residential property overhang
Latest NAPIC’s statistics reveal that houses initially targeted for B40 and M40 income groups are a major contributor to the property overhang in Malaysia, with 31% or 11,610 overhang units coming from those priced less than RM300,000, while another 26% or 9,461 units are priced within RM300,000 – RM500,000. In terms of unsold units under construction and not constructed, the majority of them consist of housing products priced below RM300,000 – both at 41% (29,083 units) and 44% (9,641 units). New launches also share the same trend, with 35% or 15,332 units being products priced below RM300,000, and 36% or 15,723 units are housing products priced within RM300,000 – RM500,000(Figure 1).
Most importantly, the cost for such a house to be built in a particular location needs to be taken into account as not all of them are economically buildable. Due to the escalating land cost and building material costs, constructing affordable houses could become too costly in certain locations and may give rise to the problem of cross-subsidization from free-market houses, if it is made mandatory for private developers to fulfil this obligation.
Cross-subsidization is defined as the strategy of pricing a product above its market value to subsidize the loss of pricing a different product below its market value.
For example, in the case of Rumah Selangorku or the RSKU affordable housing scheme – developers are mandated to deliver a certain amount of RSKU units as part of their qualifying housing developments. The RSKU homes have a specified house type, size, and capped selling price – irrespective of the land value and market locality. The surplus development cost of an RSKU unit is always transferred to the free-market houses due to the relatively lower unit selling price compared to the construction cost – thus creating higher selling prices for normal housing products.
A study has shown that, without any cross-subsidization, it is not viable for building RSKU Type D (priced at RM200,000) as the profit margin – which is the determinant factor for the commencement of a housing project is near to non-existent at RM700. Not to mention, other types of RSKU housing such as RSKU Type A (priced at RM42,ooo), Type B (priced at RM100,000), and Type C (priced at RM150k,000), have even lower selling prices (Figure 2)!
How effective is the new RSKU Harapan?
In view of the unfavourable economic situation in the post-COVID-19 era and as a means to revive the real estate industry which has been slowing down since 2018; the Selangor state government recently introduced a new affordable housing scheme – Rumah Selangorku Harapan or RSKU Harapan. This scheme aims to encourage developers to speed up construction in order to increase the RSKU housing stocks to an additional target of up to 60,000 units (an increase of 30,000 units in the market over a period of 3 years).
This scheme allows developers to change the approved RSKU development from the construction of a combination of conventional RSKU Type A, B, C, and D (between RM42,000 and RM200,000) – to one type of RSKU Harapan with a higher selling price of RM250,000 (also known as RSKU Type E). Its construction is also not restricted to areas under the govern of MBPJ, MBSJ, and MBAJ. Though the revised selling price does help increase the buildability of RSKU Harapan, it is not necessarily solving the core issue.
The building of RSKU Type E with a higher selling price at RM250,000 could be viable in theory – yet, it is not necessarily attractive to housing developers as the profit margin of such development could be wiped out due to high land costs if developers are not able to maximize the land value. So far, the construction of RSKU Type E is only allowed in cities under the govern of MBPJ, MBSJ, and MBAJ; and the allowable maximum density of 120 units per acre is the key to the project viability in these prime areas.
However, subject to the local planning requirements and traffic conditions, not every development can achieve this maximum density. In this sense, the reduction of allowable density can have an impact on the profit margin; thereby limiting the selection of suitable locations for the construction of RSKU Type E housing (Figure 3). For example, the building of RSKU Type E would become not viable in both the MBSJ and MBPJ areas, if the development density is to be reduced to 90 units/acre. Even if the allowable density is at 100 units/acre, RSKU Type E also lack attractiveness due to its insignificant profit margins of below 4%.
Moreover, the newly imposed development conditions under RSKU Harapan listed below would deplete the project viability:
- house size must not be less than 1,000ft2;
- each unit has to be equipped with air conditioners, kitchen cabinets, clothes cabinets and water heaters;
- each unit has to be provided for 2 car parks,
- the allocation of 15% to 30% of the loss of RSKU Type A and B units to the state government for free in return for the exemption for the provision of the respective price-controlled affordable housing.
Assuming a developer is required to build 884 units of RSKU houses, consisting of 20% Type A, 20% Type B, 40% Type C, and 20% Type D, on a 13-acre land located in Selangor Zone 1 with an approved density of 68 units/acre. Since the Gross Development Value or GDV of the project at RM113 million is less than its Gross Development Cost or GDC of RM153 million, the project suffers a deficit of RM40 million (Figure 4); and cross-subsidization is definitely needed for the project to kick start.
Increase in development cost of RSKU Harapan outweigh any subsidy provided
By allowing the developer to change to the construction of RSKU Harapan, with a higher selling price of RM250,000 and a higher density of 120 units/acre, the GDV of the respective project increases to RM390 million, which then becomes financially viable compared to the construction of conventional RSKU housing. Although it should be noted the GDC also increases substantially to RM385 million, resulting in an insignificant profit after tax of 0.9% (Figure 5).
The increment in development cost is mainly attributed to the higher building cost (+7%) and the higher cost of constructing a multi-storey car park (+3%), as the simulation below is done based on the assumption that a total of 1,560 units of RSKU Harapan is constructed in 3 residential building blocks with 2 podium car parks. While the percentage for other costs remains unchanged (prelim, compliance, and financial charges) or even reduced (land & land-related cost, infrastructure cost), the actual figure of these costs have increased 47.6% along with the increase in development cost.
RSKU contra for developers must be set below 20%
RSKU contra is a new cost to the developer due to the allocation of a certain number of RSKU Harapan units for free to the state government, in return for the exemption for building 354 units of RSKU Type A and B. Assuming the percentage for RSKU contra is set at the minimum level of 15%, there will be 53 units of RSKU Harapan to be surrendered, with a cost of RM13.3 million that contributes to 3% of the project GDC. Apparently, the cost of RSKU contra is subject to change and tends to be higher if the maximum level of 30% is to be applied.
If this is the case, 106 units of RSKU Harapan with an amount of RM26.5 million (or 7% of the GDC) are to be surrendered to the state government, causing the resulting GDC (RM398 million) to surpass the project GDV (RM390 million). Based on the simulation, by keeping other variables constant, the construction of RSKU Harapan is only viable if the RSKU contra is to be set below 20%; otherwise, the project will be suffering from a deficit (Figure 6).
Project density can further compound the cost issue
One should realize that density is still the key determinant of RSKU project viability. In case the allowable density is no longer at its maximum of 120 units/acre – the project could, again, suffer from a deficit. As shown in Figure 7 – assuming other variables stay constant and the RSKU contra is kept at its minimum level of 15% – the resulting project deficit will be at 10% and 4% when the density is reduced to 100 units/acre and 90 units/acre, respectively.
The summary of the resulting project profit (or deficit) with different combinations of allowable density and RSKU contra is shown in Table 1. It is obvious that the viability of building RSKU housing in the Klang Valley region is not present. Although developers are allowed to construct RSKU Harapan with the renewed selling price, the newly imposed development conditions mentioned above could substantially increase the project development cost, thereby offsetting any profit margin that can be generated from the higher selling price. To ensure its viability, the project must not only achieve a density of 120 units/acre but must also have a RSKU contra level set below 20%.
|Allowable Density (units/acre)||Level of RSKU Contra|
|120||PAT = 0.9%||PAT = 0.3%||Deficit = 1%||Deficit = 2.1%|
|100||Deficit = 10%||Deficit = 3.4%||Deficit = 4.6%||Deficit = 6.2%|
|90||Deficit = 4.1%||Deficit = 5.5%||Deficit = 6.8%||Deficit = 8.5%|
Table 1: Resulting project profit (or deficit) with different density and RSKU contra
Note: PAT = profit after tax
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To preserve the commitment to building price-controlled affordable housing, measures that could efficiently improve its buildability are imperative. Rather than being heavily regulated, builders or developers need to be incentivized in order to ensure the housing supply efficiency. The accumulation of regulatory barriers such as compliance cost, Bumiputera quota, the mandatory building of low-cost housing, RSKU requirement, rigid planning requirements and one-size-fits-all housing standards have reduced the ability of the housing market to effectively address the population’s growing demand.
These regulations have been ever-tightening and serve only to increase the challenges confronted by industry players to maintain their survivability. As these requirements increase or tighten so, too will the cost and the time required to efficiently produce houses. As a result, mandatory price-controlled affordable houses will only be viable with cross-subsidization, if the problem of its buildability is not addressed.