Customs: No reason for house price hike

BY LOSHANA K SHAGAR

Raizam Mustapha, Customs Department’s senior assistant director (property, construction and professionals), said developers could claim Input Tax Credit (ITC) for commercial properties and also for the GST incurred for infrastructural and recreational works of mixed development projects.

“All raw materials, some of which were not taxed under the Sales and Services Tax (SST), will now be taxable.

“Under the SST, materials such as floor tiles, pipes, fittings and paint were taxed between 5% and 10%, and these were not claimable from the Government.

“When the GST comes into effect, a 6% tax rate will be imposed on the materials but the ability to claim under the ITC means developers will see some savings,” she told a media briefing yesterday.

Among the items that would be newly taxed under the GST are cement, bricks and steel, in addition to construction work by contractors.

The Customs Department had announced that there would only be an impact of between 0.5% and 2% on housing prices, if there were no changes in supply and demand.

Raizam said the ITC was expected to serve as the stabilising factor to ensure that property prices in the country did not rise drastically.

On maintenance fees for stratified residential properties, Raizam said that as they were exempted from the GST, changes in fees would be decided by the building management committees.

“If they get services from companies which do not have to register for the GST, these firms cannot impose 6% charges on management committees,” she said.

Deputy Finance Minister Datuk Chua Tee Yong, who was at the briefing, later noted that property prices, especially in the cities, had been rising at a rate of over 6% yearly.

“The number of property launches have declined and the cost of building materials has also stabilised. This will help maintain the market price,” he said.

Asked to comment on those who had rushed to buy properties before the GST for fear of high prices, Chua said those giving such advice were not accurate.

“Look at the past few years, even without the GST, property prices have been on the rise. External factors, like state government policies, have also had an influence on the market prices of properties,” he added.

Chua said that ultimately, it was up to the developers to determine if the increased costs under the GST, estimated at between 1% and 2%, would lead to a price hike.

“Some developers may determine they can make a profit and impose a higher price on the properties, while some may believe they cannot sell as many and decide to absorb the costs,” he said.

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Unfair housing loan agreement

MOST if not all house buyers will require financing to buy their dream homes. While there appears to be stiff competition among banks for market share and interest rates may be kept low, house buyers are ultimately at the mercy of banks when it comes to the detailed terms and conditions of the housing loan. (Banks in this context refers to commercial banks, Islamic banks and other financial institutions).

Unfair legal fees

When a borrower takes a housing loan, the borrower is required to execute a loan and other related agreements. This entails the borrower having to pay legal fees, the amount of which varies, depending on the loan amount – the higher the loan amount, the higher the legal fees although the complicity and level of work does not necessarily commensurate directly with the loan amount.

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Although it is the borrower paying the loan lawyers’ fees, the said loan lawyer is actually acting for and on behalf of the bank. As such, the loan lawyer is not in the best position to advise the borrower if there are clauses in the loan agreement which are not in the best interest of the borrower.

In addition, in the event of any dispute between the borrower and the bank, the borrower cannot ask the loan lawyer for advice as the loan lawyer is acting for the banks.

If this is the case, then is it “fair or equitable” for the borrower to pay such legal fees when it is clear that the lawyer is actually acting for the banks? Obviously not. Hence, the bank should absorb the legal fees as the lawyers are clearly there to act for the bank and protect its interest.

Exorbitant fees for simple letters

The banking sector in Malaysia is a very tightly regulated industry. Any fees that banks intend to charge must be approved by Bank Negara. It is disheartening to note that borrowers continue to be charged exorbitant fees which seem to have the explicit blessings and consent of Bank Negara. Instances of borrowers being charged unreasonable fees for copies of redemption statement, EPF statement letter etc are common.

Allocation of monthly repayment to principal and interest

This is a story about three friends who took a housing loan (HL) of RM500,000 ten years ago. They were offered the same HL interest rate of 4.2% (base lending rate of 6.60% less 2.40%) but took different loan tenures as follows:

Albert took a 20-year HL. Eric took a 25-year HL and Jamie took a 30-year HL.

After servicing their monthly loan instalments diligently for the past 10 years, they decided to fully settle their housing loan using a combination of their EPF monies and own savings. When they asked for a redemption statement to find out what was the principal sum outstanding, they received a shock of their lives.

Albert, Eric and Jamie were under the impression as they had served 50%, 40% and 33.3% of the loan tenure, their principal sum outstanding would be RM250,000, RM300,0000 and RM333,333 respectively.

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So, when their respective redemption statement showed that Albert, Eric and Jamie still owed respectively RM301,654, RM359,415 and RM396,652, they got a big shock.

So, why did they still owe so much more than what they had thought? The answer lies in the allocation of the monthly instalment towards covering the principal sum and interest charged by the bank.

In an equitable world, the monthly instalments would be allocated on a “straight line basis” to cover the principle and interest charged. Thus, a borrower who served 10 out of a 20-year HL would only owe 50% of the original loan amount.

However, the reality is that the borrower still owes 60.3% of the original loan amount.

The typical borrower will always be “penalised” for settling his loan before the maturity date. Even in the penultimate year of the original loan tenure, the actual amount outstanding is still higher than the theoretical amount, which should be the amount outstanding had the allocation of monthly instalments been done on a straight line basis.

Is it fair and equitable?

Most borrowers do not know or even understand how this allocation is calculated. Is such an allocation “fair and equitable” to the borrower? Under such circumstances, are borrowers supposed to accept that the bank’s own generated computer system has calculated the interest correctly and allocated the payments in the correct manner?

To the borrower, they have paid 10 out of a 20-year loan, he should only owe balance 50% and not 60.3%. Is this manner of allocation not just another unjust way for the bank to generate higher profits, after all the bank did receive the payments on time and in full every month. It is the dream of every borrower to be debt-free as soon as possible and it is not fair to the borrower to be penalised in such a manner when he wants to settle his loan early.

That said, borrowers have no choice but to accept the calculation of the bank as correct and final. If the borrower were to reject and not pay the required sum, the loan will not be considered as repaid in full. The borrower could even be blacklisted and even have his property auctioned off by the bank to recover the remaining sum outstanding if the borrower refuses to pay up.

It would be more transparent and equitable if the monthly payments made by the borrower are allocated in a “straight line basis” to interest and principal equally over the

tenure of the housing loan. Short of that, borrowers are at the mercy of banks.

Some banks operate like a “cartel” and standardise their fees to be charged to customers. One wonder whether such unfair practices are condoned by the regulators like Bank Negara.

It is also interesting to note that banks are exempted by the Malaysia Competition Commission allowing banks to agree and collude on unfair fees, penalties and practices to be charged to borrowers.

Unnecessary expenses

Loan agreement “printing charges” – sold between RM150 and RM350. The banks’ solicitors need to purchase a standard loan agreement from the bank (via soft copy) and adds the borrowers’ details in order to complete the loan agreement. The banks charge the lawyer and the lawyer charges the borrowers.

Standard loan agreements are now downloaded from the bank’s website or from soft copy. The bank no longer need to print them and should not charge for such documents. Alas, this has been continuing till to date.

Lopsided terms and conditions

Lopsided terms and “add-on” products are aplenty, if the borrower wants to identify with them. It would be good practice to remove or qualify the banks’ arbitrary powers.

Conclusion

The National House Buyers Association (HBA) had on Sept 4, 2014 made representation to the Finance Ministry (MOF), Bank Negara. Housing and Local Government Ministry in the presence of Association of Banks Malaysia and Islamic Banks of Malaysia in the form of slides presentation on some observations and unethical practices of some banks.

HBA is looking to work closely with MOF, Bank Negar and all related stakeholders to level the playing field for housing loan borrowers in the long-term interest of the banking industry. We had proposed to set up a working committee to resolve all unfair practices. MOF and Bank Negara have a legitimate interest in the final shape of the banking industry into operating a principled and towards a “customer friendly arena”.

 

Chang Kim Loong is the honorary secretary-general of the national House Buyers Association: www.hba.org.my, a non-profit, non-governmental organisation manned purely by volunteers.

p/s: Looking forward your actions on the so called “unfair” practices. Seriously HBA like a sole soldier in the dessert. How to fight the war?

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MRT2 works to start

PETALING JAYA: Mass Rapid Transit Corporation Sdn Bhd (MRT Corp) is expected to start awarding contracts for the various packages of the RM23bil Mass Rapid Transit line 2 (MRT2) in the last quarter of this year.

Contractors who handled jobs in the first phase of the MRT (MRT1) would hold an advantage due to their experience in carrying out the works on the first line.

“Also, many of the contractors did not get the expected returns and profits from MRT1 works due to various reasons,” says a contractor.

The MRT2 project, which was given priority in the revised Budget 2015, was expected to ground break in the first quarter of next year, according to MRT Corp chief executive officer Datuk Seri Shahril Mokhtar.

Details are still being firmed up. But MRT2 will be the second main urban rail artery linking Sungai Buloh via Serdang to Putrajaya with about 40 stations and will complement MRT1 which is more than halfway to completion.

So far only MMC-Gamuda have been appointed the Project Delivery Partner (PDP) for MRT2.

For MRT1, the joint venture of MMC-Gamuda was appointed the PDP and their job is to ensure that the project gets done within time and budget. The PDP did not participate in any tender for works above the ground such as construction of stations or civil works to build the infrastructure.

But MMC-Gamuda was awarded the job to build the underground tunnels – which is the most expensive portion of the entire MRT1.

Sharil said that for MRT2, although existing contractors would have the advantage it was not certain that the companies would be rewarded in MRT2.

“For example, if Gamuda and MMC are proven to have good track record in their maiden MRT underground works, they would be given a number of ‘stars’ based on our strict merit system, but this is not an absolute assurance for them to be the winner as there are many other criteria that could influence the total weighted score,” said Shahril.

An analyst said that most short to medium-term investors would likely stay on the sidelines for now. The impact of MRT2 on MMC and Gamuda, the two companies that have a role in the job for certain, has already been reflected in their current valuations.

“The trick is to invest in less notable construction counters with unexpected ‘stars’, said the analyst.

At this juncture, Shahril, who was “promoted” to assume bigger responsibility at MRT Corp from Prasarana Negara Bhd since Jan 1, confirmed the recent news that the pre-qualification exercise to shortlist prospective tenderers for major MRT2 packages would start in the third quarter of this year.

“We will shortlist the pre-qualified candidates based on general checks on their technical know-how and financial standing. When the tenders are out and re-submitted to bid for jobs we then will do thorough checks on the bidders’ financial, technical know-how and the quality of their previous jobs under a stringent process not much different from the evaluation process in Line 1,” he said.

On the alignment, Shahril said MRT Corp was currently waiting for the Land Public Transport Commission (Spad) to approve the submitted proposed alignment, thus he reasoned it would be premature to share the key details now.

“However, we plan to have the three-month public display from mid-May to mid-August,” he said.

Alignment is one of the interesting parts of the MRT initial development that could spark controversial issues in terms of residents’ complaints, loss of business, creation of new township and real estate booster as well as preservation of heritage sites based on the line 1 experience.

Former MRT Corp chief executive Datuk Wira Azhar Abdul Hamid, who bowed out on the grounds of being accountable for the death of several workers in an accident during the construction last year, faced a lot of resistance in firming up the alignment.

Malaysia, which is facing a challenging year with the fall in oil prices and commodities, revised its Budget 2015 that was unveiled in October last year.

However, MRT2 remained a priority. The other project that was not affected is the LRT3 line from Bandar Utama to Klang.

Putra_LRT

Naza proposes to finance up to 90% of LRT 3

BY EUGENE MAHALINGAM

PETALING JAYA: The Naza Group, which is jointly bidding for the role of project delivery partner (PDP) for the development of the RM9bil light rail transit line three (LRT 3) with China-based CSR Zhuzhou Electric Locomotive Co Ltd, has proposed to finance up to 90% of the project.

“The bid by Naza-CSR for the LRT3 project will not just be confined to the role of PDP but will also provide funding of up to 90% of the project cost,” said a source.

The tender by Naza was submitted via unit Naza Engineering & Construction Sdn Bhd (Naza EC), after the inking of a long-term partnership with CSR, China’s largest electric locomotive manufacturer.

The source also said Naza had proposed to jointly implement and carry out the development and construction of other potential rail projects in Malaysia, such as the High-Speed Rail project linking Kuala Lumpur and Singapore.

The company is competing for the coveted role of PDP with five other parties – a joint venture between Gamuda Bhd and MMC Corp Bhd, a tie-up between Malaysian Resources Corp and George Kent (M) Bhd, UEM Group Bhd, Sunway Bhd and a collaborative effort involving WCT Bhd and AlloyMtd Group (which is the merged entity of MTD Capital Bhd and Alloy Consolidated Sdn Bhd).

The six parties were shortlisted for the PDP role by Prasarana Malaysia Bhd.

The PDP concept was first used in the Sungai Buloh-Kajang mass rapid transit (MRT) line under MRT Corp Sdn Bhd. It was proposed by Gamuda which was eventually given the job together with its partner MMC Corp Bhd.

Under the MRT agreement, the PDP will receive a fee of 6% of the total aggregate work package contract value. Should the eventual total cost of the project be less than or equal to the target cost, then the PDP shall be entitled to the full fee. But if the project cost is more than the target cost, then the PDP fee shall be reduced in accordance with an agreed formula.

Subsequently, the joint venture of Gamuda-MMC was also given the PDP role for the MRT2 project.

The 36km-long LRT 3 line, which will link Bandar Utama to Klang, has 25 stations plus an underground station. LRT 3 is expected to be operational in 2020.

p/s: LRT 3 – 36km from Bandar Utama to Klang with total 25 stations and an underground station. 2020? By seeing how LRT2 status and progress, our bet is 2025. So, set a right expectation and timing while putting your money LRT3 related property investment. Lol.

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How to calculate return on investment?

A simple question, how to calculate return on investment?

Investment in property may take much time and effort than you may expect. When you find a great deal, you might need to leverage on other people’s money to increase your return of investment.

How to calculate the return of investment?
Generally, there are 2 components of returns, rental yield per annum and capital gain or so-called capital appreciation.

What is rental yield?
Rental yield is the return based on rental income from the property less maintenance expenses incurred versus the total purchase price of the property. There are gross and net rental yield. Gross Rental Yield is rental versus the purchase price before the expenses incurred and so on and so forth. In rules of thumb, the Net Rental Yield is approximately 85% of the Gross Rental Yield.

There is another rental yield called Net Leverage Rental Yield. This means, the financing cost is taken into calculation when rental yield calcualted. The expenses incurred inclusive of finance cost versus the net gain is defined as Leverage Rental Yield.

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How much is really needed to qualify for affordable housing?

YOU may find it hard to believe. Just four to five years ago, it was possible to own a decent-sized, quality condominium unit in urban centres like Kuala Lumpur, Petaling Jaya, Johor Baru and Penang for approximately RM200,000. They were in fact, quite common.

From 2010 up till 2012, the Government had considered the price of RM220,000 to be within the “affordable” housing range. This was evident when it first launched the My First Home Scheme or Skim Rumah Pertamaku (SRP) for houses priced up to RM220,000. However, towards the tail-end of 2012, it was becoming increasingly evident that houses hovering around that price was becoming more of a rarity.

Genuine first-time house buyers were gradually finding themselves being priced out of the market.
Recognising the changing property price landscape, the Government in 2013 bumped the maximum price range for SRP eligibility to RM400,000.

The move garnered ridicule from both sides of the spectrum for different reasons. On one hand, lower income groups found it laughable that a price tag of RM400,000 for a house could even be considered “affordable” as it was far beyond their reach.
On the other hand, the younger and more urbane groups who were striving to purchase their first home derided the ceiling price of RM400,000 as being out of reach. Their contention was that prices for an acceptable standard of housing was already priced beyond RM400,000.

If anything, the Government’s efforts at trying to determine what is “affordable” shows us that it should be assessed based on our personal situation.

And, what might be affordable to you today may no longer provide as comparable a standard of living to what was affordable to you five years ago. Regardless of what is affordable to you, how much is really needed to purchase an “affordable” house? Let us examine house prices ranging from RM100,000 to RM600,000.
Affordability of initial entry costs.

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Firstly, there are the entry costs of purchasing a house. Table 1 illustrates the kind of upfront cash one must have to purchase a house in a given price range.

There is the standard 10% down payment, along with the rest of the legal fees and stamp duties which follow a scheduled fee structure.

If the entry costs above look discouraging, fret not. There is hope yet. If you are a first-time buyer, there are certain schemes and methods that you can take advantage of to ease your purchasing burden.

These include (Refer to Table 2):


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1) A 50% stamp duty discount on the Sales and Purchase Agreement (SPA) for properties priced up to RM400,000.

2) SRP, which allows you to take a 100% loan for properties priced up to RM400,000, negating the need to pay the initial 10% down payment. Even if one does not qualify for the above schemes, there is still the EPF (Employees Provident Fund) or KWSP’s (Kumpulan Wang Simpanan Pekerja) scheme that allows you to withdraw money from your EPF Account II to help pay for the down payment of the house.

Affordability of loan
Even if one can afford the initial cash outlay to purchase a house, one must still be able to qualify for a mortgage loan to proceed with the purchase. When assessing whether a housing loan is affordable, there are two criteria that must be considered.

Firstly, do you meet the minimum acceptable level of income you must have before a bank can even approve your housing loan?
Secondly, even if you do qualify for the home loan, after paying off your monthly instalments, realistically, could you get by on the remaining amount?

It would be unwise to enter into a home purchase if your answer to either of the above is “No”.

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Table 3 indicates the estimated minimum level of household income one must have to qualify for a loan of the given amount in the year 2014. It also shows clearly the estimated monthly instalments one must pay. These calculations have not even taken into consideration any other commitments that you may have.

Conclusion

While your personal financial situation may be unique, the costs associated with the purchase of a home are somewhat set according to price.

The best way to know what you can afford is to measure your personal finances against the required costs.

– Loanstreet