How the Budget 2014 revised RPG Tax will impact on the Property Industry
On Friday, October 25th 2013, Malaysian PM, Dato’ Sri Mohd Najib Bin Tun Haji Abdul Razak, has unveiled and tabled the much waited Budget 2014 which carried, as tag-lines, “Strengthening Economic Resilience, Accelerating Transformation and Fulfilling Promises”.
While Budget 2013 has surely been the Budget for the Rakyat this year the Budget 2014 has to be read with a “Country eye” or, in other words, Budget 2014 surely is a Budget for Negara. Earlier this year Malaysia has been receiving a warning from international credit rating agencies in the form of a “downgrading” of the outlook from stable to negative. Budget 2014 is the reply to it and has been welcomed by the agencies in a very positive way. Now it is up to the Government to show that is able to “walk its talk”.
GST wise no worry, for the moment. Malaysia still has one year plus to get ready for it. AN earlier implementation of GST would have been representing a kind of “economic suicide” and the Government has been smart enough to see the risk of it and act properly. We will all have to get ready, understand the application and the implication of the GST enforcement that will finally take place on April 1st, 2015.
Economic performance wise this 2013 has been for Malaysia a “transition year”. The economy didn’t perform as well as the past year but we are still far above others and the “others’ are all fully developed Countries and “advanced economies”. To have a confirmation to this compare the basic indexes below and you will see the outcome by yourselves.
The outlook for 2014 is at the moment positive and many are the positive comments to the Malaysian economic and financial performances. On October 22nd and 23rd Kuala Lumpur has hosted the World Capital Market Symposium during which world experts from all the different layers of the financial sector have been praising the Malaysian performances. Next year the economy should be boosted by all the new megaprojects announced earlier on this year and some of the new ones. The high speed train between Singapore and Kuala Lumpur has been confirmed and will become real in few years and the new highways and upgrading of existing roads proposed with Budget 2014 will enhance the logistic mobility between North and South. Contemporaneously, looking at this facts with a “property eye”, new areas will profit of the increased accessibility and will slowly become the Property hot spots for the next few years. Kuantan and a good part of the east coast will see an uprising trend of growth that will start with enhanced infrastructures, proceed with industrial and manufacturing parks to finally see residential and commercial developments been launched within the next couple of years. Investors should keep a close watch on these areas to grab the opportunity when it will appear.
RPGT, DIBS and foreigner purchasing value cap
Everybody was expecting big changes in the property taxation, rules and regulations and it really happened. RPG Tax has been brought back to 30% and Companies and foreigners will keep on paying a final 5% even after the 5 years. The Prime Minister has been introducing these changes justifying or better explaining the choice that the Government has done with this word:
“187. I hear the grouses of the rakyat who wish to own a comfortable home, especially from those in the low and medium-income groups. Various concerns have often been raised, such as soaring house prices, inadequate supply of houses and difficulties in getting financing.
188. The recent sharp increase in the prices of houses has affected the ability of the rakyat to purchase houses. In addition, speculative activities have an impact on house prices and can adversely affect the real estate market in the long term.”
Then the confirmation of our worst fears:
For sure the new RPG Tax will curb the highly speculative operations that some investors have been conducting in the last few years; buy today and resell within 12 months or even earlier with a profit. From my point of view the implementation of the new RPG Tax will bring benefit to the market helping in redefining investment in the real estate. A property investment should not be seen as a very short term transaction. The capital market with Forex and the stock exchange are there to accomplish this. Real estate investment has to be seen and used as a medium-long term transaction. Now if we look at the revised taxation with an investor medium-term eye, 3 to 5 years, the scenario is actually not that bad. Where investors are buying most of their properties? A good 80% of them are chosing their purchase from new development projects. The next question is: when investors are buying in new projects? Most of the time they are doing their best to profit of pre-launching offers from developers. If we visualize this in a table it is easy to see how little the actual RPGT impact is for “real” property investors.
What I think most of Malaysians want is a stable Property Market, the new RPG Tax will help in building a long lasting profitable market, no doubt on this.
Two other important changes are the ones affecting minimum value for properties purchase by foreigners and the much liked DIBS (Developer Interest Bearing Scheme). For the first one, considering that in the hottest Property Spot in Malaysia “Iskandar Malaysia” less than 8% of the transactions have been completed by foreigners, I cannot see how this new limit will affect negatively the Property Market. Furthermore most of the properties purchased by foreigner are far above the new RM1,000,000 cap which is much higher of the “affordability values” which have been recently so much spoken about. The new cap is setting a limit that will not affect anymore the properties normally purchased by the middle class income earner group and this will help this group to finally see a more stable and realistic values and market situation. DIBS instead require an explanation which might not be liked by everybody but, I hope, at the end of it some of you readers will agree with me with the logic behind. DIBS as far as “Zero Deposit”, “Free Loan Agreement”, “Free MOT” and so on are mostly financial packages that many developers have been offered to the public during the last few years only. These financial packages have been the “reply” to the pressing public demand for lower cash out-flow requested when purchasing a property. Considering that the profitability of development projects has been eroded in the years by higher costs, taxation and competition, developers have been, I would say rightfully, adding these “additional financial costs” into the finalization of their pricing or, in other words, the purchasers are still paying for most of these financial items but in a much less painfully way together with the loan installments. What should be a logic question that all the purchasers should ask themselves is: how much more I’m going to pay for all these “free-but-pay-later” freebies? I’m quite sure the reply, which can be seen in the table below, will make everybody recalculating the convenience to buy a house for a house instead of a house for a house-plus-plus-plus.
In conclusion the new imposed taxation and the new rules for the Property Market should slowly bring a healthier market situation and a more stable growth trend for Property values which are the basic fundamentals for a long term sustainable market. Both developers and purchasers, either for own use or investors, should be looking in a positive way to this improvement which guarantees to the industry many more profitable years to come.
Let me close this possibly different interpretation of the Budget 2014 with an optimistic quote by Wil Rogers (1935): “Don’t wait to buy Real Estate but buy Real Estate and then wait!”