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Budget 2019 and Its Impact on the Property Industry in Malaysia

Nov 08, 2018

Kuala Lumpur, 08 November : Budget 2019 and Its Impact on the Property Industry in Malaysia

2nd November 2018 marked the first time in 60 years that the country’s budget was presented by a Finance Minister who is not from the Barisan Nasional government and the first time in 20 years that the Finance Minister who presented the budget was not at the same time, the Prime Minister of the country. This would probably not have been possible if not for the astonishing outcome of GE14 on the 9th of May 2018 when the then opposition Pakatan Harapan coalition came up winners in the election.

In his maiden Budget which carried the theme "Credible Malaysia, Dynamic Economy, Prosperous Rakyat", Finance Minister YB Lim Guan Eng, unveiled a budget which was less painful than expected, after rumours of a tough budget with new taxes floated around in the weeks leading to the tabling of the Budget.

In the Budget, the Finance Minister revealed that the Malaysian economy is projected to grow at a slower pace of 4.8% in 2018 and 4.9% in 2019 as compared to the 5.9% growth achieved in 2017. This is against the backdrop of a slower global economic growth of 3.7% in both 2018 and 2019.

In view of the less favourable financial situation of the country, several major infrastructural projects have either been cancelled or postponed eg. the Mass Rapid Circle Line (MRT 3) and the Kuala Lumpur-Singapore High-Speed Rail (HSR) due to the inability of the government to fund such projects. Nevertheless, the government has decided to move ahead with some other projects eg. Sungai Buloh-Serdang-Putrajaya (SSP Line) MRT 2 after the cost has been reduced by 23% and Light Rail Transit 3 (LRT 3) where the cost has been slashed by 47%. At the same time, the Klang Valley double track project, will be retendered on an open tender basis where it is hoped that the cost can be brought down significantly before the project is carried out. This is certainly sweet news to property developers who have purchased land along these rail lines to take advantage of the enhanced accessibility as well as investors or homebuyers who have invested in a property located near the proposed stations along these lines in the hope of enjoying strong capital appreciation when these rail lines become operational.

Budget 2019 did not offer much in terms of the goodies hoped for on the property developers’ wish list which will help to stimulate the current sluggish property market. Nevertheless, the budget can be described as mildly positive as it did contain some goodies although they were offset by some additional tax burdens.

The main thrust of the budget was on the lower to middle income groups as the affordable housing sector once again took centre stage. The following are the key budget highlights which have an impact on the property sector.

>> An allocation of RM1.5 billion will be set aside for the building of affordable homes.

>> A further sum of RM1 billion will be provided via Bank Negara Malaysia to help first time home buyers with monthly incomes of less than RM2,300 to finance their purchase of homes costing less than RM150,000 at a lower interest rate of 3.5%.

>> An allocation of RM25 million by Cagamas will be used to provide mortgage guarantees for first time home buyers with monthly household incomes of less than RM5,000.

>> There will be a stamp duty exemption on the first RM300,000 on the Sale & Purchase agreement and Loan Agreement for first time purchasers of homes costing RM500,000 and below for a period of two years till end 2020.

"Henry Butcher: The above measures are expected to fuel demand for housing in the affordable price segment. The substantial allocation of RM1.5 billion for the building of affordable homes is indeed welcoming news for those in the lower to middle income groups who have not been able to purchase their dream home amidst the rapid rise in house prices over the past five years. Nevertheless, it is noted that a similar allocation of RM1.5 billion was announced in Budget 2018 by the previous administration but due to weaknesses in implementation, the affordable homes targets were never met. With new hands on deck, it is anticipated that the cherished hopes of the lower- and middle-income groups of owning a home can now be fulfilled."

>> To alleviate the huge overhang of unsold houses, there will also be a six months stamp duty exemption on the first time purchase of homes costing between RM300,000 and RM1 million.

"HB: Although the impact is not expected to be substantial, the foregoing two measures will help to revive interest to a certain degree in the current sluggish housing market."

>> The stamp duty on transfer of property above RM1 million will be raised from the current 3% to 4%.

"HB: This is a dampener for the high-end market as it increases the acquisition costs for buyers of properties in this market segment which is already seeing slow sales."

>> The Sales and Service Tax (SST) will be extended to foreign service providers.

"HB: This means that companies engaging foreign consultants like architects will have to pay more and the government hopes that this will lead to more jobs going to local consultants."

>> In consideration for the exemption of building materials from SST, the real estate and housing developers’ association (REHDA) has pledged that developers will reduce the cost of houses by at least 10%.

"HB: We have to point out that there are a multitude of factors which influence how property developers price their properties. Cost is obviously a major consideration but demand as evidenced by the sales take-up rate is also a factor which a developer will not ignore. As it is, even without the SST exemption, developers are already giving discounts, rebates and other goodies besides easy payment schemes and even developer financing schemes to lure buyers. To really attract buyers, the proposed 10% price reduction will have to be over and above what the developers are currently offering to the buyers."

>> The Real Property Gains Tax (RPGT) structure will be amended such that locals as well as permanent residents will now be levied a tax of 5% (previously 0%) if the sale of property takes place after the fifth year. For non-citizens who are not permanent residents as well as companies, the tax rate will be set at 10% (previously 5%). Low cost, low medium cost and affordable houses costing RM200,000 and below will be exempted.

"HB: The objective of RPGT is to deter short term speculative activities and therefore penalises the people who flip the properties after a short period of owning them. Although the tax rate of 5%/10% is not substantial and will probably not deter people from continuing to buy properties, it is our view that genuine buyers who have held the properties for a long period of time such as five years and more should not be penalised. In this case perhaps the government could introduce a new tier and limit the 5%/10% tax on those who own the property for less than 7 or maybe 10 years. Those who dispose of their properties after ten years should be exempted from any RPGT."

>> Peer-to-Peer Lending Scheme – The government will allow the private sector to set up crowdfunding platforms to enable buyers to own a property with just a 20% down payment with the balance 80% to be raised from contributors. There will be no mortgage repayments or interest payments for a period of five years after which the property owner can refinance his property if he decides to stay on or to sell his property if he decides not to keep it. More details on this P2P scheme is needed to assess its attractiveness and viability. Nevertheless based on the FundMyHome platform which was launched after the Budget announcement, it was mentioned that if the property is sold after the five year period, the contributors and owner will firstly get back their capital after which, the surplus will be distributed between the contributors and the owner. The contributors will get a first cut amounting to 20% of the surplus whilst the balance 80% will be distributed between the owner and the contributor in the ratio of 20:80. A security agent will hold the property as security.

"HB: This is a very interesting and innovative scheme to boost home ownership but as this is the first such a scheme is being implemented, there are many grey areas which need to be addressed such as the cost of running these crowdfunding platforms, the criteria for qualifying as a buyer under the scheme, how properties are evaluated and accepted into the scheme as well as how risks are mitigated for contributors. Further, it is quite common for buyers in the low- and middle-income groups to apply for a 90% loan margin as they do not have sufficient savings to pay more than 10% of the purchase price and it may be difficult for these groups to come up with a 20% down payment. In fact, to lure such buyers, developers are offering zero down-payment or easy entry schemes which do not require the buyers to come up with much upfront payments. Lastly, as it is something new, the man on the street would need some time to understand and digest the scheme and a lot of hand holding before they dare to take the plunge and sign up as a contributor."

>> The government has announced plans to set up the world’s first “Airport Real Estate Investment Trust” (REIT) into where the assets of Malaysia Airports Holdings Berhad (MAHB) will be injected. MAHB will be given concessions to operate these airports whilst investors of the REIT will receive income arising from user fees collected from MAHB. The government hopes to raise RM4 billion from this exercise

"HB: The REIT will provide not only institutional but also retail investors a rare opportunity to invest in quality infrastructure assets and benefit from the growth of the aviation industry. Nevertheless, the setting up of this REIT is announced at the same time as the levying of a tax on international departures which may, although in our view, will probably not affect much, the number of international travellers departing from our airports."

>> The Government has also announced plans to hold scheduled and staggered sales of land via auctions to the highest bidders to generate revenue.

"HB: Hopefully this will increase the supply of landbank for housing development and help to keep a cap on rising land costs in the major towns."

>> Khazanah Malaysia will be entrusted to develop an 80-acre site located in Subang into a world standard aerospace hub.

"HB: This aerospace hub is expected to generate employment opportunities and create demand for housing as well as shops to support commercial activities."

>> The Government will also designate a 380 acres site in Pulau Indah in Selangor as a Free Trade Zone to support the shipping and logistics business in Port Klang.

"HB: This augurs well for not only the shipping and logistics industries but will at the same time provide opportunities for property development activities such as housing schemes and commercial centres in Pulau Indah and Port Klang."

>> The Government will turn Pulau Pangkor into a Free Trade Zone.

"HB: This is expected to provide a big boost to tourism on the island and lead to more commercial properties being developed besides hospitality and leisure related developments such as theme parks and hotels."

Overall, Budget 2019 may not have a lot of goodies for the property sector but the positive growth of 4.8% and 4.9% in 2019 and 2020 respectively is supportive of a stable property market. The larger budget deficit may temporarily affect the country’s financial standing and international credit rating agencies’ evaluation of Malaysia but the greater transparency and determination of the government to clean up the excesses and wrongdoings of the previous administration and the steps being taken to put the country’s economy on a sound and firmer footing augurs well for the future of the nation and we certainly look forward to all these measures leading to a speedier but more orderly recovery of the property market.


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