Connexion: Housing developers need radical paradigm shift

By Joachim Ng

In the Edge City & Country’s report on its Green Excellence Award 2022 , “… one site stood out for the judges — 1 Lasam in Ipoh by Perak-based Bonanza Venture Holdings (BVH) Sdn Bhd.” 1 Lasam won the Edge-PAM award, crowning BVH group headquarters’ record as the first Green Building Index Platinum (DA)-certified building in Perak.

Earlier in June, 1 Lasam also won the Silver Award in the Sustainable Development Goal Category of the PAM Awards 2022 by the Malaysian Institute of Architects, or Pertubuhan Akitek Malaysia (PAM).

In an interview with Ipoh Echo published last month, BVH director Edwin Tan said: “It is our greatest wish that 1 Lasam will become more than just a landmark in Ipoh, that it will become an example of sustainability that others would want to emulate while educating the general public on what green buildings are and their importance,” said Tan.

The property industry as a whole should fulfil this wish and move, not only in an ecologically sustainable direction but also in an economically sustainable direction. Residential accommodation is one property segment that is driven by the wrong paradigm and needs to be pushed towards adopting new patterns of operation.

Housing has long become a commodity that you buy and sell for profit. Everybody wants to profit from housing, including the Government which makes by charging a hefty premium for converting a piece of land to residential use. As the premium is based on land value, a developer owning 5 acres valued at RM100 per square feet will pay roughly RM20 million.

There is also an Improvement Service Fund contribution to the local authority which works out to roughly RM320,000 if you build 500 condo units of average size 1,200sf on 5 acres. After obtaining the Development Order, the developer has to pay a Development Charge which could be 2.5% of the gross development value or cost to develop the project. For a 500-unit medium-priced condo, this may work out to RM6 mil.

The developer has also to pay utility companies to provide sewerage, telecommunications services, water and electricity. That could be another RM2 mil. Building the roads and drains will cost another RM5 mil. All these peripheral costs jack up house prices by 15% to 35% depending on the type of development and will be passed on to the purchasers.

Every developer is also given a quota of low-cost houses to subsidise. Developers recover this cost by factoring it into the selling price of their regular houses. Then there is the upward spiral of construction cost, with prices of building materials such as gypsum products, softwood lumber, cement, steel, aluminium alloy, wires, bricks, and PVC pipes higher than in pre-Covid years.

Two interconnected factors should lead the industry to consider a paradigm shift in housing: prices in relation to environmental sustainability, and prices in relation to social stability.This article will discuss prices in relation to social stability.

The primary discontent fuelling pro-democracy riots in Hong Kong is the depressing housing environment. Most families can only afford to rent mini-studio apartments that are too small even for singles. Getting youngsters to join mass protests is easy as they spend most of their daytime on the streets.

Hong Kong is an extreme case. More likely we are going to resemble Europe where only half the population can afford to buy properties and the other half are spending half their incomes on paying high rents. The spillover effect on the larger economy is that there is less disposable income for retail shopping. In Berlin, 80% of the people are tenants.

But in a worst-case scenario, we will be forced to take the low road to America where unaffordable properties are twinned by unaffordable rents pushing elderly jobless people to retire onto the streets. Los Angeles and Phoenix are glaring examples of cities that are seeing tens of thousands of homeless folks pitching tents along street walkways. In Australia, surging inflation is forcing rents so high up that renters are being evicted.

We may be reaching that low road. The median house price in Malaysia is RM295,000 and that is 4.72 times the annual median household income of RM62,508. This ratio of house price to income is classified as “seriously unaffordable” and in Perak it is at 5.13 (severely unaffordable). For a house to be affordable, the ratio must not exceed 3.0.

To afford a RM300,000 house you need a monthly income of RM8,333. Only a quarter of Malaysian households earn this combined husband-wife income. An affordable house for three-quarters of Perakians has to be priced at RM200,000 and preferably below.

To build an affordable house occupying 1,000 sf of land, you need the land price to be capped at RM30 psf. As land cost makes up 20% of total cost, the house can be built for RM150,000 at RM30 psf land price. But even if you can secure a loan tenure stretching to 60 years with a two-generation agreement, continually rising interest rates will turn your finances topsy-turvy.

Your fallback position is to rent, but the landlord’s primary goal is to obtain a yield higher than the FD rate. For a RM500,000 property, expect the rent to be not lower than RM2,000 monthly. The landlord also has overheads to cover such as assessment tax, and building maintenance contribution if it is a condo unit. These overheads push the rent to RM2,500. If property prices keep surging, many will not be able to afford rental.

Prices will decline with a change of paradigm starting with a classification of housing into three categories: affordable (70%), medium-cost (20%), luxury (10%). There must be a rule that affordable housing is strictly for own accommodation. As it is, many affordable houses are purchased by investors who rent them out and later do a flip when there is good capital appreciation. Proof of low income must be made a strict requirement.

A radical paradigm shift means excluding the land and inserting a term limit of, say, 50 years into the SPA. The developer repossesses the area after 50 years for purposes of redevelopment. These two measures will slash the price by a third, bringing a RM300,000 house down to the affordable limit of RM200,000. Term purchase also ensures that aged properties do not turn into slums as they will be torn down for redevelopment.

The price can be further slashed if Government fees imposed on developers are removed for affordable housing, and utility companies are made to bear all the costs of their own fixtures. REIT companies should be pulled into affordable housing for sale and rent as they have a modest profit target, with a dividend yield of 8% considered attractive.

Developers of affordable housing units should not have to undertake market research. Inadequate data has led to a volume and location mismatch resulting in losses. A paradigm shift would require the Government to undertake research and planning for affordable housing as it has all the population data. The Government should decide the locations and population target for each new development area.

In another article, we will discuss ways to improve the desirability of affordable and medium-cost housing.


Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Ipoh Echo

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