Tax Boost For Property
RPGT removal may increase real estate deals.
THE rumour mill has been abuzz with chatter that the Government is set to accept an industry proposal to abolish real property gains tax (RPGT) so as to boost the sluggish property market. There is also talk of a waiver or a reduction of stamp duty on property deals.
Sources say it is likely that an announcement on the matter will be made during the Invest Malaysia 2007 conference later this week. Jointly organised by Bursa Malaysia, RHB Investment Bank and UBS Securities, the event will be held between Wednesday and Friday.
Meanwhile, reports have indicated that the proposal to do away with RPGT is the result of recent meetings between property players and government officials.
It is felt that besides giving the Malaysian property sector a shot in the arm, the abolishment of RPGT will also help draw real estate investors to the Iskandar Development Region in south Johor.
The RPGT structure was last revised in the mid-1990s amid a hot property market. The Government had given waivers to ease the burden of sellers during difficult times (such as in the wake of the Asian financial crisis) but the industry has now asked for the tax to be eliminated.
RPGT is a form of capital gains tax. Only the profit arising from the disposal of a property is subject to RPGT. The tax will be assessed based on a percentage ranging between 5% and 30%, depending on how long the seller has held the property (see table). For Malaysian individuals, there is no RPGT if the property is disposed of after five years.
For foreigners, a flat rate of 30% is applicable within five years from the purchase of the property, and 5% on the sixth and subsequent years. As such, it is easy to see why it has been argued that a relaxation on RPGT can trigger a re-rating of the property sector.
Positive for property
Even without the possibility of the RPGT removal, many analysts have of late turned positive on the property sector on the back of the rising equity market and the Government's pump priming measures.
During an economic up-cycle environment, earnings of property companies tend to surprise. Generally, a healthy equity market will eventually flow through to the property sector. Analysts are expecting this to happen even faster with the abolishment of RPGT. “For those who make a living buying and selling houses, this ought be a good thing. Previously, property owners who did not wish to pay taxes needed to wait more than five years before selling. This will encourage more people to invest in properties,” says one industry observer.
An analyst from KAF Securities says it would definitely be a good thing if RPGT were abolished and if stamp duty on property transactions were waived, although market talk has it that the former is more likely. It would have an impact on foreign home buyers and locals as they would be more inclined to upgrade their homes given the absence of taxes. Key beneficiaries will include developers involved in the mid- to high-end segments. She however feels that the stamp duty waiver would be the more significant factor given that it is based on the total purchase value.
For instance, a two-and-a-half-storey house in Bandar Utama launched in 2004 is worth about RM628,000 and its sale will attract a stamp duty of RM12,000 – a small figure percentage-wise, but a large sum in absolute terms.
“That is a lot of money and it would be a point of contention for a property buyer or investor when choosing to buy the property. Some property developers pay the stamp duty for their customers in order to garner more sales,” says the analyst.
She adds that the RPGT is not a major source of income for the Government, and thus doing away with it would not affect government revenue very much. Also the increased number of transactions will probably make up for it.
“It doesn't matter whether it is a full removal or if it is a 50% rebate. We will see the overall property market picking up,” she says.
OSK investment research analyst Mervin Chow shares the same view, as he feels that investors will be able to transfer property investments easily. He foresees the higher-end market to be the biggest beneficiary as the oversupplied mass residential market is still lagging in terms of demand.
Singular Asset Management founder and chief investment officer Teoh Kok Lin says abolishing RPGT is an excellent move that will spur demand for properties.
“This lowers the transaction costs, and people will be able to buy and sell more frequently without having to worry about taxes. In terms of property prices, Malaysia is a lot cheaper than Singapore. We're even cheaper than Bangkok and Jakarta,” he adds.
“Malaysia's properties are very undervalued. I think a move like this will definitely create a more vibrant property market.”
It is on this note that the analyst from KAF Securities feels that worries of a property bubble are premature. She says: “Property prices in Malaysia are far from shooting through the roof. Although stronger price appreciation has been more apparent in certain prime areas within the Klang Valley such as Mont’Kiara, Bangsar and Damansara, supplies in these areas have been quite tight and is far from being reflective from the broader market.
“Also within Asia, our prices are lagging far behind our regional counterparts.”
Teoh believes that the abolishment of RPGT, if it happens, will positively impact not just the high-end market, but the property sector in entirety. “This benefits you and me. I don't think the Government's main aim is to attract foreign investors. After all, the largest landowners in Malaysia are Malaysians.”
Sparking foreign interest
With property prices in Malaysia being generally cheaper, and with the ringgit still considered a cheap currency, observers feel that any liberalisation in the property sector could see foreigners pumping money into the sector.
“For somebody earning pounds in Britain, what is a house that is worth RM250,000? It would also be a less risky investment compared to Malaysia's equity market,” remarks the observer.
This could also mean an uptake in the condominium market, as foreigners and expatriates tend to prefer condominiums for its better yields.
The sector has been given an additional boost as the Government has been easing restrictions on foreign buyers. As an indication, foreign purchasers will be allowed to buy houses and condominiums priced above RM250,000 per unit without the approval from the Foreign Investment Committee.
On top of that, foreigners will also not be subject to any conditions in terms of usage or limit on the number of properties purchased. Citigroup investment research head Choong Wai Kee says the market share of premium housing has been creeping up.
Assuming RM250,000 per unit as a pricing level for premium housing, Citigroup's study suggests that the market share of this segment has been steadily rising since 1999.
“This trend is not surprising to us because Malaysia’s economy is continuing to grow, leading to rising demand for better quality and larger housing,” he says.
Breaking down unsold residential properties by pricing range, Citigroup's study says the oversupply persists in housing priced at RM150,000 and below – 68% of unsold units as at the second quarter of 2006.
“This has happened because most developers concentrated on the “affordable” segment (priced less than RM150,000) after the Asian financial crisis in 1997, which led to over-building in this segment. Hence, we opine that developers with strong branding and the right products in good locations will continue to fare well in niche premium housing,” says Choong.
The analyst from KAF expects the beneficiaries to be players such as Sunrise Bhd, E & O Property Development Bhd, Mah Sing Group Bhd, SP Setia Bhd, Sunway City Bhd and Glomac Bhd. Citigroup’s top picks in this sector appear to offer earnings visibility, good dividend yield and revised net asset value upside from rising land values. “For these reasons, we think SP Setia, UEM World Bhd, TA Enterprise Bhd, Mah Sing and E&O Property look compelling,” says Choong.
Source :The Star 17/03/2007 Close Window