RPGT hike a game changer for investors

The doubling of the real property gains tax (RPGT) announced in the 2014 budget and impending surge in supply of newly completed properties has changed the game for property investors who will likely have to wave good-bye to the days of property flipping that were rampant in the last two to three years.

Short term investors and speculators are expected to be the biggest losers from the RPGT hike announced in the 2014 budget.

The increase in RPGT – which went up from 15% to 30% for properties disposed within the first three years – will likely hit investor sentiment and could cause a drop in interest in the secondary or sub-sale market.

Short-term Investors will be at disadvantage

Without a pool of ready buyers for the newly completed properties, short-term investors without sufficient holding power will have to contemplate selling their properties for less than expected or be prepared to fork out the interest payments as their loan servicing kicks in.

Long term investors however are unlikely to be overly concerned about the duty increase.

“The increase in RPGT is a wake-up call for flippers,” said Foo Gee Jen, managing director at property consultancy CH Williams Talhar and Wong.

“Investors will have to go back to investing in property fundamentals, such as location and yield.”

Foo noted however that long-term investors have no need to change their plans as they had built in a long time horizon into their investment strategy and the property gains tax would not be applicable or only minimal when they decide to sell.

He said that the increase in tax was positive for the long-term sustainability of the market.

Foo added that while there would be an immediate reaction in the market to the RPGT hike it would not be drastic.

“There is no major impact expected in the long term,” he said. “I am still bullish on the outlook of the property market as we have a growing population.”

A real estate negotiator, who wanted to be known only as R.T., said that the “happy days” of making a quick profit by buying and selling whatever properties were hot is now coming to an end.

He said that with the RPGT increase, secondary market properties would be less appealing to some investors who would prefer to look at new launches as the construction period would likely extend past the period during which the most punitive bracket of RPGT would apply.

R.T. also noted that investors that had bought into property launches without solid demand and hoping to make a profit by selling it to another investor upon completion will likely be hurt unless they had significant financial stamina.

“Investors will have to go back to basics,” he said.

While the controversial Developer Interest Bearing scheme (DIBS) has been banned going forward, it is likely developers will come up with alternative financing schemes for buyers.

Opinions on RPGT hike and abolishment of DIBS

Steve Yong, an investor who has accumulated more than three properties so far said that the increase in RPGT and the abolishment of DIBS was welcome as it would cool down the market and make it more sustainable in the long run.

He also said that the changes will not impact his investment strategy.

“A good investor will adapt accordingly,” he said. “I cannot change the wind but I can always adjust my sail.”

Another active property investor, Jason Chong, said that he doesn’t expect to be impacted by the tax increase.

“If you have a long-term strategy, you buy to keep,” he said. “You shouldn’t be afraid of policy changes.”

Developers however are warning that the increase in RPGT may have an opposite effect of sending prices higher.

Real Estate and Housing Developers Association (Rehda) president Datuk Michael Yam said that the doubling of RPGT could encourage investors to hold on to their properties causing a drop in supply in the secondary market and drive prices even higher.

“Genuine house-buyers may be hurt,” he said. “Some fine-tuning of the RPGT may be necessary.”

Yam said that contrary to some expectations in the market, he does not expect the property prices to drop due to the changes in the property gains tax structure.

“Prices are not going to reduce,” he said. “At best it will stabilise. At worse, the rate of escalation will be slower.”

“I don’t think the government intends for property prices to drop or you will upset the 4.6 million house-owners in the country,” he added.

Yam also pointed out that the cost-push factor in property development remained.

He said however that more clarity was needed on the Goods and Services Tax (GST) and its impact on property prices due to a possible increase in prices of materials when it comes into force in 2015.

“We are waiting for more engagement on GST with the government,” he said. “It may not be straightforward. Some segments of property maybe exempted.”

Group Managing Director of the Mah Sing Group Berhad, Tan Sri Dato’ Sri Leong Hoy Kum noted that a recent property research report said that demand for properties will surge before the implementation of the GST due to anticipation of the increases in new house prices.

“Experience from other countries has seen such trends in anticipation of future cost push inflation on asset prices,” said Tan in a media statement.

Malaysia had previously exempted investors from RPGT in 2007 but re-introduced the tax in 2010 due to concerns that the property market was overheating.

Beginning next year, investors will be taxed on profits at 30% if they disposed their property within three years and 20% and 15% for the fourth and fifth year respectively.

 

* Article was first published on Free Malaysia Today.