More developer incentives needed so building affordable homes is fairly profitable

Developers urge the government to offer them more incentives as a means to offset shrinking profit margins.

The perennial issue of building affordable homes has been a contentious one, particularly as home prices continue to outstrip income growth for most Malaysians.

On the other hand, most developers lament that shrinking profit margins are not commensurate with the capital investment and risks involved to construct and put a price on houses in the affordable range for B40 and M40 house buyers.

Hence, the core issues of housing affordability and affordable housing should be equally addressed by the government so that houses are priced correctly and developers gain a fair margin.

Taraf Nusantara Sdn Bhd managing director Jimmy Doh told Property Advisor that as land and material costs continue to rise, builders of affordable homes are reeling from increasingly slim profit margins.

“This means it is difficult to be financially sustainable with all the capital investments and risks involved.

“Developers like us that are segmented in affordable categories need to design, build efficiently without compromising quality and ensure that there is adequate financing for the B40 community or first time home-buyers.”

Taraf Nusantara is currently developing Bandar Baru Setia Awan Perdana in Perak, a five-phase township with 10,500 semi-detached and terrace homes and Lagenda Teluk Intan with 10,000 homes.

He noted that pricing is largely dependent on supply and demand. Nonetheless, most reputable developers will conduct thorough market research before building.

Doh said that to encourage developers to keep building affordable homes, the government could review the many regulatory fees imposed on them.

“Currently, there are many different types of regulatory fees that local, state and federal authorities impose on developers. These contribute to higher costs for those who want to develop in this category,” he said.

Leong Hoy Kum, founder and managing director of the Mah Sing Group Bhd said as a market-driven property developer, the company had moved from higher-end products to affordable products.

“The move was in response to the soft property market in the last few years. The margin for affordable products is lower at around 18% of profit before tax (PBT) as compared to nearly 20%-25% for higher-end and commercial products,” he said.

Apart from the smaller profit margin, Leong also said that mortgage approval rates remained low.

“Based on Bank Negara Malaysia statistics, the mortgage approval rate was at 44% in the first quarter of 2020. Other than the reduction in interest rates, there has not been any easing of loans approved by banks.

“However, our conversion rate is in the range of 50%-70% as we normally have at least five to six banks that support the end-financing of our individual projects because we target affordable homes in good locations,” he said.

As a result, buyers have a wider choice of banks to apply for mortgage financing, he explained.

MacReal International Sdn Bhd associate director Gan Boon How said most developers are more concerned about their profit margin as projects below RM300,000 do not command higher margins as compared to high-end projects.

“The projects for affordable homes are not attractive as compared to high-end projects. As such the government should look into ways to incentivise developers to build more affordable homes.

“I also believe that the government has to accommodate a diplomatic solution which focuses on continuous improvement of housing market efficiency and sustainability.”

Developers of affordable homes should be incentivised

Leong hoped that the government could consider introducing more property-friendly policies such as a longer loan tenure of up to 45 years.

“Other than that, the government should allow the Developer Interest Bearing Scheme (DIBS) for first-time home buyers, discounts on development charges or a reduction on other compliance costs borne by developers.

“We also hope the threshold for foreign buyers will be lowered to RM500,000 and that there is a relaxation of lending for mortgages as the property sector is the key driver for over 140 sub-sectors in Malaysia and the property market has been down since the introduction of cooling measures in 2014,” he said.

Although the government has introduced a few affordable housing schemes, which are more market-friendly such as RumaWIP and Rumah Selangorku, it is important to note that affordability may differ depending on the location.

“For instance, you cannot have an affordable home priced at RM200,000 in the city centre. For us, we define ‘affordable’ as in the price range of RM400,000 to RM700,000,” said Leong, adding that 84% of its residential products are priced below RM700,000.

Last year, Housing Minister Zuraida Kamaruddin declared that the official definition of “affordable housing” should be in the region of RM150,000 and RM300,000 (between rural and urban).

According to PropertyAdvisor analysis, 2019 saw a decline in property transactions for houses below RM300,000 to 11,173 from 14,687 in 2018 within the Klang Valley.

This segment appears to make up approximately 35% of all transactions whereas 10 years earlier, it made up 65% of all transactions.

With rising costs further placing pressure on developer margins, is Malaysia facing an issue of insufficient affordable homes as alluded to by the government or is it really facing an issue of affordability amongst the population?

This article was written by Sharina Ahmad of PropertyAdvisor.my, Malaysia’s most comprehensive source of property data, property analytics and insights.