Bringing back Rent Control, but at whose expense?

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By Seng H Yeoh

There have been advocates pushing for Rent Control of properties in the George Town heritage area.

The primary reason, as claimed, is to enable the living culture to thrive and fulfil the objectives of the Unesco Heritage City Status.

Much of the brickbats came from so-called activists who claim that the astronomical hike in rent has driven out the traditional inhabitants.

In a hasty response, the policymakers were quick to consider bringing back Rent Control to remedy the situation. What is the real crux of the issue? Let us step outside the zone and look at the issue in totality.

The Rent Control Act was only repealed in the year 2000 after a lot of contention from the tenants. From the paper written by researcher Saeko Atsumi (Cornell, 2003), one of the key reasons for the repeal was:

“It is now felt that the time has come for the Act to cease to operate, and for the landlords to be able to recover possession of the controlled premises for purposes of development.”

Landlords had suffered in silence for decades before the repeal and now, there is an attempt to turn back the clock.

Let me provide a perspective of a major group of stakeholders in this core Heritage Zone, the clan houses.

A brief dose of history will show that the main beneficiaries of Rent Control were the main tenants who sublet the premises at astronomical profits to the sub-occupants.

With such meagre rental income, it was not economically feasible for the clan houses to conduct major repairs to improve the condition of the buildings. As such, many of the premises were left unattended, with little or no refurbishments.

Forward to July 7, 2008 when Penang was conferred the World Cultural Heritage Site by Unesco.

With this boost, the demand for properties took a positive turn with significant interest coming from foreigners. At the onset, the foreign buyers were welcomed as the local owners could sell at a tidy sum.

The aftermath led to a wave of renovation and restoration of the dilapidated properties. If we refer to the intended objective above, the repeal did lead to the improvement of the properties.

With expanded capital investment for refurbishment, there is a reciprocal tendency to increase the rent to justify the returns on investment. The spillover effect was a general rise in rental based on market forces.

What was the impact on properties owned by clan houses? With increased demand for restored properties and the corresponding higher rental yields, there is now an economic incentive for clan houses to invest in restoration and improvement works. Otherwise, there is no justification for the capital expenditure.

The public authorities made matters worse with the over zealousness of the Heritage Committee of the local council.

This regulatory body imposed stringent conditions on the materials used, the type of plastering, with strict conformance to the original specifications of the buildings.

While the act appears laudable from the conservation perspective, it begs the question of who will pay for the costs.

Clan house are not funded by the state and do not receive annual grants from the local authorities. Their main source of revenue is the rental income from the properties owned, which are predominantly in the heritage zone.

There would certainly be a double whammy effect if Rent Control is introduced, leading to a drop in revenue while the cost of compliance to the heritage requirements remains high.

If a clan house spends a few hundred thousand ringgit on restoration works, there has to be a corresponding rise in rental. Otherwise, it would revert to the Rent Control days when the building conditions would be far from desirable.

Some activists even proposed that clan houses subsidise the long-term tenants.

Incidentally, a number of these tenants are the same parties who have benefited from the sub–leases for decades. They are also the ones who stretch payments knowing that clan houses are less litigious compared with private landlords.

For the advocates of subsidies for tenants, let me raise the question on who will subsidise the clan houses for the exorbitant costs of repairs and restoration?

Berlin’s way was for a Rent Observatory body to monitor excessive rate hikes (rent brakes) and not limit an increase in rental.

There are different areas within the Heritage Zone and the conditions of the properties are taken into consideration.

The local council legislation is only enforced when the tenants take the landlords to court. There are also exceptions to the rental limits on percentage increase.

If a property is renovated at a cost that reaches beyond a third of what it would cost to construct a new building, the limit on the rental rise is waived.

The problem with our public policy is that recommended solutions tend to be reactionary in response to small groups generating higher decibels.

There should be an integrated approach where stakeholders should be invited to meet with policymakers to offer their views and feedback.

There could be separate sessions with the clan houses, private landlords, and representatives of tenants to voice their concerns.

A comprehensive survey could be conducted by the Housing, Building and Planning Faculty of USM to determine the extent of the economic impact on the stakeholders.

From the findings, public policy measures can then be more objective and efficient without pandering to those who shout the loudest.

Seng H Yeoh is an FMT reader from Penang.

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