Q&A – June

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Ziv Nakajima-Magen,an Australian, together with his Japanese partner established Nippon Tradings International (NTI) to assist investors in capitalising on Japan’s vast property market. He can be contacted at: zmagen@ nippontradings.com

Q : Japan was the hottest property market in Asia last year and in all likelihood this year. I am wondering why it is so from the standpoint of the nation being susceptible to natural disasters such as earthquakes, tsunamis and volcanoes. Are all buildings in Japan earthquake-resistant and are all buildings covered by natural disaster insurance?

ZM : The short answer is yes, all structures in Japan are earthquake-resistant and all buildings are covered by natural disaster insurance policies. The levels of protection, however, vary as follows:-

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1) Generally speaking, reinforced concrete buildings are of course far more resistant than wooden structures. Japan generally does not use bricks and mortar as building materials, and so most houses (as opposed to apartment blocks) are wooden-based structures. And while said wooden structures have also gone through some earthquake resistance standards re-vamps, such as ensuring reinforced concrete foundations and pre-built ground/foundation compatibility tests, to name but a few — they are still far more susceptible to earthquake damages. The property investment market, however, is primarily focussed on apartment blocks, and so the vulnerability of wooden structures is more of an issue for owner-occupiers than investors.

2) Reinforced concrete buildings have gone through several cycles of earthquake resistant building standards renovations, the latest of which have been introduced in 1981. Stricter testing methodologies for reinforced concrete buildings have been introduced in 2006 as well.

3) Natural disasters are included in the vast majority of insurance policies (which are ridiculously cheap in Japan, incidentally) — tsunamis are not covered specifically, but since they are always caused by deep sea earthquakes, therefore are covered indirectly. The level of coverage varies however, and is normally about 50-60% of the value of the property at most.

4) Individual unit owners in reinforced concrete blocks are also partially covered by the building’s accumulated funds pool (known in other countries as the sink fund pool) which is always used to repair natural disaster damages as well.

5) Last but not least, in cases where all of the above don’t apply for any reason, government compensation will be provided—although this may take a far longer time than any of the compensation methods listed above.

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Steven Craig is the Managing Director of JLL Korea, and he also heads the Capital Markets team.

Q :Will the jeonsae rental system eventually be phased out by a hybrid monthly rental system and how would this impact on both commercial and residential properties?

SC : Jeonsae, in the commercial market, especially in major office buildings, is rare nowadays. It’s been that way since the influx of foreign investors into the market in the late 1990s and the early 2000s following the Asian Financial Crisis, which had the effect of ‘internationalising’ leasing market practices.

qa2However, in the residential market, jeonsae is still very common. The stagnant house price growth witnessed since the Great Financial Crisis (GFC) and the current low interest rates should really be the death knell for the jeonsae system but typical Western-style monthly rent structures still only account for about 4% of leases nationwide.

Landlords are keen to boost their monthly returns but many are heavily indebted and are relying upon jeonsae deposits to keep their heads above water. The Bank of Korea estimates that 10% of Korea’s 3.7 million jeonsae landlords may find it difficult to repay tenants’ deposits but that’s likely a conservative number considering the dominant market practice of having to find a new tenant in order to pay back the jeonsae amount to a departing tenant.

What we are seeing though is an increase in hybrid lease structures—a lower (but still significant) key money deposit plus a monthly rent payment although lower than under a typical monthly rent system.

That’s likely to evolve to become the dominant lease system because unless we see a significant financial crisis or high prices go through the roof – both of which seem unlikely anytime soon—the high deposits used under jeonsae and hybrid leases structures are unlikely to wash out of the system.

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Elizabeth Siew is Managing Partner of Messrs Iqbal Hakim, Sia & Voo and has vast experience in conveyancing and corporate legal matters.

Q : I am thinking of participating in an en bloc purchase of a block of offices with 20 other purchasers. How would the agreement be framed to ensure that we are all able to exit amicably and profitably from the deal later? What are the key clauses?

ES : It depends on the manner and structure of the ‘en bloc’ purchase. If the group is merely grouping together to negotiate for an en bloc bulk discount from the developer or vendor, while every unit will be purchased by individuals, then no particular agreement is required between the 21 of you in relation to the acquisition of these properties.

Depending on the objectives of the acquisition, the 21 individuals may consider entering into some sort of Deed of Mutual Covenants or ‘Agreement’ to govern matters like joint management of the properties, appointment of Property Manager, general policy of rent and sale (setting minimum or maximum price of rent or sale), pre-determining the type of trade allowed within the properties, potential pool rental income and distribution of the pool income. The Deed of Mutual Covenants or Agreement will need to be tailor made to match and meet your commercial objectives.

If the group is forming a company or partnership to purchase the en bloc offices i.e. the sale and purchase agreement for all the office units will be under a ‘legal entity’, then a ‘joint venture’ agreement may be necessary and required to govern the manner of joint venture and duties, responsibilities, obligations and relationship of the joint venture partners.

klcc2If the vehicle used is a limited liability company i.e. Sendirian Berhad, then all ‘joint venture partners’ ought to enter into a Shareholders’ Agreement. If the vehicle used is a partnership, then you ought to enter into a Partnership Agreement.

Matters to be provided in the agreements will include the number of shareholders and directors, quorum and manner of conducting meetings, manner of voting, each shareholder or partner’s covenants, undertakings, obligations, duties and responsibilities, breach of obligations, covenants and undertakings, consequence of breach, termination by virtue of breach, death, insanity, etc.

To sum up, whatever the legal documents the parties enter into, it is necessary to be mindful of 3 stages of the investment timeline—entry point, holding period and exit point. The above list and items are far from exhaustive. You are advised to engage the services of a professional lawyer in drafting the necessary documents.

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Agnes Wong, the Managing Partner of Syarikat Ong Group of Companies specialises in tax consultancy for corporate restructuring, business advisory and GST.

Q : I have set up a private limited company to deal with 10 of my investment properties in Malaysia, as well as for future purchase of properties. My total rental income (gross) is RM200K a year. Do I need to register for Goods and Services Tax (GST)?

AW : By purely looking at the rental income of RM200K p.a., I would give a “No Need” as my answer because the mandatory registration threshold of RM500K p.a. has not been met. However, with the new amendments in the GST Guide for Property Developers dated 30 March, 2015, determining registration threshold is no longer so straightforward. See Clause 52 from the Guide for Property Developers below:

 

52. In the case of land, any individual is treated as carrying out a business if he has-

a) in his possession more than 2 commercial properties or more than one acre of commercial land; and

b) the intention to supply such commercial properties as a supply of goods.

Looking at the said clause, one would realise that further clarification is still required to address a real life situation. This includes:

1) How to define “intention”?

2) At which stage of the property investment that the “intention” test is required to be done – at point of purchase, point of holding or point of selling?

3) What is the documentation proof required by the Customs when assessing “intention”?

4) Is the ‘holding period’ an issue that will result in different outcome when assessing the “intention” of an investment?

gstIn reality, property investment is not as straightforward as 1 + 1 = 2 as circumstances do change from time to time, and case to case. For example, a buyer who first purchased the property with the intention of own use, may had decided to sell it upon obtaining vacant possession due to change of decision, found a better property, sold it to improve cashflow, etc.

Until further clarification comes from Customs, one important question requiring DIY answers would be, to the best of one’s knowledge:-

“How many commercial properties do I have in hand which are invested for the purpose of subsequent sale and not for rental or put to own use?”

If the answer is more than two commercial properties, theoretically, registration requirement is met by virtue of Clause 52 of Guide for Property Developers. In conclusion, a property investor, when assessing whether he/she needs to register for GST, needs to assess not only the yearly rental income but also whether Clause 52 of Guide for Property Developers has been met.

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Michael Yeoh is a 19-year veteran in mortgage matters. You may contact him at www.michaelyeoh. com.my

Q :I have a housing loan each in Singapore and Australia; and four loans (both residential and commercial) in Malaysia. My rental income pays for the instalments and I still have positive cash flow after that. I am thinking of taking another loan for a duplex condominium unit in Kuala Lumpur. I have several questions:

How do I ensure that I will get a loan? Do I need to declare to prospective Malaysian lenders my loans in Singapore and Australia?

MY : If you are from, say Singapore, and want to borrow from a Malaysian bank, it will ask you to print your credit bureau report (http://www.creditbureau.com.sg/) as part of the documents needed in their credit assessment of you. The report will show your commitments (debts) in your country. Every country has this type of report but calls it a different name. It will also show whether you are a good paymaster.

If you are Malaysian, you don’t need to declare your overseas loans. If you show the Malaysian bank your overseas loans, it will take them into consideration in your debt calculation.

qa4If you are Malaysian, you need to do three things first before you apply for a loan. First, you need to know yourself. Sometimes an excess amount of rental is way too little and will not help much on the loan approval. You need to check the following information which banks will look into before approving your application:

1. Credit Tip-Off System (CTOS)

You can now do a self-check online at https://www.ctos.com.my/consumer/. Previously, it was very difficult to check on a potential customer’s financial status unless the company subscribed to the system. This is managed by a private company.

2. Central Credit Reference Information System (CCRIS)

This is owned by our central bank. It will show all your debts and repayments. If your CCRIS statement always shows late payments, the banks most probably will not grant you your loan. A CCRIS report will show a 12-month cycle. To know more, visit http://creditbureau.bnm.gov.my/ccris.html.

3. Debt Service Ratio (DSR)

If you have an income and a debt, you will have a DSR. The banks will calculate your DSR before approving your loan.

Do not, I repeat: Do not be over-confident that your loan will be approved. Submit what the banks want – nothing more, nothing less. Gone are the days when people tended to submit everything to the banks.

Q : How do I find the cheapest interest rate?

MY :  I am always asked this question by borrowers or in seminars. You need to do your research. The banks keep changing the interest rate. In Malaysia, we have Base Lending Rate (BLR) and Base Rate (BR) effective January 2015. If I were to write on how to choose interest rates, this will be a very long answer. You can attend one of my seminars to know more.

Is the “cheapest interest rate” really the best? If you ask me, my answer will be a big “NO”. Not necessary. It depends on your goal when buying a house. Sometimes there is a huge difference between buying a house to live in and purchasing for investment.

Let’s say you want to buy this house for investment and you will sell it in two years’ time. Do you take the loan package with lock-in rates and penalty or none of this? Definitely you will choose the second one but the interest rate would be higher. If you do your own calculation, you may find that you save more with the higher interest rate.

It all depends on your goal. Don’t always think of the cheapest interest rate only.

Q:  I am thinking of refinancing one of my existing properties to make the downpayment on this latest property. How soon should I start the process of refinancing and which property should I choose to refinance first?

MY :  Below are some refinancing tips:-

1. If you have several properties, deciding on the property to refinance depends on how much you need. It is good to know a valuer or banker.

2. Look at your current bank first. You might want to consider a top-up loan. This will be cheaper in terms of documentation and if you are a good paymaster, the bank will give you favourable rates. Please read the new terms before signing on.

3. The central bank has a new rule with regards to refinancing. Please check this out.

4. There is no set “good time”. To me, if the rate is right, I will refinance.

5. Set up your goal for existing and new properties.

6. Please check with several bankers. Take the package that is most suitable for you.

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Ivan Chan, a conveyancing lawyer for many years is currently attached to Messrs Amir Toh Francis & Partners, Kuala Lumpur. He can be contacted at cphchambers@gmail.com

Q : I am a 60-year-old retiree from the UK and am looking to retire in Malaysia. I understand Malaysia has the Malaysia My Second Home (MM2H) programme for foreigners. What are the basic financial requirements, and what if I purchase a property there? Is it better if I just rent a house in Malaysia instead?

IC : A. Below are the financial requirements:

a) Applicants aged 50 years and above may comply with the financial proof of RM350,000.00 in liquid assets and offshore income of RM10,000.00 per month. For those who have retired, they are required to show proof of receiving pension from government at RM10,000 per month.

b) Approved participant who has purchased and own property which was bought at RM1 million and above in Malaysia may state his/her intention in the letter of application during submission to lower down the basic fixed deposit requirement. Source: http://www.mm2h.gov.my/index.php/en/ (as of December 2013).

B. Property purchase is not a pre-requisite for participating in the MM2H programme; participants are welcome to buy if they so desire. Any foreigner may purchase any number of residential properties in Malaysia, subject to the minimum price established for foreigners by the different states in Malaysia. They start from RM500,000.00 per unit for most states, from 1st March 2014.

Land is a state matter and it is important to check the respective state laws before making any commitment, as the minimum purchase price is not standardised between the different states.

Participants are advised to buy homes which are already issued with Certificates of Fitness but if you intend to purchase uncompleted units from developers, ensure that it is a reputable company. For a list of reputable project developers, please contact Malaysia Property Incorporated (MPI) www.malaysiapropertyinc.com for the updated list.

C. The types of properties that foreigners are not allowed to acquire are as follows:-

a) Properties valued less than RM1,000,000.00 per unit (where such amount is expressed to be the minimum threshold);

b) Residential units under the category of low and low-medium cost as determined by the State Authority;

c) Properties built on Malay reserved land;

d) Properties allocated to Bumiputera interest in any property development project as determined by the State Authority; and

e) Agricultural land developed on the basis of the homestead concept.

D. Renting a house in Malaysia:- Foreigners are permitted to rent a house in Malaysia governed by the provisions of the tenancy agreement and the applicable laws.

As to whether it is better to rent than to buy a property, the question which may be raised is why rent if you can afford to buy. When you have settled your housing loan, the property will be yours, and if it appreciates in value, you can reap monetary benefits and gains from such appreciation.

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