REAL ESTATE AS A FINANCIAL INSTRUMENT

Many experts are of the view that property ownership will eventually move towards ownership of shares of the entire unit or development or rights over property instead of the entire brick and mortar unit.
Text by Jan Yong

Of late, in Malaysia, there are proposals to make property more affordable by making changes to its ownership and financing structure. Many different views have been given from utilising retirement funds (Employees Provident Fund) monies for the monthly loan instalments to fractional ownership, crowdfunding and rent-to-own schemes.

The newer proposals involve using financial instruments with property as the underlying assets. These tradeable instruments can be real or virtual documents representing a legal agreement. Equity-based financial instruments represent ownership of an asset including real estate or rights to real estate while debt-based financial instruments represent a loan made by an investor to the owner of the asset.

According to lawyer Chris Tan, real estate has always retained the quality of a financial instrument alongside its brick and mortar counterpart. It’s just that due to the oversupply situation and lack of affordability, people are seriously looking into alternative ways of ownership and funding which inevitably make use of financial instruments.

Existing financial instruments with property as the underlying assets include REITs, funds, listed property counters e.g. SP Setia and schemes such as rent-to-own schemes.

But in accountant Agnes Wong’s opinion, the instruments that seem to offer the biggest gains to property investors as opposed to first time homebuyers is the REIT structure or fractional ownership structure. In its simplest form, it basically means sharing a piece of the entire property with other owners. Your ownership is evidenced on a piece of paper known as a share instead of a grant of title or where there are trustees, your name will be in the list of beneficial owners in the Trustee register.

You have every right to buy more or to sell off your portion in the form of share sale. Someone else, usually a professional manager is managing the property and the trading of the shares on your behalf.

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