5% RPGT a real threat to recovering property sector

The government’s introduction of a fixed 5% real property gains tax (RPGT) effective Jan 1 next year is perplexing, to say the least.

If the surprise announcement by the prime minister when unveiling Budget 2010 last Friday was intended as a lenient and hence palatable variant of the RPGT before its waiver in April 2007, it could not be further from the truth.

Although a seemingly watered-down version of the original RPGT, the impact of the fixed 5% RPGT should not be seen as harmless as it has been made out to be.

Already, the local property fraternity is feeling the heat;  the edginess can be expected to catch up with prospective buyers around the globe. Moral of the story is, refrain from any step, however minute it may appear, that could undermine market sentiment.

Malaysia has been working on overdrive to woo property foreign direct investment (FDI). Millions of ringgit have been invested and many more millions can be expected to be ploughed into continuing promotional programmes and schemes, the latest being a joint private-public initiative called Malaysian Property Incorporated (MPI) which has been tasked with popularising Malaysian real estate overseas.

Over at the tourism ministry, officials are labouring to convince many parts of the world that Malaysia is a compelling destination for foreigners looking to set up a second home away from their countries.

Not only will their participation in the Malaysia My Second Home programme boost Malaysian property values but think also of retail, food and beverage, travel and lodging needs of visiting friends and family. No doubt, the trickle-down effect can be tremendous.

A good friend of mine was in London on the day of Budget 2010 when I texted him on the 5% fixed RPGT effective Jan 1. Clearly frustrated, he responded very quickly and called the government’s decision an embarrassment to him and the others there with him — they were there to promote Malaysian property.

“We once highlighted as a plus for investors the non-existence of the RPGT in Malaysia. Now, we need to explain, not only about the 5% RPGT but also the frequent changes to policies that affect investors,” he lamented.

To recap, the previous RPGT (waived in April 2007) hinged on a sliding scale of 30% to 5% of the gains if the property concerned was disposed of within five years of its acquisition. Beyond that, the RPGT would no longer apply.

This time around, a fixed 5% RPGT kicks in everytime there is a real transaction, never mind when the property was purchased.

There are some exemptions, among them sale of a residential property for the first time and transfer of properties among family members, like father to children.

Primarily, there are two very disturbing aspects of the 5% RPGT.

Malaysian property values may have generally been spared the intense beating experienced in some countries but developers here will tell you it has been no walk in the park.

To generate healthy cash flows, sales have been pushed mainly by innovative pricing and mortgage schemes specially struck up with financial institutions.

Certain areas have done better than the others, with the super prime address of Kuala Lumpur City Centre even taking a hit. Interest is said to be returning, slowly but surely in tandem with an improving market.
Still, sentiments remain very tender and delicate and they must be handled with extreme care. While it is easy to bring a machine to an abrupt halt, getting it started and running again will demand both hard work and time. And time is money.

The 5% RPGT is in danger of being viewed as yet another of Malaysia’s once infamous flip flops in real estate-related guidelines and regulations. If we are indeed serious in attracting property FDIs, we must walk the talk. At all times.

On another front, Selva, now retired, bought a typical intermediate two-storey link house in Kuala Lumpur’s Taman Tun Dr Ismail enclave in 1983, paying RM166,000 for it.

Today, Selva can easily sell the same property for RM650,000 or more. With the newly introduced 5% RPGT, Selva will have to give up 5% of the gains to the taxman the moment he decides to dispose of the property.

The government must be lauded for addressing certain shortcomings in the housing industry such as the rehabilitation of abandoned low-cost homes.

Whether or not good money should be used to chase after bad money is, however, a topic for discussion on another day — it is no secret that some low-cost housing schemes have sprouted in locations that just don’t work.

If indeed the government is wishing on the RPGT collection to enable it to do more, just how much is the expected collection in a year?  Has any such study been carried out? Alternately, is there no other way to rake in the numbers?

An active property market will translate into higher stamp duty collection, so it makes no sense to dampen sentiment now.

If the government must proceed with the 5% RPGT, be fair to those who have bought their properties decades ago — at no time, until now, were they told their gains are subject to RPGT.  

Start the 5% RPGT with properties acquired in the last five years. For the rest, give it a miss.

Au Foong Yee is editor of theedgeproperty.com and City & Country, the property pullout of The Edge Malaysia weekly.