Vacancy tax on developers –What it means for home buyers

Property cooling measures and vacancy taxes are usually introduced when property markets are bubbling. A vacancy tax is imposed in the form of the penalty based on the percentage of gross selling on the properties that are left vacant and are unsold for a specific amount of time. According to the National Property Information Centre (NAPIC), total completed unsold property value stood at approximately RM46 billion (63,063 units) in the first quarter of 2020. Of this, RM20 billion were residential units, RM21 billion were serviced apartments, RM6 billion were shops, RM1 billion were small office, home office units (Soho) and RM2 billion were industrial properties. The proposed tax on property developers is being discussed as a solution for the burgeoning overhang units in the Malaysian residential market but there is a need to get the objective right before implementing a measure.

Figure 1: Trend of Overhang in Malaysia for 1H 2018 – 2020 (NAPIC)

The issue of vacancy tax is quite a hot topic in the property industry recently. However, a tax on the inventory of overhang properties is better described as an “unsold property tax”, rather than a vacancy tax. It was first raised by Datuk Hasanuddin Mohd Yunus (PH-Hulu Langat) in the Parliament, questioning if the government will impose similar tax practices as seen in several other major cities around the world to address the number of unsold luxury condominium units in the Klang Valley. In answering the question, the Deputy Federal Territories Minister Datuk Seri Edmund Santhara Kumar stated that there is no need to impose such a tax now as the number of unsold luxury condominiums (priced over RM1 million) is low, but such a proposal would be studied further.

A week later, the Housing and Local Government Ministry (KPKT) announced that a vacancy tax is being formulated and could be imposed as early as next year (2021) on property developers who fail to sell their properties. According to KPKT, the introduction of such a tax could encourage property developers to be more responsible in the projection of their projects, particularly in high-rise developments, in order to reduce the overhang of residential units in the country. However, the Minister of Housing and Local Government – Zuraida Kamaruddin – mentioned on 27 August that KPKT is still studying the vacancy tax and has not made any decision on the matter. Previously, the proposal for the tax was made based on figures the Ministry obtained showing that unsold units are priced at RM500,000 and above.

To date, the only country that implements an unsold property tax is Singapore, which imposes an ABSD (additional buyer’s stamp duty) of 30% (5% non-remittable upon stamping) on unsold properties after five years from the date of acquisition of the land. In addition, Singapore imposes a QC (qualifying certificate) tax of 8% on foreign developers. The QC scheme requires a development to be completed in five years and all units to be fully sold within two years of completion. The extension charge is 8% of the cost of the land for the first year of extension, 16% for the second year and 24% for the third and subsequent years. Targeted at both buyers and developers, it is used as a tool to manage excessive property speculation, especially by foreign buyers.

Malaysia does not have the same problems as Singapore. Deputy Federal Territories Minister Datuk Seri Edmund Santhara Kumar noted that among the factors contributing to the accumulation of unsold luxury condominiums were the inability of buyers to secure financing loans as well as the mismatch in supply and demand. Further, the Malaysian Institute of Professional Estate Agents and Consultants (MIPEAC) president was quoted on NST saying “The property market and situation in those countries are different from Malaysia and we do not have the same problems. Malaysia needs more foreign investment, so a vacancy tax will be counter-productive”. He said a proper study is needed to get a detailed picture of the causes and distribution of Malaysia’s overhang units.

The vacancy tax that was proposed by KPKT is likely to take the form of “unsold property tax”, not vacancy tax as widely termed, which will not only cause a fall of residential property prices across the board, but also degrades the homeowners’ welfare. This is because property developers will very likely reduce the prices of their overhang units in order to avoid the vacancy tax; consequently, leading to a lower selling price and thereby affecting the market value of the secondary market housing. Since the country’s homeownership rate is as high as 76.9% – based on the latest statistics by DOSM – a fall in house prices will inevitably cause a negative equity to a majority of the rakyat.

On a longer-term, a vacancy tax is expected to exacerbate the problem of housing affordability and availability in the country. Property developers are expected to be much more conservative with their planning and development in the future, leading to a decline in property supply in the market.

Representative from MIPEAC commented that the proposed implementation of vacancy tax on developers who fail to sell their properties within a certain period of time is rather untimely, given the challenging environment brought about by the Covid-19 pandemic. As quoted by the Malay Mail, “MIPEAC deems such legislation ineffective to solve the overhang issue,” the institute said in a statement today, while urging the government to relook at the decision to impose a vacancy tax on developers who fail to sell their properties within a specified time slated for implementation next year. “MIPEAC concurs with the Association of Valuers, Property Managers, Estate Agents and Property Consultants in the Private Sector Malaysia (Peps) that developers must do an independent market and financial feasibility study for future housing developments before building their projects.” In addition, a vacancy tax may cause property prices to fall across the board, initially affecting the primary market and subsequently the secondary market.

Following the outbreak of COVID-19, a softer property market is observed and a buyers’ market is prevailing. It is expected that buyers in the post-MCO era will be more price-conscious, and will likely place more emphasis on housing location that benefits their quality of life in the long run. Therefore, rather than relying on market-spurring initiatives to boost the sales and to drum up the buying sentiment, property developers should go back to the fundamental principles of property development – the dynamic trade-off relationship among house price, size, and location – when determining what types of products to be released, and which group of buyers they are targeting on.