Common Questions Answered for Expats Investing in Malaysian Property
Written by K.C.Lau and Dr. Ong Kian Leong.
In its new report, entitled “Doing Business 2015: Going Beyond Efficiency”, the World Bank has found that Malaysia ranks first out of the emerging economies in East Asia and ranks fourth out of all the countries in Asia.
Malaysia’s ease of doing business ranking has also improved two positions over last year, moving from 20th to 18th place. One of the main reasons for the climb in the country’s standings has been the ongoing improvements with respect to dealing with construction permits. Malaysia is continuously on its track of economy transformation to provide a better place of investment welcoming foreigners.
The transformation has become a gravitational force that attracts more and more expatriates consider investing in Malaysian properties.
In this article, we review some of the popular reasons why expatriates are investing in Malaysian property. We also provide detailed answers to those questions commonly asked by most expats. The points in this article are mainly focused on foreign individual investors instead of corporate investment by foreigners.
Why do foreigners invest in Malaysian property?
In terms of property market, Malaysia property prices are still among the cheapest in Asia with good growth amidst a resilient economy. Regional property markets like Hong Kong and Singapore have actually risen too much in the past few years and are now taking a breather, as shown by the Regional 1- and 5-year House Price Changes below. This has deterred the appetite of foreign investors in the two popular Asian cities.
Source of date: www.globalpropertyguide.com
On the other hand, Malaysian property offers stable rental yield between 4% to 5% per annum for the last 2 years. On average, Malaysian rental return takes only 16 years, which is one of the better returns as compared to other countries in the region.
Source of data: National Property Information Center (NAPIC)
The local demand for property by Malaysians is huge with up-graders and young families getting richer. The fundamentals driving the property market’s growth in recent years have not changed where the younger population is still leading to new household formation, a rising middle-income group and stable employment in Malaysia. The majority of 93% of the total properties investment in Malaysia are still by the local Malaysians, and only 3% are from the foreigners. Thus, Malaysia’s property price index has been steady over the years despite constant hiccups of world crisis due to steadily increasing demand for properties. The local demand fuels the wealth and prosperity growth over the years in Malaysia.
Other attractive socioeconomic advantages of Malaysia:
1. A.T. Kearney has ranked Malaysia in the third place after India and China in the 2014 Global Services Location Index (GSLI) for off shoring destination of choice.
2. Malaysia maintains low unemployment rate of less than 3% yearly with the inflation rate at average 2.5%. Living cost is relatively low in the region.
3. Malaysia experiences increasing visitor arrivals for 2013 – Top 10th Tourist Destination in the World.
4. A place of peaceful living free from major natural disasters such as volcanoes, floods, tsunami and earthquakes.
5. Harmonious multicultural society.
6. English language is widely used thus it is easy to communicate with locals.
7. Malaysia is ranked 3rd Best Place to Retire by International Living Inc. in 2014 for its retirement residency program – Malaysia My Second Home program (MM2H).
8. Easy and affordable connectivity to other countries with well developed infrastructure of airports, highways and seaports.
9. Private hospitals and health care system attracting foreigners for quality services with world-class healthcare facilities.
Sale And Purchase
What must you do first?
We strongly recommend you to find a good real estate lawyer first before you buy any property in Malaysia. A lawyer specialising in real estate will not only be able to provide you valuable information and legal advice of sale and purchase procedures, but also contacts of some reliable professionals in the industry, such as real estate agents and bankers. You can trust them and save your time to look for others as they have been working together with the lawyer in many previous successful transactions.
What must you know about property titles in Malaysia?
There are two categories of titles in Malaysia available for foreigners. Freehold (which gives the owner full, permanent ownership of the property) and leasehold (which allows the owner to stay in possession for a limited period). Most leaseholds titles are originally for 99 years and can be extended on paying a further sum.
A house receives a “title” once completed and an apartment or condominium is given a “strata title”. In the case of new apartment buildings, the strata title may not be issued for some time after the building is completed.
What are the contracts/ agreements involved in a transaction?
The purchase agreement for a property is called the “Sale & Purchase Agreement” (SPA or S&P). These are fairly standard, but it is best to have a lawyer representing your interests before signing any agreement.
A memorandum of transfer also has to be signed to transfer the title from the seller to the purchaser. In the case of a new development where the developer does not yet have full title, the seller will state in the SPA that this will be given as soon as they have the properties.
What are the procedures to buy a property in Malaysia?
The first step to purchasing a property in Malaysia is to hire a real estate lawyer to assist in the transaction. Once property is selected, a Letter of Offer/Acceptance is signed between buyer and seller, and a 1%-3% earnest deposit is expected from the buyer.
Within 14 to 30 days, the Sale and Purchase Agreement is signed. The buyer must pay another 7%-9% deposit to make up a 10% down payment. From the date of the signing, the buyer has a maximum of three months to accomplish full payment upon receiving Land Office consent.
The Sale and Purchase Agreement must be stamped at the Stamp Office. After the examination on the property by the valuation department, Stamp Duty is paid to the Stamp Office. The transfer must be registered at the Land Office Registry. These are all done by your real estate lawyer after signing the Sale and Purchase Agreement and before the completion of transaction.
How can foreign property buyers get financed in Malaysia?
There are generally two ways to finance the purchase of properties in Malaysia. The first way is to bring in your own money from your home country to finance the purchase. This is the most direct approach and the easiest, as non-Malaysians are allowed to maintain accounts with banks in Malaysia without restriction on the amount of Ringgit held in the accounts.
The second is to take a loan with a bank in Malaysia. With sound credit ratings, most foreigners should have no problem obtaining Margin of Financing of 70% with banks in Malaysia. This could be even higher depending on the banks and financial standings of the applicants. For those seeking to purchase a residential property in Malaysia by taking up a home loan, you are advised to use an online comparison tool with the various banks as they may differ slightly from bank to bank.
Some banks such as CIMB and UOB offer categories of home loans specifically catered for foreigners; which make them a great place to start when shopping around for a home loan. But generally, most banks in Malaysia are eager to provide home loans for foreigners so finding one should be relatively simple.
The average interest rate of mortgage loans here is currently between 4% and 5%.
What is the advantage in buying a residential property under the Malaysia My Second Home Programme (MM2H)?
MM2H is a programme promoted by the Malaysian government to allow foreigners fulfilling certain criteria to reside and travel to and from Malaysia unrestricted for an extended period of time. Generally, MM2H is valid for a period of 10 years, and is renewable.
For those staying in Malaysia using the MM2H visa, buying a property in Malaysia is an added incentive; as it allows you to withdraw part of the money you need to place in a fixed deposit account in Malaysia, which is an MM2H requirement. You can do this starting from the second year of staying in Malaysia:
• For MM2H participant below the age of 50, you can withdraw up to RM150,000 from your fixed deposit commitment of RM300,000 for approved expenses, including those related to home purchase.
• For MM2H participant aged 50 and above, you can withdraw up to RM50,000 from your fixed deposit commitment of RM150,000 for approved expenses, including those related to home purchase.
Additionally, should you purchase a property in Malaysia worth RM1 million and above in Malaysia, you are allowed to reduce the amount of money you need to place in the aforementioned fixed deposit account, in the following way:
• For MM2H participant below the age of 50, your fixed deposit commitment is reduced from RM300,000 to RM150,000.
• For MM2H participant aged 50 and above, your fixed deposit commitment is reduced from
RM150,000 to RM100,000.
Costs of Property Purchase
Source: Global Property Guide
The round trip transaction costs include all costs of buying and then re-selling a property – lawyers’ fees, notaries’ fees, registration fees, taxes, agents’ fees, etc.
Real estate agent’s fee in Malaysia
Real estate agent’s fees are regulated by the Board of Valuers, Appraisers and Estate Agents Malaysia (LLPEH). A maximum commission of up to 3% is paid either by buyer or seller, subject to a minimum fee of RM1,000 per case.
Rules & Regulations
Do foreigners need to apply for approval to buy property in Malaysia? For most property purchases, foreigners are no longer required to obtain Foreign Investment Committee (FIC) approval. There will be FIC approval required for property purchase below RM20 million per unit for all foreigners.
However, foreign purchasers are still required to obtain approval from the State Authorities who will consider factors such as the location of the property, the type of property and in new developments, the percentage of total units sold owned by foreigners. Application of such approval is normally part of the job of your lawyer.
What are the restrictions on minimum purchase price for foreigners?
Malaysia property comes under the control of the various Malaysian State Governments, so rules can vary depending on which part of Malaysia you buy in. Although the Federal Government passes national regulations, the States have the option of implementing these or not when it comes to property matters. One example is setting the minimum price at which foreigners can buy property.
The latest decision by the Federal Government was to raise the minimum property price to RM1 million, effective 1 May 2014, for all foreigners including MM2H participants. However, as of 1st September 2014, the Selangor State Land Office changed the minimum purchase price regulations for foreigners to RM2 million. Also, foreigners can’t buy landed properties in Selangor state unless it’s in a gated community, which has a Landed Strata title. The same restriction of minimum RM2 million is also applicable to foreigners buying landed property in Penang Island.
Therefore, it’s vital that you doublecheck on the prevailing minimum purchase price as well as other conditions imposed by the State Authority prior to taking any actions, as such conditions tend to change from time to time and are not standardized between the different States of Malaysia. Your lawyer should be able to provide you with the latest information of this matter.
What are the types of property that foreigners cannot buy in Malaysia?
Foreigners can own all types of property in Malaysia except the following:
1. All properties built on Bumiputra* reserved lands.
2. Properties allocated to Bumiputra.
3. Low- and medium-cost properties (subject to approval by State Authority)
4. Most agriculture lands
*Bumiputra refers to any Malay individual or aborigine in Peninsular Malaysia as defined in Article 160(2) of the Federal Constitution of Malaysia; as well as any individual as defined in Article 161A (6)(a) and Article 161A (6)(b) in Sarawak and Sabah, respectively.
Is there any limit to the number of property a foreigner can own in Malaysia?
Foreigners are allowed to buy as many properties as they wish in Malaysia provided that they comply with the above-mentioned conditions.
What is Real Property Gains Tax?
Real property gains tax (RGPT) is charged on chargeable gains arising from the disposal of real property as well as shares in the real property companies based on following guidelines:
[*Individual of non-citizen includes all expatriates working in Malaysia and MM2H visa holders]
There are a few exemptions of Real Property Gains Tax:
i. Gains derived from disposal of property between parents and children, husband and wife, grandparents and grandchildren;
ii. Exemption of up to RM10,000 or 10% of the net gains, whichever is higher, is given to an individual.
The chargeable gain is only applicable on net gains, after deducting all related costs such as renovation costs, commission and incidental cost such as legal fees and exemption.
Is rental income of foreigners subject to tax in Malaysia?
All rental incomes derived from Malaysia are subject to tax. While a lot of foreigners find Malaysian properties attractive, it is very important to know the tax rate to avoid any unpleasant moment when the Inland Revenue slams you with a hefty tax bill to pay.
Tax on rental income for foreigners charged by Malaysia Inland Revenue differs by the status of resident or non-resident in Malaysia. Resident status is for someone who stayed in Malaysia for more than 182 days (about six months) in a calendar year. Currently, Malaysia Taxation on rental income under the personal name will be as follows:
• Resident status for foreigners:0 to 25%
• Non-resident status for foreigners:flat at 25%
Malaysia tax rate on rental income for foreigners does not take account of the type of visa pass. There is no special advantage for a holder of MM2H visa compared to the Expatriate Work Visa group.
Things to be Aware of
Choosing the right location might seem daunting at first, but, as it is generally accepted that foreigners are happier if they settle in an area that offers the safety net of an expat community. This narrows down the choice of location considerably.
There are two large expat communities in Malaysia: one is in the capital, Kuala Lumpur (KL), and the other is in Penang. While the expat community in KL is considerably larger than the community in Penang, the majority of the expat community in KL are here in Malaysia on a work permit, while the majority of expats in Penang are here as retirees under MM2H. It seems logical for a retiree (who is not working) to retire to a non-capital city, where prices are lower, traffic congestion less, and the pace of life more in tune with retirement.
However, the usual advice to retirees, given by those who have lived here for several years, is not to buy at first, but to rent, and then only to buy when they are absolutely happy about the chosen area.
Landed property vs. condominium
Landed property is noticeably more expensive to buy, though cheaper to rent, than condominium apartments of equal size. In the long term, in spite of the vagaries of the economic cycle, landed property has continued to appreciate, while the value of certain ranges of apartment fluctuates according to supply and demand.
Other than amenities, another advantage of a condominium unit is that there is good security and that an owner or tenant can just lock the door and then take off, travelling either around Asia or even back to the homeland to visit family and friends with no worries about the property. Security of a house can be a problem, which is normally overcome by fitting security alarms and leaving a maid living in the property while the owners or tenants are away. Another solution to the security problem of landed property is to choose gated and guarded (G&G) residence – a cluster of houses where entry is restricted by “gates” (boom gates, chains or locks) across the roadways, resulting in the creation of an enclave and secure private community.
Condominiums are easy to maintain and clean, and can be run without the services of a full-time maid. Houses with gardens seem great, but, unless a gardener is employed, gardening can be very tiring in the heat of the day. Due also to the high temperature and high rainfall, the outer fabric of a house needs constant attention, whereas in a condominium the outer fabric of the building and the gardens are maintained by the management. The cost of maintenance is covered by the monthly management fee, which is typically paid by the owner of the condominium unit, not the tenant.
Be cautious when buying new property in unfinished condominium projects. Buyers may not be fully protected against default, an issue vigorously raised by the Malaysian House Buyers’ Association, which has pointed to flaws in The Housing Development (Control & Licensing) Act 2002, and the Strata Titles Act. Those buying unfinished property from developers should ensure that the developer has a valid Developer’s License and a valid Sales and Advertising permit. Malaysia property market favours investors, not flippers
Malaysian property is not good for house flippers who are looking for fast and high resale gains. It is better for landlords because of historically high rental yields in areas like Kuala Lumpur, Penang, and Johor Bahru. If you expect it to be like overseas properties in the West, where you can buy at low cost, do it up, and sell it high the next year, you may be heading to the wrong battlefield. One reason is more than 90% of the demand is from Malaysians. Another reason is because of the highest-ever Real Property Gains Tax now in force in Malaysia.
Dealing with real estate agents
It is prudent to always agree upon the terms and conditions first before you engage any real estate agent in Malaysia. For example, while it is the seller who should be paying the commission for a successful sale transaction, the amount to be paid is dependent on the quantum of the transaction. Similarly, for lease agreements, the landlord pays a month’s rent for the transaction of a successful tenancy term (anything from one year and above) but negotiations are required if the lease term is less than a year. Such details should be ironed out and agreed upon before work proceeds to avoid any misunderstandings.
Higher Home Loan Interest
In Malaysia, the average interest rate of mortgage loan is between 4% and 5% for the past 10 years. It may be one of the lowest rate countries among other developing countries in the region, but it is still considered high as compared to most of the developed countries. For this reason, some foreigners prefer to take up a loan from their original country with a lower rate, instead of borrowing from banks in Malaysia.
According to the Global Peace Index (GPI) 2014 released by independent research house Institute for Economics and Peace (IEP), Malaysia was among the 30 countries in which levels of peace deteriorated. However, Malaysia was still ranked sixth in the whole of Asia-Pacific, behind New Zealand, Japan, Australia, Singapore, and Taiwan. On the other hand, the advice given by some expats living here for years is to be vigilant on the roads and in public places against snatch thieves. Also, foreigners who drive in Malaysia have to be more alert and careful because the traffic system here is yet to be as safe as compared to developed countries.
K.C. Lau, having worked in the financial industry since 2003, is a personal financial adviser and has authored several books and runs a number of online financial courses. You may visit his personal finance site at www.kclau.com or follow him on Facebook at www.facebook.com/kclaumoney.
Dr. Ong Kian Leong is the creator of GoFinanceTM, an investment evaluation tool, and the man behind the popular Real Estate Investment Blog at www.REIJB.com