Insert Property “Title” Here
By: Jotham Lim
Conventionally, when you think of commercial properties, retail stores, office spaces, and brick-and-mortar establishments come to mind. Conversely, residential titles are associated with condominiums, flats, apartments, bungalows, etc.
However, ever since people have started buying and selling land, the distinction between these two titles—Residential and Commercial—has been muddled. There are always exceptions, exemptions, and unclear boundaries when it comes to what you can and cannot do with your property.
Ever more so with the new breed of properties emerging in the market. Studios, SoHos, SoVos, SoFos, and serviced apartments are what we call “mixed developments.” These are not exactly new concepts, but the definitions of residential and commercial titles have become increasingly obscure.
More often than not, the land title of a new particular project is not predominantly displayed in advertisements and promotions. Today, Property Insight will explore the differences between these two titles and how mixed developments fit into the picture.
RESIDENTIAL TITLE
In simplified terms, properties with residential titles are meant for living and/or residing in only. On paper, residents are not allowed to conduct any business on the premises in any way, shape, or form.
When it comes to utilities and infrastructure, residential rates are typically cheaper than commercial rates. Electricity bills for residential properties can be as low as half the price compared to commercial properties despite the same usage.
In mid-2018, The Edge Market reported that half of Malaysian jobholders are still earning less than RM2000 a month, thus saving up for a down payment becomes a huge barrier to purchasing a property for most people. However, first-time home buyers looking to buy a residential property are allowed a Loan-To-Value (LTV) ratio of 90%. Residential home buyers are also entitled to many benefits provided by the government, banks, and developers, with some programmes offering low or zero down payments.
From an investment point of view, rental yields for residential properties are typically lower than commercial properties. Managing residential properties requires much more active management, including constant monitoring and the added risk of encountering bad tenants. There are plenty of horror stories of investors trying to deal with problematic tenants defaulting on rent and vandalising furniture and the property itself. This is definitely something to be factored into an investment decision.
Renting out generally has a higher turnover. Contracts usually last one to two years, and periods of vacancy should be factored in as well. A few ways around this include renting out individual rooms for profit or considering renting to corporations looking to house workers. Broadly speaking, corporations are much more trustworthy than individual tenants because corporate entities are easier to hold accountable legally and are less likely to disappear without a trace.
COMMERCIAL TITLE
Strictly speaking, commercial titles are strictly meant to house businesses. This means you aren’t allowed to cook on the premises unless you have dedicated licences, and all must adhere to stricter fire safety policies. You are also unable to host parties on the premises.
As mentioned, utility assessments, costs, and quit rent are priced higher. Financing ranges from 80%-85% with relatively higher interest rates, and you are unable to withdraw from the Employees Provident Fund’s (EPF) second account to finance the property.
On the upside, commercial projects offer better rental yields, especially if you decide to run a creative concept on your property, such as opening a co-working space. Seeing that renting out prospects to businesses means you can expect stable tenants with longer leases lasting between two to ten years or even more, heavily renovated for business-specific use. It is easier to take legal action against a business compared to an individual if they have defaulted on their payment or broken the terms of the agreement. If you manage to secure an anchor tenant with a strong franchise, it has the potential to be a goldmine investment.
MIXED DEVELOPMENTS
As with all things in life, there are always exceptions to everything. SoHos and serviced apartments are built under the jurisdiction of the Housing Development (Control and Licensing) Act 1966 (Had). Under the Had, these units can be used for dwelling and business purposes simultaneously, albeit in a heavily restrictive manner. They are also entitled to certain government benefits, such as a once-in-a-lifetime exemption from Real Property Gains Tax (RPGT). Discuss with an agent or consult the utility company directly to determine if utility rates are treated as commercial or residential by default. Owners can opt to convert the title provided they prove no business is being conducted within the property.
Do note that SoVo, SoLo, and SoFo, similar in nature, fall under the purview of the Had and are primarily intended for office use. Commercial and residential titles come attached with different sets of Sales and Purchase agreements, so it is essential to read the fine print and clarify with the agent properly. Outside of mixed developments, many of you may have asked, “Is it possible to open a café in my living room?” The short answer is that it is highly unlikely you will be able to do so.
However, Majlis Bandaraya Petaling Jaya has allowed certain areas to be turned into limited-use areas, namely the SS2 area, Jalan Universiti, and Jalan Gasing. Limited-use allows a narrow selection of operations on the premises, such as art galleries, agencies, and homes for the elderly. For those who toy with the idea of opening a business from their own home, please consult your local city council to clarify limited-use regulations.
WHY THE RAPID CHANGES IN THE INDUSTRY?
The sudden wave of mixed development projects sprouting across Klang Valley did not exist without reason. Consumer behaviours are changing, and mixed development projects are there to satisfy those needs. Let’s dive into the mind of a potential buyer and figure out the factors that contribute to his purchase decisions.
Affordability: In retrospect, small-sized units are relatively cheaper than traditional three-bedroom-two-restroom units (3R2B). Recent findings show Malaysian homes are amongst the largest by global standards, averaging 1264 sq ft. Which begs the question, is it really necessary to fork out extra cash for added space? Paying RM350,000 for a 450 sq ft studio apartment would be considered a bad investment by some and considered luxurious by others. However, servicing a RM1500 monthly payment requires significantly less commitment compared to RM2000, not to mention additional miscellaneous costs.
Jobs and Careers: Freelancing has increasingly become a substantial contributor to the economy. The latest statistics from the Employees Provident Fund (EPF) suggest Malaysia is the third-largest freelancing market in the global region. We have slowly seen an increase in startups, small-scale entrepreneurs, freelancers, and remote workers requiring working space, far from removing the need to travel and additional costs. For those who wish to set up their own proper address, this is a great option.
Privacy and Cohabitation: Consider an alternative. Let’s assume a young professional is looking to buy their very first home on a limited budget and opts instead to service the loan by renting out the remaining rooms with no intention of occupying them anytime soon. With this decision comes the whole ordeal of finding and drafting a tenancy agreement, calculating cost distribution, and vacancy periods. Some prefer not to dabble in the complicated matters of being a landlord early in life and value privacy much more. If the space is too restrictive, you can always opt for a larger apartment while putting the studio to use. Friends and family may nag and push for a larger space for better value for money and easier to start a family, but cohabitation with strangers may not be right for everybody. Objectives and goals are factors you should care about.
When all is said and done, we can confidently say yes, the title is a determining factor when it comes to buying and investing. Knowledge is power, and it doesn’t hurt to learn the ins and outs of purchasing, especially when you are paying for it most of your life.