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Investors’ profit margin may be affected under the new Strata law

Strata regime: Return on investment will always be a consideration as higher cost would certainly affect the possible margin of profit in today’s buyers’ market. Strata regime: Return on investment will always be a consideration as higher cost would certainly affect the possible margin of profit in today’s buyers’ market.

Property has topped the list of investment options for those who have extra cash. Property investors and those who prefer other instruments are trying to gain maximum returns on their hard earned money.

Property investment has gained momentum because of the price boom in the last 10 years as seen by the massive development and high take-up rate. Because the bulk of these properties are stratified residential properties, legislations have been updated for a more efficient delivery of strata titles. Essentially, these new legislations provide more protection to house buyers.

Among these are the Housing Development (Control and Licensing) (Amendment) Act 2012 (“HDAA”), Strata Titles (Amendment) Act 2013 and Strata Management Act 2013 (both “Strata regime”). The Strata Management Act came into effect on June 1, 2015.

Return on investment will always be a consideration as higher cost would certainly affect the possible margin of profit in today’s buyers’ market. While having new legislations are good news for house buyers, these new legislations could also impact the cost of any investment in strata residential property.

For a start, there is now higher compliance cost for the housing developers, as there is an increase in the amount to be deposited in the housing development account. There is also the new requirement to maintain the common property defects account prior to the delivery of the keys to the house buyers.

This means that under the new regime, developers will have a higher compliance cost, which may indirectly result in fluctuations of property prices. This means developers need to be financially strong and there is the possibility that they may incur financial costs as they try to maintain a feasible and sustainable cash flow.

This will discourage the smaller players. Having fewer choices is definitely not good news for the investors. In addition, there is also a higher transactional cost for those who plan to flip their properties.

The earlier issuance of strata title upon delivery of vacant possession will require investors to fork out expenses related to the stamp duty before selling the completed property to the next buyer.

In other words, there is no longer savings on the stamp duty on transfer for those investors who bought directly from the developers. This lowers the return on investment, not to mention having to bear with the longer and complicated process of double transfers for those who are eager to dispose of the property on delivery of vacant possession.

The new template of the prescribed sale and purchase agreement's Schedule H also requires that the payment shall be in compliance with the schedule of payment and no person shall act as stakeholder to collect such payment.

In simpler sense, the developer is no longer allowed to collect booking fee from the investors for their preferred unit and the unit they have selected is only secured upon the signing of the sale and purchase agreement with the 10% payment.

As such, there is no turning back once you have signed on those dotted lines and there is no way to secure your unit of choice with lower amount while you are working on the full 10% deposit.

Another cost that will burden property investors is the maintenance fees charged by the management office when they get their keys to their properties. The new strata regime has provided for the possibility of limited common property usage and the exclusive use of certain facilities – a privilege – which comes with a price tag.

If the management adopts any limited common property, they are looking at a two-tier service charges and sinking fund, with one for those who have the use of one set of common properties and the other for the use of limited common property, to be enjoyed only by a selected few.

Despite monetary cost, time cost is also a factor for investors. A purchase into a strata development now calls for more involvement in the management as the management corporation of the development is formed much earlier now with the possibility of having the title and the keys delivered at the same time.

The new strata regime requires the active participation of all owners, as the tenure of the office bearer is limited. Other owners are required to sit in the management corporation committee on subsequent years. Despite the fact that taking up the responsibilities of committee members offers monetary gains, any misconduct or negligence may now result in a penalty.

The new restrictions on advertisement and representation by the developers also mean that the investors are required to spend time on research and do their own due diligence to better understand the investment.

There is no longer permitted representation such as time/distance from a particular venue, projected monetary returns/gains and rental income. Thus, before making decision to invest, the consumers have to do more personal research on the investment.

While property investment remains feasible over the longer term, investors are advised to take these legislations into consideration to come out with a realistic projection of investment return.

 

- The Star BizWeek, 15 August 2015

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