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Strata Property Investments

With land for property developments shrinking by the day especially in the Klang Valley, many property developers have been moving towards higher density developments.

These include stratified properties and integrated developments which involve high-rise components, said Exastrata Solutions Sdn Bhd chief real estate consultant Adzman Shah Mohd Ariffin.

Statistics from the National Property Information Centre (Napic) showed that as at end-2015, about six million or 30% of Malaysians were staying in 1.5 million residential strata properties.

On top of that, there were about 16,000 completed residential strata developments as at end-2015, Adzman told the audience during a talk at the Malaysian Annual Real Estate Convention 2017 (MAREC‘17) organised by the Malaysian Institute of Estate Agents on March 4.

There is no doubt that strata residential properties, especially those that come with a wide range of facilities and features, have become increasingly popular not just for homebuyers but also as investment property, he said, adding that such properties are also relatively easier to market and dispose off.

“If you look at the housing loan applications for the past six months, 75% of them came from first-time homebuyers, who could probably only afford properties priced RM400,000 and below. And what are the properties that are within this price range? They are strata properties,” he added.

As an investment property, non-landed residences tend to offer more attractive rental returns than landed residences.

“According to a media report published about six months ago, a well-managed condominium is able to offer high yields of 5.5% to 6%, especially those in Mont’Kiara, while those in other areas in the Klang Valley can offer returns of up to 4%, compared with 2% to 3% from terraced houses and bungalows,” he said. Hence, strata properties can be good investments.

However, when investing in strata properties, some homework needs to be done before purchasing the property. Adzman noted that there are a lot of strata property owners and investors who do not understand or ignore the concept of strata properties, the responsibilities of a strata property owner as well as laws pertaining to strata property such as the Strata Titles Act. Such ignorance or apathy could lead to problems with their investment.
“The Strata Titles Act actually affects the way we live. In addition, the Ministry of Urban Wellbeing, Housing and Local Government has plans to review the Act to improve it further, so this is how dynamic the situation is when it comes to strata living,” he shared.

Failing to understand and embrace their responsibilities as strata property owners, such as paying their charges on time, or failing to jointly undertake the responsibility of managing the building’s common properties, or failing to familiarise themselves with the Strata Management Act 2013 may also cause the owners a lot of trouble when problems arise later, said Adzman.

If the owner is one of the committee members of the joint management body or the management corporation and fails to do the job of managing the property, he or she could be sued by the other owners for not fulfilling the duties of a property manager, he said.

He added that as a strata property owner, one should also understand the role of the management committee and monitor their performance because a well-managed property will offer better value.

Hence, he advised owners to get to know their management team and find out if they are capable of managing the property.

Meanwhile, Adzman also warned investors to avoid strata properties with legal issues, those with a lot of maintenance issues as well as those built by dodgy developers or developers that are not registered with the ministry.

He also thinks that investors should avoid investing in properties that have been under the Master Title for a long time with no prospect of getting their own Strata Title anytime soon.

In addition, strata property investors should always study their investment options before making the final decision.

“When you are looking for a property to invest, you need to check out the surroundings of the property, including cleanliness, operational condition of the facilities, upkeep of the common areas, and others. You need to be active in your research as there are a lot of things to look at,” he said.

He pointed out that investors should also consider the occupancy rate of the property to ensure that it is adequate enough for the collection of sufficient maintenance fees and charges in order to maintain the facilities and common areas.

Investors should also identify units with the best value in a strata building. For example, units on higher floors are usually more expensive as they offer better views. However, if units on the lower floors are cheaper but are able to accord the same view, investors should go for the lower units, he said.

Meanwhile, there are plenty of opportunities in the primary, secondary and auction markets for non-landed strata residences, but investors have to scan through them all to find the best deal, he added.

“If you think about your investment well, you can avoid a lot of headaches. Try to avoid properties with a lot of issues and, at the same time, please understand what comes with the ownership of strata properties. And again, you have to make sure your investment gives good returns,” Adzman concluded.

Tenancy in Malaysia

A tenancy agreement is defined as a contractual relationship between a landlord and a tenant, requiring the tenant to pay rent to the landlord for the use of the real estate. Tenancy is created for a term not exceeding three years.

A lease, on the the other hand, is the letting of a property for a period exceeding three years. Under the National Land Code, a lease has to be registered with the Land Registry, which means that the lease will be endorsed on the title of the property giving notice to the world that the property is under a lease.

There are three elements in a tenancy setting, namely the landlord, the tenant and the property.

The applicable laws governing tenancy in Malaysia are as follows:

• National Land Code 1965, Part 15 on ‘Leases and Tenancies’;
• Contracts Act 1950;
• Specific Relief Act 1950;
• Civil Law Act 1956;
• Distress Act 1951;
• Common Law/ Case Law.

There are three types of tenancies as follows:

• Fixed term tenancy;
• Periodic tenancy; and
• Tenancy at will.

A fixed term tenancy has a definite beginning date and ending date and may have an option to renew in the agreement.

A periodic tenancy is a tenancy for some period of time as determined by the term of the payment of rent. Tenancy can be from year to year; month to month or week to week.

Tenancy at will is a tenancy agreement where a tenant occupies a property with the consent of the owner but there is no written agreement between the parties that specifies a definite payment of rent or the tenure of the rental. It can be terminated by either the landlord or the tenant at any time by giving reasonable notice.

Once a landlord and tenant agree on a tenancy arrangement, they would usually execute a preliminary agreement called ‘Letter of Offer to Rent’ specifying the terms and conditions as agreed to by both parties. The tenant would pay an earnest deposit (usually one month’s rental) upon signing the Letter of Offer. Thereafter a Tenancy Agreement would be executed between the two parties. The Agreement should be duly stamped.

Some important things to take note of in a tenancy agreement:

• Permitted use of the premises: The use of the premises must be in compliance with the existing laws and regulations. There are instances where the property is being rented out for residential use while it is a purely commercial entity and vice versa.
• Sub tenancy: Is this permitted or not permitted by the landlord? This is important as there it is not uncommon to find tenants sub-letting the premise to a sub tenant without the expressed consent of the landlord. By doing this, the tenant would then be in breach of the terms and conditions of the tenancy agreement.
• Fixtures and fittings: If the premises comes with this then an inventory list should be done. This should be done and attached to the Letter of Offer To Rent at the initial stage. This is important as there are cases where there is dispute in what the tenants saw earlier at the viewing of the property was later not provided for in the tenancy agreement by landlord.

What happens when the tenant defaults in paying the rent?

Under Section 7(2) of the Specific Relief Act 1950, a landlord is prohibited from evicting the tenant and/or recover possession of the demised premises without a court order.

The landlord should not resort to self-help measures such as changing the lock or to retake possession of the property by force. Otherwise they may find themselves sued by the tenant for trespassing etc. It is also of not much use in making a police report either regarding such matters as it is deemed to be a civil matter. In such a situation, the landlord is advised to engage a good lawyer who is well versed with tenancy matters to evict the tenant.

The legal procedure for evicting a tenant is as follows:

• To give a notice to the tenant to regulate the rental;
• If the tenant still does not pay up the outstanding rent, the landlord will give a notice of termination to the tenant;
• The landlord through his solicitors will then file a suit against the tenant for the arrears of rent and seek for an order for vacant possession of the premises. It will take approximately three months to obtain a judgement for this;
• Once a judgement is taken on the arrears and the order for vacant possession is given, the landlord’s solicitors will have to file a writ of possession to ask the bailiff to re-take possession of the property. It will take approximately three months to obtain this.

All in all, it would take approximately seven months from the very beginning to re-taking the possession of the property and the costs of the proceeding is approximately RM10,000. This is based on the presumption that this is not contested by the tenant.

The landlord may also claim from the tenant double rent under Section 28 (4) of the Civil Law Act 1956 from the expiry of the notice of eviction until the possession is given to the landlord. However it must be noted that the recovery of double rent is not the right of the landlord but is a matter of the court’s discretion.

In another context, the landlord could go through the route of the Distress Act 1951 to recover the outstanding rent from the tenant provided it is for a period not exceeding 12 completed months of the tenancy preceding the date of application. The court bailiff will seize and sell the tenant’s goods via auction in satisfaction of the outstanding rent.

However, there is no provision to terminate the tenancy here. This is effective particularly in the instance of a commercial enterprise that is occupying a shoplot or retail outlet. In order to safe guard and to avoid jeopardizing the branding of the business concerned, the tenant would usually pay up before the landlord proceed further.

Tips for Landlord:

• Register utilities under the tenant’s name to make tenant liable for the outstanding amount
• Conduct a background search on the tenants via Google and Facebook. For an individual, a bankruptcy search can be done while winding up search can be done on a company through the Official Assignee. Furthermore a search can also be done on a company via Companies Commission of Malaysia where one can determine whether a company has been duly registered; to assess the financial viability of the company concerned – from the Balance Sheet, Income Statement and the total Issued Share Capital of the company; to ascertain who are the Directors and shareholders of the company.
• Find out where the tenant works and the designation of him/her in the company. This will give some clues as to the background of the person concerned.
• To have an alternative address of the tenant in the Tenancy Agreement apart from the demised premises e.g. hometown or work address. This is to enable the landlord to track the tenant if there is a necessity to do so.
• Can request for CTOS report and other reference (from the landlord of previous properties rented) from the tenant.

Tips for the tenant:

• Can conduct a search on a title to ensure that the landlord is the actual registered owner of the property. There are instances where the landlord represented to the tenant that he/ she is the owner when it is not the case.

Recommendation for the government: To set up a National Tenancy Database like in Australia for owners and estate agents to check on the background of the prospective tenants. Commercial tenancy reports can also be made available here. Information such as identity verification, tenant blacklist screening and bankruptcy and court record check should be made available here.