Construction Research Institute of Malaysia (CREAM)
THE HIKE IN COMPLIANCE COST AND HOW IT IMPACTS THE HOUSING AND PROPERTY INDUSTRY
Compliance cost refers to all the costs incurred to follow the relevant regulations. It includes compensation for compliance personnel, time and money spent on reporting, new systems needed to meet retention obligations, etc. The compliance cost is experiencing a hike in value as the number of regulations increases and more time is spent to adhere to the regulations. It can be a significant burden, especially for Micro, Small & Medium Enterprises (MSMEs). The issue may pose a severe threat to the Malaysian economy as a whole, as MSMEs play a vital part in the Malaysian economy. The total number of MSMEs in Malaysia as of 2021 is 1 226, 494 representing 97.4 per cent of the total business establishments in Malaysia. In the same year alone, SMEs contributed 37.4 per cent to Malaysia’s Gross Domestic Product (GDP). The MSMEs comprise five main business sectors: services, construction, manufacturing, agriculture, mining, and quarrying. The construction sector is the second largest sector, with 98,274 firms. It contributes 3.7 per cent to Malaysia’s GDP. However, the increasing compliance cost poses a significant challenge for the construction sector, particularly the housing and property industry.
Despite the high demand for housing properties following the increase in population in Malaysia, 23.1 per cent of the population did not own a house in 2020. The average annual housing production in Malaysia is 138 900 units, yet there are still a lot of unsold units due to rising housing prices. The rising housing prices may be mainly due to cost factors. Besides that, the increase in interest rates and Consumer Price Index (CPI) also contributes to the rise in housing prices.
There are four main issues surrounding the housing and property industry (Figure 1), namely;
i) over-regulation adds to the cost but not necessarily the value of houses,
ii) overzealous planning requirements reduce sellable land,
iii) cross-subsidies create price distortion, and
iv) lengthy process of approval.
Figure 1: Main issues surrounding housing and property in Malaysia
The first issue stems from various laws, policies, guidelines, and regulated standards in the Malaysian housing industry. Separate agencies then impose new compliance through regulations, policies, standards, etc. This led to high costs and limited supply, creating inflexibility to adapt to market changes. Nevertheless, the high costs do not necessarily add to the house's value.
The second issue occurs due to the reduction of sellable land due to the State’s overzealous planning guidelines. This has directly increased the land cost per unit area. One of the major compliances is the parking lot. The buyers will have to bear the cost even when they do not need it, as it is part of the housing price.
The third issue is then caused by the cross-subsidies, such as Affordable Housing Quota and Bumiputera Quota, imposed by the government. Although the subsidies are intended to help low-income individuals purchase a house, the high subsidies cause a price distortion. Often, the policy does not consider the real demand for the said locality, which will result in unsold units. The unsold quota units add to strata holding costs and maintenance service charges.
As of June 2020, there are 6 121 unsold Bumiputera Quota units in Malaysia, which resulted in RM4.6 billion of total holding cost. The release of unsold quota units also involves a complicated and long process, which results in additional costs.
The fourth issue is the lengthy process of housing development approval. The uncertainty of project approval affects the planning and implementation, as well as higher risks of rejection, additional holding costs, and expected higher returns during the selling process. This will be then bored by the buyers.
These issues will lead to high compliance costs. The costs range between 21.8 to 32.5 per cent of the Gross Development Value (GDV). The compliance in any township and strata includes the conversion premium, development charges, capital contribution, other utility costs, cross-subsidies, holding costs, submission fees and titles. It varies from project to project due to location, types, sizes, and policies.
Hence, the Construction Industry Development Board (CIDB), in collaboration with REHDA Institute and the Construction Research Institute of Malaysia (CREAM), has conducted a case study on ‘Reduced Compliance Towards Lower Development Costs - Case Studies of Development Costs of Affordable Apartments.’ The study aimed to encourage a better understanding of the compliance costs involved in the housing and property industry and how they affect price stability. It depicts an objective industry viewpoint and industry insights on the most pressing difficulties the sector is experiencing. It also offers practical advice from the industry's perspective on identifying, controlling and mitigating rising business costs to maintain house prices at a more sustainable level for future homebuyers.
The study was conducted in five housing locations, namely;
· Selangor (Rumah Selangorku) 1,
· Penang (Island – Private CSR Affordable Housing Project),
· Wilayah Persekutuan Kuala Lumpur (RUMAWIP),
· Wilayah Persekutuan Kuala Lumpur (RUMAWIP) including low cost, and
· Selangor (Rumah Selangorku) 2.
It was observed that the building cost for most projects in these locations is around RM136 and above per sq ft. A stand-alone development with all affordable units is impractical for the private sector when government-controlled prices exceed development costs since the development absorbs losses through a cross-subsidy component.
The cost can be reduced if the affordable housing plan is carried out on government land and the housing development is offered a higher density or plot ratio. Controlled pricing may result in a loss, which would need to be offset by revenue from other development's open market segments. Reducing capital or statutory contribution will also help lessen some of the burdens on the costs. Utilising technology such as Building Information Modelling (BIM) may contribute to minimal impact on GDV. However, the authorities should speed up the approval process at the same time. As a result, the reduced compliance costs will lead to sustainable house pricing (15 to 28 per cent lower). The price will be much lower where the land price is very high. The reduced cost will benefit the private sector and the government. However, cost reduction is only relevant provided no more compliance obligations, requirements, or cost increases are introduced during construction.
Three main transformational thrusts are recommended based on the case studies:
· reduce unproductive costs,
· minimise cross-subsidies, and
· optimise land or gross floor area efficiency (Figure 2).
The relevant authorities should carry out the structural reform of the existing regulations, requirements, and processes to ensure more sustainable house prices in the future.
Figure 2: Main transformational thrusts