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Room For Rent, Part 2

Where We Advocate 3 Pro-Rent Policy Approaches

Renting, the only viable housing option for many Malaysians, is plagued with a lack of transparency and protection. We take a look at global policy approaches that could make renting better for Malaysians.

By Fikri Fisal, Ooi Kok Hin & Nelleita Omar14 June 2022


Renting has been the only viable housing option for many young and lower-income Malaysians but the Malaysian rental market is plagued with a lack of transparency and protection. We take a look at global policy approaches that could make renting better for Malaysians.

In Part 1 of this research series, we highlighted Malaysia’s longstanding policy focus on home ownership against the backdrop of a still significant proportion of ‘hidden renter-households’, or households that do not own their homes, particularly in the Klang Valley region.

The proportion of renter-households may rise in the near future. A recent survey by PropertyGuru found that there is a substantial increase in the Rental Demand Index, suggesting that many home seekers are now opting to rent.

Despite the growing demand for rental units, the Malaysian government has continued to prioritise policies to promote home ownership, including the recent “One Family One House” pledge by the Prime Minister. He has also urged Bank Negara Malaysia to review financing models to ease home ownership among B40 and M40 households.    

Compared to home ownership, there is a lack of policy attention on regulating the rental market and encouraging renting as a viable and attractive option. 

In this instalment of our research series, we examine pro-renting policies implemented in other countries to see what options Malaysia may consider to strengthen and enhance the rental market. In our assessment, three broad policy tenets or pillars should be undertaken: enacting stronger tenant protection, incentivising rental supply expansion, and adopting rent stabilisation.

Pillar 1: Strengthen tenant protection

The first policy tenet is to strengthen tenant protection. Today, there is inadequate protection for tenants in Malaysia, especially on two major issues.

The first issue is tenure security. Currently, security of tenure in Malaysia lasts only throughout the tenancy duration, which commonly extends to two or three years at most. Upon the tenancy’s expiration, the landlord has the right not to renew the agreement regardless of the tenant’s situation or intention. 

In renter-friendly countries such as France, tenants enjoy greater security of tenure. Tenancy agreements last for a longer period – at least three years for individual-owned and six years for institution-owned unfurnished properties. Short agreements are only allowed if the owner has due personal cause to reoccupy the house (for retirement, housing a family member, etc.)  While furnished property can be rented out in a one-year contract, the agreement is automatically renewed unless either party gives a termination notice. 

Tenants in Malaysia are also exposed to eviction risk in the event of change in ownership of the rented property. If the new owner refuses to honour the tenancy agreement, then the tenant may be forced to evict the property.  

While there are a few regulations to protect tenants from unfair eviction – such as Section 7(2) of the Special Relief Act which requires a court order to be obtained before a landlord can remove an existing tenant – tenure security in Malaysia still falls short of the standards in some developed countries. 

Landlords in France are only permitted to evict tenants under specific circumstances such as if the tenant abuses their rights or if the landlord wishes to physically reside in the property – even then, the landlord must provide six months’ notice before moving in. Unlike in Malaysia, ownership transfer is not a sufficient reason for landlords in France to evict tenants.

Even in the event that the landlord or owner wants to sell their property, tenants in France still enjoy a decent level of protection. If the owner wishes to sell the property, a right-to-buy priority must first be extended to the tenant. He must also provide a minimum of six-months’ notice to the tenant.   

The general process of terminating a tenancy is also highly restrictive. In most cases, tenancy termination requires a minimum of six months’ notice, and only takes effect after the contract expiry. A two-month termination notice period clause may be included in the contract but may only be executed if the tenant fails to pay rent, or fails to obtain a home insurance. Furthermore, under the la trêve hivernale (the winter truce) rule, eviction is forbidden during the winter months.

Germany similarly provides a greater degree of tenure security compared to Malaysia. Landlords in Germany may only provide a termination notice under strict conditions such as if there is a manifest breach of contract, if the landlord wants to occupy the premise, or if the landlord has justified reason to make better economic use of the premise. Even so, tenants are empowered to object to a termination notice if the termination causes hardship to the tenant or his family. The notice must also be given three to nine months in advance depending on the tenant’s total tenancy period.

The second issue is the handling of security deposits, which in Malaysia is typically paid upfront by the tenant and held by the landlord until the end of the tenancy. Security deposits are intended to serve as a guarantee that the tenant will preserve and maintain the rented property’s condition. Failure to do so enables the landlord to deduct or withhold the deposit for reparation work. 

However, there is a risk of dispute where tenants claim that their security deposit is unfairly deducted or withheld by the landlord. When such a tenant-landlord conflict arises over security deposits, there is no mechanism to resolve the dispute except by going to court, which can be a costly process to both landlords and tenants.1

There is a better way to resolve this tenant-landlord conflict. The state of Victoria in Australia has created an institutionalised mediation process in the case of tenant-landlord conflict regarding tenancy matters such as eviction and security deposit claims. The Victorian Civil and Administrative Tribunal (VCAT) also allows for faster adjudication of disputes between landlord and tenant compared to formal courts enabling tenants to seek immediate legal protection in case of unjust treatment by their landlords.  

They also formed a neutral third-party body, the Rental Tenancies Bond Authority (RTBA), to take over the responsibility of managing tenants’ security deposits from the landlords. RTBA would receive the deposit at the beginning of a tenancy, and return the full amount to the tenant at the end of the tenancy. If the landlord wishes to dispute the amount returned – perhaps due to damages caused by the tenant – he or she can file a petition to VCAT.

There is now realisation that legislation on renting is sorely needed. Early this year, the Ministry of Housing and Local Government announced its commitment to table a Residential Tenancy Act (RTA) sometime in 2022. Initial documents shown during the public consultation stage indicated that the proposed RTA will contain provisions for stronger tenant protection. 

Following the announcement, the Real Estate and Housing Developers’ Association (REHDA) pushed back against the proposed RTA and instead argued that its application should be limited to rentals below RM750 monthly. 

We at The Centre acknowledge the concerns posed by REHDA which champions private landlords’ right, and preference, to manage their rented properties without government interference. However, limiting the RTA’s application to rentals below RM 750 monthly  will reduce the RTA’s coverage and effectiveness. We believe that  a clear legal framework to regulate tenancy rights should exist and be applicable across the rental market. 

Having an RTA will facilitate a clearer tenant-landlord dispute resolution process on both issues of security of tenure and security deposits. We also recommend that the RTA further enhance tenancy protection by creating a tenant/landlord database. Potential tenants may be alerted to problematic landlords prior to finalising a rental agreement. This may include landlords who have abused their rights such as practicing discrimination or unfairly deducting their tenant’s security deposit.

Similarly, landlords may also utilise the database to filter “bad tenants” i.e. those who consistently missed rental payments, have caused considerable property damage or have committed criminal acts in their rental units. Having such a database provides greater protection for both tenants and landlords, which would enhance the local rental market.

Pillar 2: Expand rental supply 

The second tenet is to enhance the rental market by incentivising increases in rental housing supply. 

The Malaysian government has been providing tax incentives as a measure to encourage the private rental market though the incentives have mainly targeted individual landlords. For instance, landlords in Malaysia may deduct rental-related costs  from their taxable rental income. These include mortgage interest on loan, maintenance/reparation costs, fire/burglary insurance, assessment tax and quit rent, rent collection fees, and new tenant search expenses. In 2018, landlords were even entitled to 50% tax exemption on their rental income.

To significantly increase the supply of rental units, there is room for innovation here. Consider, for example, tax incentives for institutional owners of rental properties such as private corporations, social enterprises, housing associations and real estate trusts. 

The US government has encouraged the development of affordable rental housing by private entities for almost 40 years through a scheme known as Low-Income Housing Tax Credit (LIHTC). Under this scheme, the federal government grants tax credits to developers or investors to construct affordable rental housing projects catered to low-income and middle-income tenants. In order to qualify for the credit, the rental rate must be below an “affordable” threshold2, and a certain percentage of the housing project must be affordable. 

LIHTC is estimated to have supported the construction or rehabilitation of 3 million units of rental housing since its inception, and is the largest source of affordable housing financing in the US. 

Apart from private firms, tax incentives can be extended to social housing providers to cater to disadvantaged or special interest groups such as low-income families, minorities, elders, and students. Housing associations have built a quarter of England’s new homes and are estimated to house six million people. As they contribute considerably to the provision of affordable rental housing3, these associations and their subsidiaries are exempted from the residential property developer tax which was introduced in the UK last year.4

These aforementioned tax incentives can be taken as a guideline to spur various entities in Malaysia to provide more rental housing units at scale, entities such as government-linked companies, private firms, social enterprises, religion-based waqf and zakat authorities to name a few. 

Alternatively, these entities may also be encouraged to convert existing vacant and unsold premises into rental homes. The conversion of vacant premises into rental homes is becoming a trend in the US due to increased popularity of remote and hybrid working in the wake of the Covid-19 pandemic.5 This solution may be useful in Malaysia where decreased occupancy rates in office and retail spaces have been reported. Occupancy rates in both categories dropped from 83.3% and 81.3% in 2017 to 78.3% and 76.3% in 2021. 

Incentivising conversions into residential rental units not only increases rental home supply, but also reduces the quantity of unsold and vacant units in Malaysia’s property market. While tax incentives can be a good facilitator, other factors too need to come into play for this conversion strategy to work, such as easier access to up-front financing, favourable rezoning laws, attractive location and floor plan.

Pillar 3: Adopt rent stabilisation 

The third tenet involves stabilising rental rate increases to provide some degree of certainty for long-term tenants and to reduce the risk of hardship from sudden significant rent hikes. 

Global data indicate that rental rates have risen rapidly especially after the Covid-19 pandemic. Cities across the US have reported drastic rise in rental rates with some – such as New York, Austin, and Miami – exceeding 30% in a year. The trend is observed closer to home too in Singapore where rental rates have similarly spiked, reaching a seven-year high in 2022. 

The government may intervene in the rental market without necessarily resorting to rent control, which is still controversial.6 Rather, another way to provide for rent stability and moderate increases is via benchmarking or pegging. 

Some European countries have such policies in place. Landlords in Germany, for example, are not allowed to raise rent during the first 12 months of a tenancy, and are permitted to raise rates to a maximum of 15%-20% within a three-year period. 

Furthermore, landlords are legally restricted from arbitrarily raising rents. If a tenant feels that the rent increase is unjustifiable, then he may dispute it by referring to the local renting association, which can provide assistance in the form of legal fees and rental statistics. If the landlord fails to justify the increase, then the tenant is entitled to refuse the new rate. 

Alternatively, the government can peg the increase in rental rates to relevant benchmarks, such as the consumer price index (CPI).  This is observed in France where any rental increase must be referred to the Rent Reference Index (IRL). IRL is calculated every quarter based on year-on-year changes in consumer prices (excluding tobacco and rent), and provides some degree of predictability to tenants as well as landlords. 

French landlords may raise rents only once a year, and only if such a clause is included in the tenancy agreement. If it is not included, then any rent increase must wait until the tenancy expiry. 

The requisite condition for a rental stabilisation mechanism to work, however, is rental data transparency and availability, which is currently lacking in Malaysia. We urge the government to publish a rental index that tracks the historical movement of rental rates based on location and type of residence, which is available in certain countries such as Singapore

The city-state, via its rental index, has seen its private rental rates reaching a new all-time high in May 2022 following 16 months of consecutive increase. Through such an index, the Malaysian government will be able to identify areas with a red-hot rental market and implement cooling off measures or rental assistance programmes to assist financially-burdened tenants.

Conclusion

As household debt increases and home prices remain unaffordable to many Malaysians, demand for rental units has surged in recent years and merits policy attention. This is especially pertinent for lower-income households in urban areas for whom renting is a more practical option, if not the only possible one, perhaps for an extended period of time. 

While the government continues to promote home ownership, it should also enhance the rental market and make renting better for Malaysians. In this instalment, we advocated for three policy tenets towards addressing existing concerns plaguing the rental market: legislate stronger tenant protection, provide incentives to increase supply of rental units at scale and introduce a rental rate stabilisation mechanism.

In part three of this series, we will present the findings of a comprehensive survey on rental norms, risks and perceptions in order to better understand the concerns faced by tenants. Stay tuned.

  1.  Any tenancy-related dispute is currently adjudicated in court according to the Contracts Act 1950, Civil Law Act 1956, Distress Act 1951, Specific Relief Act 1950 and the Common Law.
  2.  Under the LIHTC, a unit is deemed affordable if the tenant spends not more than 30 percent of their monthly adjusted gross income on housing costs i.e. rental plus utilities. 
  3.   Affordable rented homes are usually rented out at 80% of the local market rent while social rented homes at 50% of the local market rent. 
  4.  Housing associations have built a quarter of England’s new homes and are estimated to house six million people. In the past, these associations relied largely on public funding to build social homes – 419,000 new homes were built from 1990 to 2010. After public funding was significantly reduced in 2010, these associations sustained themselves by developing homes for sale and market rent, and reinvesting the proceeds into building more social homes. Through this strategy, 20,000 social rental homes and 77,000 affordable rental homes were constructed from 2015 to 2019.
  5.  In 2021 alone, RentCafe calculated that a record 20,100 units have been converted into apartments, double the previous year, with about 52,000 conversions already planned for 2022 and beyond. Most of the converted units were originally office buildings.
  6.  Rent control has been largely frowned upon in the US. 37 of the country’s states have laws that preempt local governments from adopting rent control such as the Illinois’ 1997 Rent Control Preemption Act. Notwithstanding this context, tenants’ drastic rise in rental burden has generated stronger pressure for local governments to intervene in the rental market. Regulations are now being proposed throughout the country to cap monthly rental increases by 2% to 10%.

The Centre is a centrist think tank driven by research and advocacy of progressive and pragmatic policy ideas. We are a not-for-profit and a mostly remote working organisation.

For general inquiries, please write to us at info@centre.my.

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