Property developers open to rent-to-own

If rent-to-own (RTO) schemes are able to help more people own homes, property developers would definitely be in favour of them.

Developers such as UEM Sunrise Bhd and Mah Sing Group Bhd, for instance, are open to the RTO concept which allows a homebuyer to enter a rent-first, buy-later contract with the property seller. Other developers that have come up with versions of the RTO concept include TAHPS Group Bhd’s “Stay and Own” scheme, Selangor Dredging Bhd’s (SDB) “Reside and Purchase” (RAP) programme and Khoo Soon Lee Realty Sdn Bhd’s “Rent Now Buy Later” programme.

Under the RTO concept, an individual can rent the property for a specific tenure and then has the option to purchase the property at a pre-determined agreed sales price at the end of the rental period. Usually, a portion of the rent will be credited to the sales price, making the scheme appealing to those who are unable to fork out the initial down payment or not qualified for a mortgage.

UEM Sunrise and Mah Sing see homeownership as a necessity for many and RTO schemes will help provide a buffer period for these potential homebuyers to sort out their personal finances and build up their credit standing, before they start applying for a loan.

“Yes, there is a need [for RTO] as it is a good added solution for those who are planning to have a home but in the midst of building up their careers. This option will enable them to plan their finances and facilitate their borrowings,” says UEM Sunrise managing director and CEO Anwar Syahrin Abdul Ajib.

Such schemes can also help promote and raise the take-up rates of property developments.

Mah Sing’s CEO Datuk Ho Hon Sang says RTO schemes would ease homeownership by helping potential homebuyers who are not qualified for a home loan.

Citing the loan approval rate by Bank Negara Malaysia (BNM) in 2016, 72% of the total loan approval rate comprises first-time homebuyers who are purchasing properties below RM500,000, he says RTO schemes would be a good option for young families finding it difficult to raise the initial down payment.

Ongoing RTO schemes

Currently, both property developers provide RTO schemes for selected developments. For Mah Sing, its RTO programme is offered to purchasers of its shops and commercial spaces.

“This is very relevant for business operators because they would not be required to fork out a big capital outlay to start operations. With RTO, they are able to first rent and eventually own the property,” Ho offers.

For UEM Sunrise, its RTO schemes are currently offered to buyers of completed projects.

“Other than providing the opportunity for buyers to consolidate their finances, be it disposing their current property or waiting for their salary increments, this arrangement is also a means for the buyer to experience living in a rented place before they actually own it.

“The [RTO] scheme will also help to mitigate projects or developments from being empty and untenanted which may result in unnecessary maintenance,” Anwar says.

Not without hurdles

However, both Anwar and Ho warn that offering RTO or similar schemes come with their set of challenges.

For one, to do so, a property developer will need to be in a strong financial position to be able to absorb or mitigate any risks that arise.

“In order to implement RTO, developers will require a healthy cash pile as the scheme puts a lot of financial stress on cash flow. Aside from that, there is always the possibility that the homeowner may opt out of the agreement at the end of the rental tenure.

“Other concerns include timely rental collection, upkeep of the property, higher cost incurred as well as more administrative work,” says Ho.

Anwar says there is the possibility that tenants may default on rents and tenants who may not exercise their right to purchase.

“For the latter, developers will have to refurbish the property before it can be sold which will result in the inability to recognise immediate sales for the developer,” he shares.

Ho suggests that banks consider providing special loan packages to homebuyers who take on RTO schemes as this will encourage developers to adopt such schemes.

It is also crucial to regulate the RTO industry to protect both parties — property developer and homebuyer, Ho adds.

This story first appeared in EdgeProp.my pullout on Nov 17, 2017. Download EdgeProp.my pullout here for free.