Investing in Serviced Apartments
01/12/2004 Published in Malaysian Business - Housing
& Property By National House Buyers Association of Malaysia.
What to look out for.
If you should type in the words 'serviced apartments' in an Internet search
engine, you are likely to see thousands of results. However, unlike the 'serviced
apartments' offered for sale by developers here, these are apartments related
to travellers seeking alternative long term as an alternative to hotels.
For as long as this writer has been around, serviced apartments have always
been associated with longer term stays at a fully furnished apartment with hotel-like
services, most likely located in the hub of cities. These are different from
the many serviced apartment projects on sale here, which may also go by the
names of Condotel, Service Suites or Service Condominium.
Is there a difference between 'serviced apartments' and 'housing accommodation'
Yes, and not without heartache for some buyers who discovered too late that
'service apartments' are not covered under the Housing Development (Control
& Licensing) Act, 1966. The Act is actually a social legislation to protect
buyers in their dealings with housing developers. Any proposed development that
does not come under the definition of 'housing accommodation' in the Act is
outside the legislative ambit. Therefore, no protection is accorded for buyers.
In most cases, if the development land was never converted to 'residential'
status, the building can only be built as 'commercial'. Thus, if anything goes
wrong, the only legal recourse against the vendor is the contractual agreement
between both parties. However, since the sale and purchase of this type of property
is not governed, the terms and conditions are not regulated either. Many buyers
who have not done their homework later find, to their chagrin, that the terms
and conditions favour the vendor.
'I didn't know what "serviced apartment" means,' is the consistent cry. The
Minister of Housing and Local Government, Datuk Seri Ong Ka Ting, has publicly
declared that there is a loophole in the law and has repeatedly warned buyers
to be aware that 'serviced apartments' are not covered under his Ministry. Announcements
have also been made that laws would be changed or formulated to include 'serviced
apartments'. We hope that it would happen soon.
This is not to suggest by any means that all 'serviced apartments' developers
lack principles. However, there are a few in the industry whose sales tactics
are questionable. We have even come across a case of a project that was sold
as 'regular' apartments but the Certificate of Fitness for Occupation was issued
for 'Pangsapuri Khidmat'.
How to protect yourself
Caveat Emptor... buyer beware! It's that simple. Know what you are
buying. If your plan is to buy a home for your family, a development that comes
under the Housing Act is a better choice for you. For those still interested
in serviced apartments, you would be wise to study all the documents - the sale
and purchase agreement, deed of mutual covenant, lease agreement, termination
terms, etc - before making any deposit.
If you are buying an investment property to be managed by a third party,
you should view the prospectus too. Seek legal advice before making any payment
or signing any contractual agreements with the developer or their agents. Be
wary of accepting advice from advisers closely associated with the vendor.
Rental Guarantee Schemes - What's the risks
The guarantor might fail.
A group of buyers who approached HBA for assistance was furious that the
'guaranteed scheme' was terminated by the vendor after a year. They were left
high and dry as the apartments were located in a remote area and meant initially
for university students.
This group of 'amateur' landlords told us that the reason for their purchase
was the 'rental guarantee' and the vendor even had a buyer-get-buyer promotion.
So at the very beginning, when they should have been studying their legal documents,
they were kept busy introducing friends and relatives to the scheme. Doesn't
sound like such a good idea that the same friends and relatives are blaming
This is not to suggest that all 'rental guarantee' schemes would fail. However,
there are some buildings old in Malaysia with 'guarantees' that are at best
questionable in its ability to deliver. Landlords know that rental returns are
very subjective matters and conditions can change anytime. What good is a guarantee
when the company is defunct?
The Companies Commission of Malaysia (CCM) has policy guidelines on timesharing
arrangements. One of the policies is as follows: "The scheme must be guaranteed
by an insurance scheme of a reputable insurer that is approved by CCM or by
a scheme of placement of deposits offered by the developer/operator that has
to be kept by the trustee approved by CCM.' We think that this would work for
'guarantee rental schemes', too.
Points to consider:
- If the guaranteed rental is 7% of your purchase price
for the next three years, calculate the amount that the vendor would have
to put aside for all the unit owners. Sounds like a financial loss to the
developer? Ask the developer where the trust fund/security is to guarantee
such a scheme?
- On top of the possible pitfalls of buying a yet-to-be built
property, wherever possible, you should evaluate the risks and returns of
each property by an independent research report. Don't forget to include the
payments that you would have to make - monthly service charges, sinking fund,
insurance, administration fees, legal fees etc - before you calculate your
- Find out who bears the cost of furnishing the apartment.
Most likely its the landlord, and that means you who would have to 'reimburse'
the tenant-vendor for 'expenses if it's not stated clearly in the contract.
In one case, the buyers naively covenanted with the developer that the developer
is empowered to appoint its own renovator and such expense should not be less
than RM30,000 before the 'guarantee rental' scheme can take effect. In this
case, the buyer could not come up with the amount, and the guarantee was summarily
- When the lease period ends, you should be able to support
your mortgage repayments if there is no income from the rentals.
- If you intend to live in the apartment yourself, consider
that the utility rates, assessment tax and quit rent are based on commercial
rates, which are higher than residential apartments.
- If you wish to sell your apartment, would you be able to
find a buyer? We have seen one agreement where the car parks are not included
as accessory parcels but would remain the property of the vendor. This would
be a potential problem for the management corporation once strata titles are
issued unless the vendor sells those car park bays to buyers.