The cost of service apartments
The Star 25/9/2004 BY THEAN LEE CHENG

A couple bought a city apartment several years ago. When they collected their keys earlier this year they were told to apply for a parking bay.

They were told that allotment of parking bays was on a first-come-first-served basis. In addition to the normal maintenance charge of 25 sens per sq ft, they would have to budget for a monthly car park rental.

“The developers should have told us the apartment did not come with a parking bay when we signed up to buy the property at the launch. We had assumed that all apartment units came with parking bays,” they said.

The above situation is expected to be one of many involving service apartments as more of them are launched in the Klang Valley.

Says a property source: “There is a holding cost when a developer leaves a piece of land empty. He unlocks its value by developing on it. Land that comes with a commercial title has the most value compared with residential, agriculture or industrial land.

He has to pay a premium converting a residential land to a commercial. But when he converts it back to residential land, he does not get a refund from the land office.

“So the next best thing is to carve up the land (you can do that with commercial land) and built offices, complexes, a cinema or apartments. This is where service apartments come in,” he says.

“Being commercial land, utilities could be 20% to 30% higher. So he creates smaller units, to make it within reach of potential buyers. That is why smaller service apartments are easier to move compared with larger ones. A condominium is different; utilities are under residential rates.

“In a condominium project, the issue is density, how many units irrespective of size, on a plot of land. In a service apartment, it is plot ratio, or built-up versus land area,” he says.

More service apartments are being launched of late because generally, it is the smaller players who are launching them. There is a cash flow advantage to build service apartment. They incur less cost because a developer can bill customers on commencement of work, not completion.

There is flexibility of the handover date. It could be 48 months or whatever, versus a condominium project, which must be handed over in 3 years. A service apartment can also be launched without an advertising permit,” he says.

Service apartments need not necessarily mean housekeeping services are being thrown in as part of maintenance service. In some development, there is that option on a monthly or weekly basis. The monthly maintenance and sinking fund is, however, not an option.

The differences between a condominium and a service apartment do not so much lie in what is seen as what is unseen. It is not so much the exterior, the services provided, for example, but goes deeper than that.

Because of the demand and supply situation – there is more demand for living quarters than there is for shop lots and other commercial properties at this point in time – developers opt to build service apartments. Because these projects are (not) governed by the Housing Development (Control and Licensing) Act 1966, they have more flexibility to manoeuvre things around.

A legal source says most home purchasers do not know the difference between a service apartment and condominium. It may be called service suites, service residences or even a condominium.

An example is The Plaza Condominium in Taman Tun Dr Ismail, by TTDI Harta Sdn Bhd. It is actually a service apartment. However, in this particular case, car parks are part of the deal.

Says the property source: “A condominium project has an accessory parcel for the air-conditioner ledge and parking bays. A service apartment does not come with this accessory parcel. It is up to the developer whether they want to provide a car park with the unit,” he says.

The legal source says the service apartment versus condominium issue arise because some developers do not explain the differences. In the case of The Plaza Condominium, it is stated in the advertisement that “the schedule of payment of the purchase price differs from that required under the Housing Development (Control and Licensing) Regulations, 1989.”

Says a lawyer: “Developers may say that the property is located on commercial land. Period. They do not elaborate on the implications of that. They eventually accept the situation with a certain amount of resignation because they have already paid the first 10% or some form of booking fee, which is in itself, not legal.”

Buyers either do not ask questions, or they do not know what to ask. Purchasers are also not allowed to scrutinise the Sales and Purchase Agreement before opening their cheque book. In a non-service apartment projects, these documents are pretty standard, says the lawyer. Both the legal and property source suggest that buyers check the following:

·Progress payment collection

This is the first thing developers of service apartments tend to change. Under housing law, homebuyers pay progress payment upon completion of the work. In the case of service apartment, it may be upon commencement.

·Claim on defects

A buyer who takes possession of his property has up to 18 months to get the developer to make right any defects. In a service apartment, this period may be shortened to 12 months.

·Late payment compensation

A developer will charge buyers a 10% compensation for late payments. In a service apartment project, he can charge more.

If a developer takes more than 3 years to hand over possession, he has to pay for late delivery. In a service project, it is up to the developer's discretion.

·Assessment rates - Ask the developer to evaluate and estimate the rates.

Some developers promise a guaranteed rate of returns in the Sales and Purchase agreement as a carrot. From a financial risk management point of view, a developer will use a shell company to build the project, not a subsidiary. If things do not turn out, the entire group is not affected, says a property source.

“Owners may sue for breach of contract but a shell company can be folded easily. Or developers may try to rent out the unit without screening tenants and owners end up having tenants who may cut out a junk of the carpet under the bed, just for fun,” he says.

There are a number of service apartments in Langkawi and Port Dickson where owners try to rent out the place by themselves, for RM60 to RM100 for a weekend.

“It can be a hassle. Although there was a guaranteed rate of return, they are not getting their returns because the company has folded and other unit owners are not paying the monthly service or sinking fund. So location and who is going to manage the place is important.

Generally, developers will get hotel management to operate the place to give it some semblance of good service,” says the property source.

“The bottom line in service apartment is – you do not want to end up paying more for less. So be cautious,” he says.