The devil is always in the details. This is our word of caution in relation to Malaysia’s proposed Urban Renewal Act (URA), which is currently being drafted. The bill is expected to be tabled in parliament by November. In a nutshell, the objective of the URA is to make it easier for strata owners to redevelop their properties without having to obtain 100% consent.
The current requirement for unanimous agreement — under Section 57 of the Strata Titles Act 1985 [Act 318] — before any termination of strata titles of a subdivided building is approved makes it extremely difficult, if not impossible, for any redevelopment to take place. It is proposed that the threshold be reduced to 80% for buildings that are up to 30 years old, and 75% for those older than 30 years.
The overall objective of the URA is good. There is no question that many apartments/ flats built decades ago are in poor condition due to age — infrastructure such as plumbing, electrical systems and even building structure deteriorate from wear and tear. This is especially true of public housing that is poorly maintained, for which there have been limited funds and investments for improvements and upgrades. Some of these buildings have even turned into slums. Older properties are also more likely to lack the amenities and facilities that are common in newer developments. Oftentimes, a redevelopment can boost property values and living quality for existing owners and the neighbourhood, as well as generate economic growth and create new jobs from the resulting construction activities.
On the other hand, existing owners may have valid concerns. For example, redevelopment often inevitably results in gentrification, whereby owners — even with fair compensation for their existing units — cannot afford to purchase a new home in the same location or vicinity. And some may not qualify for a new loan to make up the difference, which could then lead to displacement and related socioeconomic issues.
The biggest challenge, therefore, is in balancing the needs of different stakeholders. While the will of the majority should not be held hostage by a few dissenting owners, there must also be sufficient guard rails to ensure that the minority will not be oppressed.
Singapore’s experience
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We looked at Singapore’s experience in this matter. In 1999, the city state lowered the consent threshold for en-bloc sales from 100% to at least 90% for developments less than 10 years old and at least 80% for those older than 10 years. We have seen a number of enbloc redevelopment projects since then; most have been successful but some have failed, primarily as a result of objections from minority owners.
The government sets up the necessary legal framework under the strata legislation — amending the Land Titles (Strata) Act — and provides the check list of procedural requirements to undertake the sale and redevelopment of old developments. The government does not intervene in the subsequent process, but the Strata Titles Board (STB) plays the crucial role in mediating disputes related to strata developments.
The STB reviews any objection, primarily to ensure that the entire sale process was conducted fairly in accordance with the law — from the setting up of a Collective Sales Committee, engagement of a real estate consultancy (to market the redevelopment) and an independent valuer, and drafting of the Collective Sales Agreement, to setting a reserve price, conducting a mandatory public tender and, ultimately, the selection of a property developer and sale. There are pre-defined permissible grounds for objections, including non-compliance with laws, technical irregularities and procedural lapses such as improper notices and exclusion of eligible voters, lack of transparency in the process, substantial prejudice to owners such as unfairness of the sale price and if the sale was not conducted in good faith. Of note, personal preferences such as inconvenience and sentimental attachment are not permissible grounds for objection.
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For successful redevelopment proposals, the statistics (we analysed several projects at random) show that such projects typically generate hefty premiums over market prices for existing strata owners (see Table).
Conclusion
We presume that aside from passing the URA, the Malaysian government would also set out the necessary framework to ensure full transparency every step of the way — including the procedural requirements, valuation methodology, selection process of the new property developer and the apportionment/distribution of the proceeds. The rules should also set out the proper channels and process for any minority owner to lodge a formal objection to the proposed redevelopment. A specified agency will be tasked to mediate disputes and rule on the objections based on clearly pre-defined grounds.
Here is the crux of our concern. To be clear, we believe that the objective of the URA is good. But how do we ensure that good intentions do not turn into bad outcomes? After all, the road to hell is paved with good intentions.
Even if the entire en-bloc sale process is clearly laid out, can we trust the independence and integrity of the agency that mediates the disputes? How do we hold officials, especially those who are unelected, to account? How do we ensure that all considerations are made in good faith, and not skewed by developers?
Let’s be honest. The public’s lack of trust in the institutions is real and legitimate.
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What are the additional guard rails that can be put in place to protect the interests of ALL stakeholders? For starters, a public tender (or public auction) for the en-bloc sale must be made mandatory. To show good faith, start at a higher threshold of 90%; that can be reduced to 80% after five years to win trust. Otherwise, this would simply be seen as serving the developers.
It is not our intention to pour cold water on the redevelopment proposal, which we think can create value for strata owners and society, but these are the concerns that must be raised and addressed. The hard truth is that Malaysia does not have a good track record of prosecuting wrongdoers, even when the transgression is clear. Even fewer ever face serious repercussions. Trust must be earned.
The Malaysian Portfolio gave back some recent gains, falling 1.2% for the week ended July 31. Shares in IOI properties Group (1.4%) and Malayan Banking (1.0%) gained. The three losing stocks were CCK Consolidated (-6.3%), Insas Bhd – Warrants C (-4.8%) and Insas (-1.8%). Last week’s loss pared total portfolio returns to 214.3% since inception. Nevertheless, this portfolio continues to outperform the benchmark FBM KLCI, which is down 11.2%, by a long, long way.
The Absolute Returns Portfolio, on the other hand, gained 1.4% last week, lifting total returns since inception to 5.7%. The top gainer was Airbus (+6.8%), after reporting 2QFY2024 earnings that beat market expectations across the board, including positive surprise for free cash flow. The company will still deliver fewer planes than originally forecast, owing to persistent supply chain issues, but continues to secure new orders on the back of strong demand for commercial aircraft. Other notable gainers were DR Horton (+5.2%) and Home Depot (+5.1%); and the big losers last week were Microsoft (-2.5%), Swire Properties (-1.5%) and OCBC (-1.4%).
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