Many experts are of the view that property ownership will eventually move towards ownership of shares of the entire unit or development or rights over property instead of the entire brick and mortar unit.
Text by Jan Yong

Of late, in Malaysia, there are proposals to make property more affordable by making changes to its ownership and financing structure. Many different views have been given from utilising retirement funds (Employees Provident Fund) monies for the monthly loan instalments to fractional ownership, crowdfunding and rent-to-own schemes.

The newer proposals involve using financial instruments with property as the underlying assets. These tradeable instruments can be real or virtual documents representing a legal agreement. Equity-based financial instruments represent ownership of an asset including real estate or rights to real estate while debt-based financial instruments represent a loan made by an investor to the owner of the asset.

According to lawyer Chris Tan, real estate has always retained the quality of a financial instrument alongside its brick and mortar counterpart. It’s just that due to the oversupply situation and lack of affordability, people are seriously looking into alternative ways of ownership and funding which inevitably make use of financial instruments.

Existing financial instruments with property as the underlying assets include REITs, funds, listed property counters e.g. SP Setia and schemes such as rent-to-own schemes.

But in accountant Agnes Wong’s opinion, the instruments that seem to offer the biggest gains to property investors as opposed to first time homebuyers is the REIT structure or fractional ownership structure. In its simplest form, it basically means sharing a piece of the entire property with other owners. Your ownership is evidenced on a piece of paper known as a share instead of a grant of title or where there are trustees, your name will be in the list of beneficial owners in the Trustee register.

You have every right to buy more or to sell off your portion in the form of share sale. Someone else, usually a professional manager is managing the property and the trading of the shares on your behalf.

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As an investor with equity shareholding, you don’t need to worry about anything except the returns from your share ownership. In other words, as long as you get decent returns, say 6 or7 %, you are a happy investor compared to the owner of an entire property who will probably get a more realistic 4% return and on top of that has to manage the property as well. Now, as an investor, which would you prefer?

Unfortunately, in Malaysia, the mindset is still very old school; investors like to know that they own the entire brick and mortar unit and has the title deed to show for it. The concept of rights to the property or ownership of a fraction of the property which is evidenced in a share form or a financial instrument has not taken deep roots yet.


However, this may change soon with the government taking the lead. The Malaysian Budget 2019 proposes an alternative home financing scheme called FundMyHome that allows an initial five-year rental period upon payment of 20% deposit. The balance 80% of the purchase price will be contributed by participating financial institutions such as Maybank and CIMB (unit trust division). Upon expiry of that 5-year period, the ‘tenant’ has an option to sell or take a loan to purchase the property at the prevailing market value. Rent-to- own schemes by some developers are also a variation of the same theme.

Although heavily criticised by many in the industry, it shows the government is willing to support alternative forms of property ownership. Of significance is the government’s willingness to consider crowdfunding and Peer-to-Peer (P2P) financing which shows an increasing flexibility in how properties can be funded. The traditional bank borrowing of 10:90 (10% deposit, 90% bank loan) is fast becoming a relic of the past, lawyer Chris Tan points out.

With these new funding mechanisms, new ownership structures of necessity have to be created to ensure the benefits and burdens are shared equitably among all the shareholders. In fact, Tan proclaims that there is now a new property model – “one that will enable new types of ownership and new types of financing and new types of investment exemplified by the FundMyHome scheme.”

For Tan, the idea behind FundMyHome is ‘incubating’ the 20% owner. “Hopefully, his career will take off and his income will be more in 5 years’ time. In 5 years’ time, if the property price doubles to RM1 mil from the original price of RM500K, you have to pay RM800K balance purchase price. But you have 3 options:

  1. Buy RM1 mil property at RM900K because you have already paid RM100K earlier.
  2. Sell at RM1 mil, you get back RM200k which is your 20% share. You have just gained RM100K, so you can go and buy another property.
  3. If can’t sell, you have the right to roll over for another 5 years. You need to pay another 10% which is RM100K. But you are still staying there and still maintaining ownership.

The scheme has pre-qualified the projects and the 80pc funding is ready. All it needs is for the buyers to come up with 20pc of the purchase price. But
of course, the scheme only works on the premise that property prices will go up. If prices fall, the owner suffers first as he is responsible for any losses beyond 20pc.

Although she is of the opinion that the FundMyHome scheme is a good start, accountant Agnes Wong feels that the REIT structure still best illustrates the equitable distribution of benefits and burdens. “If it’s public listed, it will be overseen by the Securities Commission which ensures protection for the investors. If it’s not listed, then the underlying asset, which is the property will be parked under an investment holding company which is subject to the Companies Act. Hence, in either case, the investors’ interest is protected.”


What all these indicate is the moving towards the ‘instrumentalisation’ of properties, that is properties becoming more of a financial instrument just like shares. Dealing with it becomes more of trading in its shares rather than the buying or selling of the entire brick and mortar unit.

It’s becoming more of a sophisticated way of investing in property where you leverage on collective resources to share in the ownership of a large piece of real estate which on your own, you are unlikely to achieve. Although not the direct owner of the big piece of real estate, you don’t have to be responsible to look for tenants, maintain its upkeep or pay the bank monthly instalments (assuming you have bought it through crowdfunding or P2P financing).

You have managed to bypass the difficult process of getting a bank loan and the hassles of owning a property directly. In other words, you have all the rights and benefits minus some of the hassles and responsibilities of ownership. Plus, it’s very liquid, you can buy or sell at any time without having to wait months for the execution to complete. The risk of vacancies is diffused and shared out among all the owners so its impact is minimised.

“It’s a great alternative to traditional ownership and financing of property. If ownership is in shares, you can trade the shares like shares in the share market. If they are just rights, you need to see whether the rights are transferable or redeemable,” notes Wong.

Of course, this is not something new – developed countries like the US, UK, Japan, France, Germany, Hong Kong and Singapore have been using these instruments for years.

Another sign that the Malaysian government is leaning towards a more flexible approach is its Budget 2019 proposal to set up the world’s first airport REIT. The intention is clearly to raise funds for the airports without losing control of the critical infrastructure. By using public money through the listing of the REIT, it will be able to unlock its value thus creating a sustainable structure to fund the airports’ future capital expenditure and expansion as well as igniting capital market interest.

This is a good example of securitising and listing an asset into a shared or fractionalised ownership arrangement where the asset owner still retains control as they still own the majority of the shares, says Wong who is also the managing partner at Syarikat Ong.

“If the REIT’s return is 6% compared to a house’s 4%, the REIT represents a golden investment opportunity for a property investor.”

Another scenario is where an investor group can craft an instrument that allows the injection of the developer’s project into a company set up by the group. Under the contract, the group will fund the project and manage it together with the developer.

An example (though not entirely similar) is where a local developer solved the issue of its buyers facing difficulty in renting out their units – by taking all the units back from the owners and injecting all the units into a company. The developer then hired an operator to manage the rentals and the combined rental income of the project is then distributed to the owners according to the proportion of their stake.

The owners no longer have to worry about the hassle of getting tenants or the rental income as this is all managed by the manager. They just wait passively for their rental income every month. In essence, the developer has instrumentalised their project with an outcome that makes everyone happy. Of course, the success of this method ultimately depends on the uniqueness of the location, rental yield and how successful they can attract tenants.

“It’s an alternative way to solve the vacancy issue using a capitalist mindset – consolidate, merge and share the benefits. That is the essence of asset instrumentalisation – its success depends on the degree of leveraging you are able to summon.”

Lawyer Tan concurs, adding that the lower the entry barrier, the better the leverage, for example, crowdfunding. He is of the view that once the Securities Commission approves property crowdfunding, the pool of funders can expand to include individual investors. He reckons the minimum entry point might be RM10K which allows most investors to buy a few, not just one property.

An even more forward thinking alternative concept is tokenisation where a fractional share scheme in property is funded with tokens (usually through an ICO), reveals Elizabeth Siew, advocate and promoter of fractional ownership in Malaysia.

“Developers get to sell to a worldwide target market by slicing up their development and selling fractions of it to buyers while investors don’t even need to get a bank loan as the one-time entry payment is very low,” she explains.


There are pros and cons to such a mechanism however. If these types of financial instruments with underlying property as assets become commonplace, the entire property scenario will likely be one dominated by such fractional ownerships. Why? Because it is more profitable for developers to carve out their projects into smaller units to be sold as shares to a larger group of buyers at a higher price per unit, Wong explains. Besides, the developer can even retain majority ownership and control of the tenants of the property as long as they do a good job and give decent returns to their investors.

Developers also bypass the need to get loans from banks as the financing is provided by these fractional owners. The contracts between them can be customised to the satisfaction of both parties as long as it complies with the rules and regulations of the governing legislation. Ultimately, the value of the property is truly unlocked.

But prices will not be cheap if you want to own the property in its entirety, warns Wong. When properties are carved out into more affordable units, more people can then participate. With more demand, developers can price each unit higher.

“Big ticket items may no longer be open for sale because say, if I were the developer of a mall, I could structure the ownership into a REIT where I sell a portion of it through REITs and still maintain ownership.”

Wong gave the example of Sunway REIT where the developer already has a ready supply of established tenants. It can therefore quickly and easily fill up a new mall with good quality tenants thus guaranteeing the REIT owners of good returns. Compare this with a developer without a REIT ownership structure – it would be a tougher sell and the developer would have to offer attractive incentives.

Kuala Lumpur City view

“The success of a REIT is good tenant management; you need to ensure good tenant mix and content, for example, by ensuring the tenant’s business conforms to the style and target market of the mall.”

“Property investment will become a game of just looking at returns without the passion. You can be passionate about your own home but investment is a different game; you need to be unemotional,” Wong observes.

Dato’ Sri Gavin Tee, President of Swhengtee International Group agrees. “What’s more important for investment is the margin of return instead of holding the property itself in hand. On the same note, what’s significant for you as an investor is the right of use instead of whether the title is freehold or leasehold,” he opines.

The property investment consultant predicts that eventually, the majority of properties might be owned by funds and institutional players while ordinary investors will end up subscribing to financial instruments such as timeshares, REITs or other home-sharing or crowdfunding platforms.

Wong isn’t too sure that fractional ownership will be the norm in the future. “This scenario will cause the rich to become richer while the poor become poorer. It may not be the norm but it’s viable as an alternative for expensive properties like villas, malls, etc. Basically, it’s downgrading what the rich own so that everyone can own it,” she notes.

Tax accountant Koong Ling Long on the other hand believes that the new trend of real estate instrumentalisation will be here to stay and might even evolve to be the dominating form of property ownership. As with Wong, he warns that prices will trend higher as people are able to leverage on financial instruments to buy into real estate.

“It’s back to the basic principle of supply and demand. The scarcity will be much higher or the plot ratio higher so demand will increase for smaller shares at cheaper prices, hence prices will rise,” he explains.

“It might even reach a point where 20% of the rich population own 80% of all properties like in Hong Kong. Speculation might be more common as they could reinvest or refinance their properties thus allowing them to buy even more while 80% of the population continues to rent.

“So, unless the government comes up with protective policies for the 80% population, it will be a prime example of extreme capitalism applied in the real estate context. But it won’t go to the extent of HK’s situation where people are sharing rooms.

“This situation is fortunately mitigated by the fact that poorer people are also able to own homes using financial instruments such as rent-to-own schemes. For them however, the barriers are still higher due to the fact that financial institutions still favour those who have good potential of repaying back the loan.

“So it cuts both ways. The beauty of financial instruments is that you can maximise profits at a minimal cost,” notes Koong.

Tee agrees saying that financing plays a big role in moving the market. “Most major properties might no longer be owned by individuals or corporates but by funds or groups of people and its value might even be denoted in cryptocurrency.”


To counter the affordability issue, the other very critical step that is often overlooked is town planning, observes Wong. In smaller countries like Hong Kong and Singapore where space is in dire shortage, town planning is a critical component of development where very careful and thorough study is made to ensure every bit of space is fully maximised.

For example, in Singapore, the MRT stations are near HDB housing and commercial areas where they are most needed while higher end properties are located much further away as residents of these usually have cars.

In Malaysia, there is a trend for developers to list the proximity to the MRT or LRT station as a buying factor even if such properties are high-end where residents mostly rely on cars. Some MRT stations are puzzlingly also located at high end areas such as Damansara and Taman Tun Dr Ismail in Kuala Lumpur. Not surprisingly, the passenger load at these stations are lower than expected.

“Those who need affordable housing are also in need of convenient public transportation. Yet, their housing is located far from the trains contributing to the mismatch in demand and supply,” notes Wong.

“It’s not just the hardware you look at but also where to place buildings in relation to the infrastructure, hence government policy plays a very important role in influencing town planning decisions. These decisions ultimately weigh in on the prices,” she opines.

Adding to that, Tee says: “Since property is evolving into a financial instrument asset, the government’s role is becoming the most important.”

“In fact, never before has the government’s involvement in the property market been so great. Not only are all mega projects owned by the government, it is also introducing guidelines to control prices and ownership of land/property e.g. imposition of RPGT and exemptions from stamp duty. As such, government policy remains the single most important factor in determining market trends, prices and profitability,” the property speaker elaborates.

Koong who is also the Managing Partner of Reanda LLKG International predicts that financial instruments related to property will become more complex and its availability more widespread due to demand for these types of ownership. “It is market driven and it matches the requirements of both real estate owners and financial instrument providers.”

“We cannot stop it because it’s like a wheel that continues to turn and turn,” he describes the evolution.


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