In the past, the consideration of buying a property used to be simple and straightforward. Residential land is zoned exclusively for residential properties, vice versa, commercial land is exclusively for commercial properties. There was no overlapping of category where a residential development can be built on commercial properties. Each residential land and commercial land has its own regulations, tax rate and utility charges with residential development enjoying the lower rate between the 2.
However, in recent years, we are seeing an increased effort by the government to meet the people’s demand for affordable housings. This has led to the issuance of mandates to property developers, allowing them to build serviced apartments and other forms of developments such as Small-office Home-office (SoHo), Small-office Flexible-office (SoFo) and Small-office Versatile-office (SoVo) on commercial land to meet the growing demands in the city. Hence, today, there are a lot more new residential developments being built on commercial land, having the property title, “Commercial under HDA”.
As a general understanding, properties with Commercial under HDA titles are developments meant for residential purposes being built on commercial land. Purchasers of these developments have their interests safeguarded under the Housing Development Act (HDA) but will have to bear higher utility rates, assessment taxes and quit rent.
Like any residential development built on residential land, serviced apartments and SoHo units are governed under the Housing Development Acts. However, being built on commercial land, purchasers of these units should be aware of the higher utility rates, and assessment tax that is based on commercial rates.
I know Commercial under HDA titles can be really confusing, it is a combination of many factors, with cross-references between regulations for residential land and commercial land. Hence, I hope this article can serve as a good guide for you to understand residential properties with commercial under HDA titles.
In order to do that, we must first understand the Housing Development Act and the distinction between residential land and commercial land. Subsequently, how these 2 factors affect our consideration when it comes to residential units on commercial land.
1. The Protection of Housing Development Act (HDA) for Purchasers
In order to understand the significance of residential property with commercial under HDA title, it is best to first understand the importance of HDA and why did it exist in the first place. HDA, more precisely, The Housing Development Act has its roots dated back to when the housing development industry was still in its’ infancy stage with the intention of regulating housing developers and safeguarding home buyers from “bullies” who would abuse the booming housing industry.
The Housing Development Act serves to protect the interest of home buyers by controlling and regulating the provision of licences in regard to the housing development industry. It is also important to understand the HDA protects homebuyers in the primary market properties and new properties still within the defect liability period.
The importance of having HDA protection for homebuyers in the primary market covers the following
- Standardized Sales and Purchase Agrement, this includes the Schedule H and G indicating the schedule of development and when money is released by the bank to the developer. Because the sales and purchase agreement is standardized according to the template set by HDA, it encourages transparency and accountability in the agreement with no room for misinterpretation by both parties.
- Purchasers’ interest are protected, as mentioned, the HDA serves to control and regulate the housing development industry. This becomes a further motivation for developers to complete construction according to the needed requirement laid out by the government.
- Development funds are released by the bank into a Housing Development Account, developers now have the burden to prove their construction milesones before they can withdraw any money from the Housing Development Account. This also serves to protect the homebuyer’s interest.
- Platform to address any conflicts, disputes and claims between buyer and developer.
As a general rule, purchasing a property with HDA protection will give you better assurance that your interest as a homebuyer is safeguarded by the Housing Development Act. Any potential dispute or claim that may arise in the future will be mediated by the Housing Development Act and will not likely involve hefty lawsuits that can be detrimental to the cost of home ownership.
2. Distinction between Residential and Commercial Properties
When it comes to understanding residential and commercial properties, the main distinction is in the utilization purpose mandated by the government.
- Residential land refers to properties that are meant for residential purposes as a home address. No business is permitted (unless with special permission) to run from this address.
- Commercial land refers to properties with the purpose for conducting business or other related retail activities. However, in the recent years, there are serviced residences that are allowed to be built on commercial land, making the distinction less obvious with room for further interpretation.
Because each land category has its own regulation set by the National Land Act, we should consider the following factors when shopping for a new property,
- Allowable financing margins are different between Residential and Commercial Properties
- Legal protection and Sales & Purchase Agreement (SPA) template
- Assessment tax and utility charges
#1 Allowable Financing Margins for Residential and Commercial Properties
If the property is being protected under HDA, be it a residential development built on residential land or commercial land, the likelihood of a loan application being approved for a 90% loan-to-value is extremely common, as long as you have less than 2 mortgage loans to your name.
In contrast, commercial properties are viewed less favourably by the banks due to the lack of HDA protection. Hence, the typical loan-to-value approved for commercial properties fall within the range from 70% to 85%.
As a property investor, I will want to consider the financing margins when planning out my property investment portfolio. Having a lower loan-to-value margin will also mean more capital invested as a down-payment into a particular property and that has a significant impact on my return on investment calculation.
#2 Legal Protection and Sales & Purchase Agreement Template
Properties such as serviced apartments and SoHo, albeit built on commercial property, falls under the jurisdiction of the Housing Development Act as these properties are meant for residential usage. In such cases, the sales and purchase agreement between buyer and developer will abide by the template pre-determined by the HDA, providing homebuyers with better legal protection and minimal room for misinterpretation by the developer.
When it comes to commercial properties, developers are not required to follow any set template for sales and purchase agreements. In such cases, buyers will have to sign non-standard sales and purchase agreements with developers, drafted by the developers and their lawyers. As buyers in such a situation, I highly recommend scrutinizing the sales and purchase agreement with the help of legal advice to ensure the agreement is not skewed to take advantage of you, the buyer. Important to note, if there are any legal disputes by the buyer for commercial properties, buyers will need to file a lawsuit against the developer and argue their case within the context of the sales & purchase agreement. They are not entitled to seek a remedy through the Housing Tribunal.
If you are buying property covered by the HDA regulation, just know that your rights and interest are covered and be assured if there is any dispute, you are entitled to seek remedy from the developer through the Housing Tribunal.
#3 Assessment Tax and Utility Charges
As you’ve guessed, there are distinctions when it comes to assessment tax and utility charges for properties on residential land and commercial land. It used to be really straightforward but the introduction of residential developments on commercial land creates a layer of complexity, which I aim to address in this article.
As a general rule, when it comes to assessment tax and utility charges, homebuyers for properties on residential land will pay less on their assessment tax, quit rent, electricity and water bills. In contrast, commercial lot owners will need to pay more on the same items due to a higher rate set by the government on commercial properties.
So with bated breath, I will do my best to lift the veil on this topic, especially when it involves special developments such as Serviced Apartments, SoHo, SoFo and SoVo.
**Utility bill: Electricity utilization
- Properties on residential land – There is a minimum monthly charge of RM 3.00, with a residential tariff rate on the first 200 kWh at RM 0.2180/kWh.
- Properties on commercial land – There is a minimum monthly charge of RM 7.20 with a commercial tariff rate on the first 200 kWh at RM 0.4350/kWh.
- Serviced Apartments built on commercial land can be converted to residential tariff rate.
**Utility bill: Water utilization
- Properties on residential land – A minimum monthly charge of RM 6 for domestic usage
- Properties on commercial land – A minimum monthly charge of RM 36 for commercial usage
- No exception for residential properties built on commercial land
**Assessment rates (with reference to DBKL)
- Properties on residential land – 4%
- Properties on commercial land – 10%
- Serviced apartments – 7%
Final Word
When it comes to buying serviced apartments or any special category of development on commercial properties, it is always important to know if your interest as the purchaser is safeguarded by the HDA or the clauses within the Sales and Purchase Agreement. As we have explored, there are significant distinctions when it comes to purchasing a residential home, or a serviced apartment.
The table below will summarize the earlier discussion for quick future reference,
A Summary on Legal Importance and Cost Difference between Residential and Commercial Under HDA
| Residential Home (Condominium, Apartment, Landed, etc) | Commercial Properties (Retail Lots, Shop Lots, etc) | Serviced Apartments | SoHo | SoFo | SoVo | |
|---|---|---|---|---|---|---|
| Description | Residential properties on residential land | Properties on commercial land primarily for commercial purposes | Residential properties on commercial land | Small-office, Home-office, partial home/ office built on commercial land | Small-office, Flexi-office, office built on commercial land | Small-office, Versatile-office, office built on commercial land |
| Property Title | Residential | Commercial | Commercial | Commercial | Commercial | Commercial |
| SPA Preparation | Standard format under HDA | Non-standard format under HDA | Standard format under HDA | Standard format under HDA | Non-standard format under HDA | Non-standard format under HDA |
| Legal Protection and Housing Tribunal | Seek remedies through HDA | Seek remedies through the court of law, according to SPA | Seek remedies through HDA | Seek remedies through HDA | Seek remedies through the court of law, according to SPA | Seek remedies through the court of law, according to SPA |
| Electricity Bill | Residential Tariff | Commercial Tariff | Commercial Tariff, can be converted to Residential Tariff | Commercial Tariff | Commercial Tariff | Commercial Tariff |
| Water Bill | Residential Tariff | Commercial Tariff | Commercial Tariff | Commercial Tariff | Commercial Tariff | Commercial Tariff |
| Assessment Tax, with reference to DBKL | 4% | 10% | 7% | 10% | 10% | 10% |
Until then, take care.
