Will discounts and rebates affect properties’ intrinsic value?

By Sharina Ahmad

In the middle of the Covid-19 crisis, many property developers have been giving steep discounts and various other rebates to homebuyers as an incentive to own a house during this critical time. 

Due to the current situation, some property developers are left with no choice as their inventory piles up due to a slowdown in sales made worse with construction activity almost coming to a grinding halt. 

As a result of the looming uncertainty over project completion dates during the movement control order and as the pandemic rages on, will discounts and rebates reflect the genuine value of the property, and will they also help to stimulate the market moving forward? Or will they cause negative consequences to the industry?

Based on data compiled from over 80,000 valuation indications on MyProperty Data’s Valuation Management System (VMS) and PropertyAdvisor PRO database last year, significant variances were found between the opinion of Market Value by professional valuers and Developer Asking Prices.

The data showed that approximately 45% of asking prices assessed disclosed a variance in excess of 10% from valuer assessed Market Value. In some cases, selling prices varied by as much as 80%. 

While this practice did not apply to all developers and development, variances of between 15% and 30% appear to be the most common, particularly at this point in time. (Please refer to MyProperty Data for more details on VMS and Property Advisor Pro system.)

Discounts, rebates and incentives are common sales and marketing strategies particularly to stimulate the market when it’s slow, or in some cases as a tool to compete in an environment where supply is high and demand is low for a particular property type. This practice, however, becomes a concern where prices are inflated above market rates to make room for cash rebates and other incentives not specifically tied to the property.

Hence, be prudent and do your due diligence before purchasing a property with knowledge that it’s important to analyse the real value of what you are being promised as part of the sale before signing any contracts.

Association of Valuers, Property Managers, Estate Agents and Property Consultants in the Private Sector Malaysia (PEPS) president Michael Kong told Property Advisor that it is obvious the offers given by the developers do not reflect the actual price of the house. 

“Developers’ pricing has never been thoroughly verified or endorsed because they do not have to. They are selling prices which are entirely up to their discretion. They can sell 20%, 30% above the market price as there is no check and balance mechanism,” he said. 

Kong said that previously the practice was quite rampant where the developer will inflate the percentage in prices in order to allow a borrower to get a maximum loan from the bank. “With this current situation, it is getting more difficult to sell for developers. I think the practice is no longer rampant but it is a matter of getting more freebies. Some developers are offering a car, for instance, free booking fee, legal fee, stamp duty; they just want to get rid of their stock!” 

However, Kong said buyers are getting discerning now and to get them to purchase a few hundred thousand homes is not that easy. 

He also expressed his concern in response to an article in The Star which stated that banks were aware of the “discounting practices” by developers and have taken the necessary mitigating measures to ensure that the end-financing provided is reflective of the true value of the property purchased.

“This is rather disappointing. It is simple, actually – you compete on your product quality, its characteristics and unique selling point. Do not distort the market, cheat the bank and try to manipulate the system,” he said.  

He noted that the property market is in a cyclical manner. “That means it goes through boom and bust. Now we are heading to the bust. 

“Banks are aware of what is happening right now. They just need to impose a market feasibility study or valuation on the primary market. Now valuation is only done for the secondary market. They should have a master valuation done for each and every project to be launched so that everyone will have a true picture on what the real market value is and not to leave it to the developer to price it.”

REI Group CEO Dr Daniele Gambero said that due to rebates and discounts on top of tightening lending standards from the banks, the future value for the property market is expected to remain low and will take a longer time to recover. 

“Valuations are mostly based on historic sales and purchase agreement (SPA) values, which is why I hope developers will ‘limit the damages’. They have been giving discounts and rebates previously which were already attractive enough. The stimulus to the industry is definitely a plus point; however, I hope they (the developers) will not push it too far,” said Gambero. 

He noted that those developers who offered additional discounts and rebates will use their own funds to bear some of the costs which lead to lower profit margins in a highly volatile market. 

Metro Homes Realty Bhd executive director See Kok Loong said the rebates and discounts will give a negative impact to the industry as they do not reflect the real value of the asset and it is against the industry practice which requires high levels of transparency.

“If there is no transparency in the market, then it will not be an efficient environment. The market would take a longer period of time to recover without transparency and buyers turn up to be the victim of the scheme. 

“At this point of time, I am sure the banks will take a scrutiny and possibly a new project requires to do a valuation to ensure the ‘real’ market value instead of just helping the buyer to do ‘cashback’. 

See said with the real discount and lower SPA offered in the market, genuine buyers are paying lower instalment and, in the long run, will save money instead of taking cash upfront from cashback.

He mentioned that there are buyers who are looking to buy cheaper property for their own use and investors are also looking at another angle to get a “great” deal if possible. 

Property insights and consulting firm Living Space Ventures Sdn Bhd director Ikhram Merican said the general consensus is that Malaysia’s property market is dominated by big developers with good cash positions. 

“They will be reluctant to reduce price in a significant way, and may have the ability to maintain prices,” he said.

Based on a news report by The Star dated June 1, National House Buyers Association (HBA)  honorary secretary-general Datuk Chang Kim Loong said the act of increasing the price and then offering a rebate of up to 10% appears to help buyers, but this actually “does more harm than good in the long run”.

Chang was quoted as saying that the rebates and discounts actually lead to higher costs for the buyer because the stamp duty for property transfer and loan agreements are based on a regulated percentage of the property value or loan.

Roughly, when valuations are made, the false information exacerbates price discovery which leads to ever spiralling valuations, said Chang.

Other alternatives besides rebate and discount

According to REI’s Gambero, he has been emphasising to homebuyers to buy a basic unit with SPA value which is equal to the net value method since the last 10 years. 

“If this would have been the rule, then we might have avoided the current market situation and house prices wouldn’t have been as high as they were right before the pandemic.

“Consumers expect developers to overprice then discount and offer rebates to cash out – but with banks clamping down, is there an alternative? I looked at it as a ‘cashback festival’ – something unusual and an unsustainable habit. It’s the easiest way to kill the values and at the same time to put a lot of people in trouble. The best alternative, as said above, is to go for bare units only.”

Meanwhile, Ikhram said a better way besides focusing on discounts and rebates to stimulate a market is a band-aid approach. 

“It will not fix the underlying problem. The economy needs to be stimulated. We need a big-picture economic plan that gets us back on a fast growth trajectory. 

“If the economy is doing well, people will be back in jobs, earning good incomes with the ability to consume goods and services. The property market will be back on its feet.

After all, he opined, rebates and discounts offered by developers are deceitful. “They’re reduced after an artificial increase in price. This phenomenon has caused property prices to increase faster than they should. In the big picture, this is a negative effect on the market.”

Metro Homes’ See said today’s technology allows people to trace all the records easily. “The industry players should come together to ensure a check and balance system is available and a heavy penalty is in place to stop all the unhealthy practice. 

“Consumers expect developers to overprice then discount and offer rebates to cash out – but with banks clamping down, is there an alternative? The alternative is the bank should allow a second charge of property (second mortgage) if the market value is high and the total outstanding of loan is low so the owner can use the property to get another financing instead of refinancing.”

The impact and recovery of property market 

According to Kong, the actual impact of Covid-19 on the property industry can be seen after the moratorium ends. “After the six months end, there will be more loan defaults and that is where the real problem starts and the distortion in the market happening.  

“Previously, Bank Negara Malaysia had imposed a guideline to end-financing that stipulates the production of an independent market and feasibility study. However, developers did not adhere to this directive.”

Living Space’s Ikhram said some buyers have been waiting for a market crash since 2012. “I don’t think the market is going to crash in a way where you’ll see values eroded significantly in the near future. 

“The problem right now is that the largest chunk of buyers who are the middle class have seen their wealth eroded. At this point in time, these people will lack the ability to buy even with discounts,” he said.

He added that small discounts like 5% or 10% are not going to stimulate buying among first-time homebuyers. “Investors will be able to snap up distressed properties and this period would benefit them but not the bulk of the market.”

For Gambero, he believes that there will be no housing market crash in the future as there are no signals for it. “I keep on repeating – if you have good holding power and find the right property for you, please go ahead. We will need to wait and see in the next few weeks what will happen.”

Nevertheless, See opined that the property market will come down gradually from 5%-15% by the end of 2020 till early 2021 and the rest will depend on the general economy. If the unemployment rate is high and Malaysia’s economy does not improve, then the market might be stagnant there for additional six months prior to recovery. 

“If Malaysia’s economy recovers in 2H21 then we should see the price come back in early 2022. 

“Investors are looking for good deals and properties that do not come into the market normally, such as certain rows of SS2 shops, Jalan Imbi shops and so on.” 

MyProperty Data is used by over 1,200 professional valuers in Malaysia to leverage insights and solutions, with over 6 million rows of transactions, rentals, auction and demographic data to guide property risk and credit decisions.

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