SINGAPORE (Oct 1): Last week, we discussed some of the major issues with regard to the current state of housing in Malaysia. To briefly recap, the rising number of unsold houses across the nation indicates that there is ample supply in the market. However, many are still unable to own a home. This is due primarily to the gap between house prices and income levels.

We showed an estimated cost breakdown for an average-priced home. It underscores the limits to which costs can be lowered — for quality housing of a decent size, at a reasonable location with connectivity and facilities that will create equity for owners in the long run. The poor performance of the Perumahan Rakyat 1Malaysia (PR1MA) housing scheme would testify to this.

We also highlighted the risks of default and foreclosure if banks were forced to loosen lending requirements, which could have serious ramifications on the banking sector and the economy as a whole. Keep in mind that the average Malaysian household is already heavily indebted and has little ability to take on more loans.

This week, I am sharing some thoughts on two concepts that have been implemented or proposed to improve homeownership — and why I believe neither sufficiently addresses the underlying issue of affordability.

First, rent-to-own (RTO) schemes such as that introduced by PR1MA and Maybank (HouzKEY).

Under these plans, you get to stay in the home and hold an option to purchase it at a pre-determined price in the future, when you have saved up enough. The beauty of such schemes is that you get to lock in the price for the home and do not need to fork out the 10% to 15% upfront (down payment and transactional costs) as you would in traditional mortgage financing.

However, you still have to pay a monthly rental. And this is the crux of the matter. This monthly rental is benchmarked against a traditional mortgage instalment plus a price for the option.

In other words, the monthly instalment is higher than either paying off a traditional mortgage or simply renting the property. Call it rental, enforced savings or whatever you wish, you are effectively taking on more debt and paying for the cost of financing 100% of the property value.

Therefore, while such schemes would appeal to some, it is not a game changer. Notably, if you cannot afford to service a traditional mortgage, then you definitely cannot afford to pay the monthly RTO instalments.

The second concept is to set up a residential real estate investment trust (REIT) that would focus on increasing the supply of affordable houses, with the low-income (B40) households as its main target market.

Such a scheme calls for the private sector to design, build and maintain affordable housing projects on government-owned land. The project will be fully funded by the REIT. In return, it will be given the rights to rental income but with a minimum rental guarantee from the government for 30 years.

The guarantee allows the REIT to secure financing for the construction at a reasonable interest cost, but which is highly unlikely to ever be cheaper than the rate at which the government can borrow on its own.

I do not know about you, but the plan sounds uncannily similar to public private partnerships (PPPs) that have become common practice in Malaysia in recent years. The private company shoulders the construction and maintenance costs, and ostensibly the associated risks, but the ultimate obligations (in the form of deferred payments) fall on the government.

Malaysia already has over RM200 billion ($65.9 billion) of such off-balance sheet liabilities — where the private sector makes all the upside returns while the government underwrites the downside risks. We do not need more of them.

The private sector (under a REIT or any other structure) is free to take up the mandate for affordable housing — but on its own. The challenge is, of course, low yields for residential, as compared with that for commercial and industrial, properties.

Otherwise, if public-social housing is needed, then let the government undertake and own the entire project.

PPPs are what I would call piratisation of public funds for private interests.

In any case, renting — even if at fixed or subsidised rates — does not build equity. Neither does it help improve the prospect of home ownership in the long run.

This long-running and unresolved issue of affordability is one that is close to my heart, as I believe that home ownership is a basic human right. I intend to design a more holistic solution that will make homes affordable to almost everyone, one that will not over-tax your balance sheet and monthly obligations. And I hope to share it with you in the coming weeks.

Most of the stocks in the Global Portfolio ticked higher in the past one week, recouping some lost ground. Total portfolio value rose 0.3%, paring losses since inception to just 0.2%. Nevertheless, this portfolio is still underperforming the MSCI World Return index, which is up 5.7% over the same period.

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<i>Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore</i>

<i>Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.</i>

No more PPP (Piratisation of Public funds  for Private interests), please

No more PPP (Piratisation of Public funds for Private interests), please

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