How New Conveyancing Rules Impact Malaysia's Property Market?

A major change to legal fees for property transactions is set to shake up Malaysia's real estate sector. New conveyancing rules under the Revised Solicitors' Remuneration Order 2023 (SRO 2023) will raise the cost of buying, selling, and transferring property titles in most cases.

While current market conditions are already challenging for home buyers, this added expense could further dampen demand and ownership affordability. We break down what the updated regulations mean for various stakeholders and discuss potential impacts on the broader property industry.

Key Changes Under the New Order

Gazetted in mid-July 2023, the SRO 2023 institutes the first major update to conveyancing fees in Malaysia since 2017. Conveyancing refers to the legal aspects of property transactions. It covers documentation, title transfers, loan registrations and other non-litigation tasks.

For properties valued RM500,000 and under, conveyancing fees will now be 1.25% compared to the previous 1% of property value. In the RM500,000 to RM7.5 million bracket, fees rise to a flat 1%.

Based on these new rates, conveyancing costs for a RM1 million home purchase increase from RM8,000 to RM10,000. At the top end, fees for a RM5 million property sale would be RM50,000, up RM12,000.

While percentages are higher across most brackets, licensed housing developers will provide buyers automatic discounts of up to 50% on conveyancing. This incentive aims to relieve cost pressures on home ownership. Discounts were previously capped at 25-35%.

Why Are Costs Increasing?

Malaysia's conveyancing fee structure was last revised in March 2017. Proponents argue this update accounts for accumulated inflation and higher operating expenses for legal firms.

The new SRO aims to standardize fees at sustainable levels so law practices can deliver efficient, quality service. The COVID-19 crisis has also exacerbated financial challenges industrywide.

Roger Tan, senior lawyer and conveyancing committee member, stresses lawyers are bound by the order. Like with medical professionals, clients should not pressure conveyancers to circumvent set fees.

Bar Association president Karen Cheah adds the revisions reflect rising market costs. The Bar consulted members extensively and proposed changes it deemed necessary and reasonable.

Under the order, lawyers can still grant discounts up to 25% for non-contentious conveyancing work. But the prescribed fees aim to cover essential overheads.

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How Each Stakeholder is Impacted

While the fee hikes seem modest, they will impact various parties in tangible ways:

Home Buyers

Probably the most affected segment, property purchasers now face higher conveyancing costs at a time of stretching affordability. This adds to the litany of taxes, duties, and expenses bogging down buyers.

The 50% discount on new projects provides relief. But resale home and sub-sale buyers will bear the full brunt of the increases. This may deter transactions, or require compromise on purchase price or property type/location.

Developers

For developers, the incentive for buyers to choose new over sub-sale units may bolster sales. But if cost creep dampens demand generally, it can slow orders and completion velocity.

Land banking and acquisition costs are already high for builders. Rising construction expenses also compress margins. While volume helps economies of scale, the risk is oversupply amid softening demand.

Conveyancing Firms

Law firms specializing in property transactions will welcome the fee adjustment. Based on volume, the additional revenue should cover growing expenses.

However, lower sales activity from reduced affordability may cancel out gains. There are also calls for the Bar to justify if current fee levels are inadequate for sustainable operations.

Impacts on the Property Sector

Looking holistically, the conveyancing changes have both benefits and drawbacks from a property industry standpoint:

On the plus side, it sustains the conveyancing profession while protecting clients. Fees are now consistent and transparent based on property value. For lawyers, it provides financial viability to match rising costs.

But for an industry already under pressure, extra transaction costs are undesirable. Malaysia's home ownership rates still lag regional peers, while prices remain high compared to incomes. Bank lending criteria is also stricter.

Industry groups argue administrative costs must be kept reasonable to avoid jeopardizing affordability. More disruptive innovations and structural reforms are needed to boost ownership and access.

There are fears higher fees could incentivize an underground sub-sale market. Buyers and sellers may attempt to circumvent conveyancing to avoid costs. This heightens legal risks and title security concerns.

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Potential Future Steps

While the updated SRO takes effect immediately, relevant parties should consider next steps to safeguard industry health:

• Conveyancers can demonstrate value by expediting processes and providing top-tier service to justify fee levels.
• Developers can absorb some costs or provide vouchers to cushion increased fees for buyers. Absorption should still allow profitability.
• Policymakers may need to review the broader property taxation and cost structure. More significant structural changes are likely required long-term.
• Industry groups can commission studies on the exact affordability thresholds and price tolerances for Malaysian home buyers given rising costs.
• Digital conveyancing can streamline and speed up processes through automation. This improves efficiency to help offset higher fees.
• Stakeholders may negotiate future fee increments in a graduated manner, instead of at once after a long interval. This eases the impact over time.

While other jurisdictions implement more disruptive measures like stamp duty cuts or grants for first-time buyers, incremental policy changes are more likely in Malaysia. But for home ownership expansion to succeed, joint efforts to tackle affordability issues are vital.

Monitoring the Market Response

The Malaysian property market faces looming uncertainty from rising rates, inflation and other variables. This conveyancing fee hike compounds challenges when boosting demand is already difficult.

But the full market response remains to be seen. There are arguments fees were due for recalibration, and the overall quantum remains reasonable. It may just require adjustment periods for stakeholders.

Much depends on wider economic conditions and income trajectories for the rest of 2023. Weak undercurrents could amplify negative reactions. But with supportive fundamentals, the impact may be modest.

Industry analysts will be observing key indicators like transaction volumes, new launches, house price measures and bank lending rates. These will gauge the true effect on buyer sentiment and behavior.

If the new conveyancing costs spur a pronounced dip in activity, calls for refinements or targeted relief for first-time buyers may resurface. However, the updated structure aims for adequate and consistent compensation for legal services integral to property transactions.