Uncertainties in life like the ones brought on by the recent global pandemic has put the perspective of legacy planning into sharp focus. Malaysian High Net Worth Individuals (HNWIs) dropped by 8% from 2019 to 2020. Even Ultra High Net Worth Individuals – ones with a net worth of at least US$30 million each – were not immune. During the same period, the number of UHNWIs dropped by 3% from 626 to 606¹.

Most Malaysian HNWIs typically own several assets such as real estate, collectibles, jewellery, cars and even life insurance policies. As economic sectors gradually open, HNWIs are looking to invest in other assets and asking themselves if they have sufficient assets to leave behind for their beneficiaries. It is not uncommon these days to find financial recommendations to invest in “newer” but more volatile assets such as hedge funds, NFTs, and cryptocurrencies.

While having a diversified portfolio of assets helps to reduce risk, most HNWIs and UHNWIs still gravitate towards investing in real estate, especially since it can be easily bequeathed to family members. Namely, properties.

Despite the initial sluggish property market during the pandemic, houses continue to be sold, albeit at a slower pace. According to the Malaysia Property Market Report 2021 published by the Malaysian Valuation and Property Services Department, there was a significant drop in volume of transactions in 2020 during the Movement Control Order but it picked up during the last quarter as house buyers rushed to qualify for benefits under the Home Ownership Campaign 2020 – 2021².

This trend was also reflected worldwide – private investors still invested in the property market, resulting in 9% more capital above the 10-year average despite volumes falling in 2020³. People often put off purchases during hard times for luxury items such as cars, entertainment, or smartphones, but people will always need a place to stay for security and comfort; they will prioritise paying rental over other expenses.

Some real estate developers are now providing attractive deals and discounts to attract new home buyers and investors. If you’re looking to add another property to bolster your portfolio or planning for your children to pursue higher education overseas, this is a good time to invest in an overseas property. Education is a key driver of around 10% of property purchases among Asian and African UHNWIs, especially in areas with top international schools such as London⁴. Your children will not only have a place to stay during their education, but the property will also serve as a future home for them if they later apply for permanent residency.

Commercial real estate is another attractive segment for investment as a quarter of UHNWIs plan to invest in commercial real estate during 2021⁵. Having a piece of property for rental and with reliable tenants, you will generate a steady flow of passive income that will support your beneficiaries during uncertain times if they are unable to secure steady employment or encounter unexpected expenses, such as medical emergencies. And unlike other tangible assets such as cars or yachts which tend to depreciate, real estate properties often increase in value.

¹ Fewer Malaysians on rich list (thesundaily.my)

² Malaysian property market emerging from the storm (nst.com.my)

³ Knight Frank Wealth Report 2021, page 7

⁴ Knight Frank Wealth Report 2021, page 5 and 36

⁵ Knight Frank Wealth Report 2021, page 52

The Knight Frank Wealth Report 2021 revealed 65% of Asian respondents reassessed their attitudes to succession planning during the pandemic⁶. Families are welcoming intergenerational wealth transfers and looking to safeguard and grow wealth. Unlike the complexities of dividing financial assets, bequeathing real estate tend to be more straightforward, especially if you have already drafted a will. This makes transition and distribution of assets as smooth as possible. Wills can be regularly updated to reflect any changes or updates to the list of assets or distribution. You can even stipulate in the will for a property to be sold and its proceeds to be divided accordingly to give more options to family members if they have different plans on investing or divesting their inheritance.

⁶ Knight Frank Wealth Report 2021, page 78

Some countries such as Japan, UK, US, and even Taiwan levy high inheritance taxes of upwards to 55% upon a person’s wealth at the time of their passing. For beneficiaries living in the property for a long time, being suddenly imposed tax just for legal transfer of ownership may seem unfair. Luckily, Malaysia is one of several countries that does not impose an inheritance tax, so families won’t be financially burdened when they suddenly lose their main breadwinner.

Another perk which makes properties an attractive asset to protect one’s legacy is stamp duty exemptions. Property transfers between spouses or parents and children – colloquially known as ‘love transfers’ – can get a discount or be completely exempted from stamp duty. Love transfers of property between parents and children get a 50% stamp duty rate; from spouse to spouse, the duty rate is 100%. For example, if the market value of a property that a parent wants to transfer to their child is RM500K, the stamp duty rate has an exemption rate of 50%, reducing the cost of RM9K to RM4.5K. From husband to wife, the stamp duty rate drops to RM0.

During the tabling of Budget 2022 in October 2021, the Malaysian government announced the abolishment of the Real Property Gains Tax (RPGT) for property disposals in the 6th and subsequent years of ownership⁷. This allows beneficiaries to keep more of their sales proceeds in the event they need to divest of the property or downsize to a smaller living space. The exemption is applicable to Malaysians who bequeath the property to their spouse, parent, child, grandparents, and grandchildren.

⁷ Budget 2022: Real property gains tax removed for house sales from sixth year onwards | The Edge Markets

One key advantage that property owners enjoy is the ability to apply for mortgage assurance upon purchase. In the unlikely event of the homebuyer’s passing, the insurer will provide a lump sum that pays off the property’s mortgage. This will allow your beneficiaries to keep the property and reduce their financial obligations, which ensures they will have a roof over their heads during this difficult period.

Similarly, properties also benefit from an option called Mortgage Refinancing. If you’re paying a mortgage but no longer bound by any existing lock-in period, you can apply for home loan refinancing. This is useful for homeowners looking to pay lower monthly instalments and transfer liability for repayment to a beneficiary. This not only helps to free up cash for future investments or even debt clearance, but also allows you, the homeowner, to obtain additional funds without having to dispose of your property.

Real estate mortgage debt typically reduces over the long term since property prices tend to appreciate over time. Inflation causes debt to lose value over time, which is ideal for those who regularly invest in real estate since the debt amount remains fixed. By investing wisely in the right properties, you can use your leverage to slowly build up your wealth.

The real assets you own today can serve as a hedge against inflation; a PropertyGuru Malaysia Consumer Sentiment Study in H1 2022 saw 53% Malaysian homeowners looking to buy an additional property for investment reasons with 43% buying for rental income. Making preparations now will help to pay dividends much later on, ensuring your loved ones get the financial security they need for generations to come.

Newer types of assets may come and go, but real estate remains one of the safest ways to build legacy wealth. By choosing the right real estate now, you will get to reap the benefits from local growth drivers that usually follow after the recovery period of a tumultuous period such as a pandemic.

Want to know more about purchasing properties overseas or locally? Call our Premier Banking hotline at 03 8315 4288 to give your family’s legacy the distinct advantage it deserves.