New SST regime reshapes Malaysia’s real estate market

The Malaysian government has expanded the Sales and Service Tax (SST) framework from July 1, 2025. This expansion introduces an 8% service tax on commercial property leasing and rental services, alongside a new 6% SST on previously exempt construction work services. The new tax regime is expected to reshape the country’s property landscape

The expanded SST applies to commercial properties including offices, shopping malls, shop lots, and warehouses for landlords with annual revenue exceeding RM1 million.

Figure 1: Key exemptions included in the recently announced SST expansion

Source: Ministry of Finance Malaysia

The expanded SST scope increases the operating expenses for existing tenants. Office tenants now face the dual challenge of higher rental costs and increased fit-out expenses due to the new construction services tax. These changes will likely influence relocation decisions and strengthen resistance to standard rental increases upon renewal.

Tenant may respond to these changes by:

• Maintaining current space strategies
• Relocating to lower-rent locations
• Extending stays at current locations
   

A company’s financial position will determine these decisions. With fit-out costs representing significant Capital Expenditure (CapEx) for office and retail tenants, the additional SST on construction services impacts overall expenditure. This will potentially slow down decision-making and increase expectations for landlord incentives.

In the retail sector, impact varies by tenant size. Malls with higher SME representation will experience less disruption. JLL interviews indicate most mall operators will avoid additional rental increases, recognising tenants are already absorbing SST costs.

For logistics and industrial tenants, where fit-out costs are less significant, rental increases may lead to greater use of tenant incentives.

While landlords face less direct impact, their operating expenses will increase due to the expanded SST scope. Buildings with higher vacancy rates, whether new or old, will likely be more sensitive to these changes, compelling owners to offer more favourable terms to attract tenants. However, government landlords gain a competitive edge through their tax-exempt status.

Developers face compressed profit margins as construction costs rise. The combined effect of higher costs and tenant resistance creates significant pressure. Many developers may pivot toward shorter timeline projects or postpone larger developments.

Township developers will likely pass costs to buyers, while commercial and industrial segments face challenges implementing similar strategies. Developers of properties currently under construction face both increased costs and potentially weaker demand.

The real estate investment landscape requires adjustment as landlord revenue growth projections decrease. REITs and investors must account for these changes in their valuation models, with yields likely experiencing slight compression. Property management expenses are simultaneously rising due to higher electricity tariffs, minimum wage increases, and SST on various services.

As a result of the SST, the Malaysian real estate market is anticipated to see reduced absorption rates across all commercial property segments, with downward pressure on rental growth. To counter this trend, landlords will likely increase tenant concessions to attract and retain occupiers. In the investment market, transaction activity may diminish as capital values and yields undergo adjustment to establish a new market equilibrium.

For both landlords and tenants, understanding the specific SST requirements and exemptions will be crucial for effective business planning in this evolving tax environment.