City & Country: Opportunities for the discerning investor

Upbeat mood - Industry experts at The Edge Investment Forum on Real Estate 2010 are optimistic about the outlook for the residential sector, property stocks and REITs this year.

The Malaysian property market has certainly bounced back from the slowdown over a year ago. The outlook for the year seems good for the residential property sector as well as for property stocks and real estate investment trusts (REITs). But before you run out to buy, the real estate industry experts at The Edge Investment Forum on Real Estate last Saturday (April 10) offered a caveat — be discerning and selective.

With property launches receiving healthy market response since June last year, there may be more upside in the near term. Beyond that, no one knows for sure as the speakers at the forum would not be drawn into a crystal-ball gazing session. They however laid out the underlying facts — that despite the market recovery, interest rates may rise further while new property supply is at the door.

More than 500 The Edge readers turned up that rainy morning at the Sime Darby Convention Centre in Bukit Kiara, Kuala Lumpur, for the forum themed “To buy or not to buy: Where to put your money?” The annual event was organised by The Edge and presented by financial group UOB Malaysia.

UOB Malaysia, Ho Chin Soon Research, developers Sunway City Bhd and The Haven Sdn Bhd were also present to showcase their latest projects. Several participants took home Ho Chin Soon Research wall maps worth RM2,000 each in a lucky draw.

CB Richard Ellis (Malaysia) Sdn Bhd managing director Allan Soo, who took the floor first, stated that “the [Klang Valley residential] market is getting from warm to pretty hot right now”, fuelled by pent-up demand and a low interest rate environment. The market will improve further if interest rates remain low, he added.

Nevertheless, buyers are becoming more selective and they should be, said Soo. Prices of landed homes are shooting up and buyers are certainly willing to pay a premium for what they want. “People may seem to be rushing to buy properties, but they are selective about quality and good locations. Superlinks, high-end, gated properties were the hot favourites,” he said.

“The secondary market is also active now, even in KLCC (Kuala Lumpur City Centre), but this is against the backdrop of a shrinking expatriate tenancy market. Therefore, you will find rents being reduced compared to the previous lease terms.”

Incoming supply
The Klang Valley had about RM1.68 million worth of residential units in 3Q2009, with another 188,961 units coming into the martket this year to accommodate the seven million population.

“Considering the current supply of homes that we have, demand and supply is pretty much at an equilibrium,” said Soo. This could impact prices and therefore, may be a good time to buy.

Soo estimated that there are 30,628 high-end condo units today, priced at above RM350 psf, and this figure will go up to about 42,245 in 2012.

In Mont’Kiara, there are now 9,444 high-end condo units, with 3,853 units coming in. As for the KLCC area, there are 5,671 units, with 4,769 units coming in the next few years.

Will prices be affected? Soo did not provide a conclusive answer, but reminded investors that prices such as those in KLCC didn’t drop as much as anticipated during the recent slowdown. One can also take heart in the fact that Malaysian property is still cheap in this region and “if our country remains stable politically, we may see investors and expatriate tenants returning,” Soo added.

The next speaker, Ho Chin Soon, director of Ho Chin Soon Research Sdn Bhd, believes that Mont’Kiara’s condominium market is sustainable. “The area’s growth rate is 16% per annum on a compound basis, from five projects to 56 over 16 years. In the next two years, this rate will increase by 2% to 3%,” he said.

Ho said that accessibility and amenities were the two main factors in value creation for property developments in places such as Mont’Kiara. He also cited Mutiara Damansara, Taman Tun Dr Ismail, Desa ParkCity, Setia Alam and Bandar Puchong Jaya and Bandar Puteri in Puchong, all in the Klang Valley, as examples of how these two factors contributed to the steep capital appreciation in these areas.

Taking part in the panel discussion on investing in “Property, REITs or property stocks” were niche developer Bukit Kiara Properties Sdn Bhd (BKP) group managing director N K Tong, Hall & Chadwick Asia Sdn Bhd chairman Kumar Tharmalingam and ECM Libra Capital Sdn Bhd head of research Bernard Ching.

Tong, who took off his developer’s hat and put on his investor’s hat, told investors not to overlook old and dilapidated property which others may consider junk, as one can add value to it with a makeover. For example, in 2005, Bukit Kiara Interiors Sdn Bhd acquired a house for RM2.1 million in Bukit Pantai, Kuala Lumpur. After spending RM600,000 to renovate it, the house was sold for RM4.2 million two years later.

Tong also told investors to be patient and have a long-term view when investing in property. When asked by a participant which hot spots he would invest in, his response was: “At the right price, place and time, every property is a potential hot spot.”

Malaysian REITs
Kumar expects the unit prices of Malaysian REITs to trade higher and closer to their net asset value (NAV) in the next six months, supported by the strengthening of the ringgit and rising inflation.

New players, including the planned entry of Sunway City Bhd’s Sunway REIT with a potential asset base of up to RM4 billion, would offer a new benchmark for MREITs by virtue of their attractive portfolio, he said.

“The moment an individual REIT (in Malaysia) achieves a value of more than RM4 billion, it begins to attract foreign investment,” Kumar said.

Sunway REIT, which comprises the group’s commercial properties, is one of three REITs expected to be listed in Malaysia this year. The other two are Singapore-based CapitaLand Ltd’s pure Malaysian retail REIT and Qatar REIT. CapitaLand’s estimated RM3 billion entity comprises Sungei Wang Plaza and Mines Shopping Centre in the Klang Valley, as well as Gurney Plaza in Penang. The estimated RM1 billion Qatar REIT, meanwhile, owns serviced residential units in Qatar.

Property stocks
The outlook for property stocks appears positive too and ECM Libra’s Ching expects the current good property sales momentum to be sustained over the next 12 months. There are uncertainties, however, over the sustainability of the current sales momentum by developers upon further hikes in the overnight policy rate (OPR). But things are looking good so far. “Anecdotal evidence shows that property sales have in fact remained strong a week after the recent 25bps OPR hike announced by Bank Negara Malaysia. Against such a backdrop, the prospects of property counters on Bursa Malaysia remain positive,” said Ching.

He advised investors to consider the fundamentals of the company rather than its stock price before investing. This means doing your research on the developer’s gearing, sales track record, product delivery and landbank replenishment.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 802, April 19-25, 2010