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City & Country: What the experts say

Strangely enough, we are less driven by speculation this time round than Singapore and China. There are a lot of multiple ownerships in Mont'Kiara condos for example and none of them has defaulted since 2008! This fact came from a bank. - Soo

Due to time constraints, speakers at The Edge Investment Forum on Real Estate 2010 entitled “To buy or not to buy: Where to put your money” were unable to take all the questions from the floor. Participants were invited to send in additional questions (edited for clarity).

Allan Soo

T K Lim
When do you think the office-space market will pick up and which area will recover faster in this sector?
The supply numbers do not look good for the next five years. We will have a cumulative stock of 90 million sq ft; a total 50% increase. Underlying this is low foreign direct investment (FDI) and slow growth in the service sector. I do not see the sector picking up in the next five years. If there is any area recovering it will likely be the KL Sentral area and perhaps Bangsar and Mid Valley, as the traffic congestion downtown worsens in the next few years .

Chow Sok Sin
Based on your presentation, you recommended Ara Damansara. What is the reason behind this? Why is Ara Damansara preferred over Kota Kemuning, which is almost the same distance to USJ and Subang Jaya?
Ara Damansara is still growing and underpriced. It will grow exponentially in terms of its commercial properties as more and more office blocks are developed. Already there are five blocks there being planned and likely to be fully occupied. The public transport there is good — two LRT stations, an airport, plus it has five golf courses nearby. It is also supported by a large hinterland — Kelana Jaya, SS2, Glenmarie and Subang, plus in the long term, the Rubber Research Institute (RRI) development. Ara Damansara is very well linked by highways and also to the rest of Petaling Jaya. All that commercial activity and hinterland will push residential prices up.

I think the arguments for this location overwhelm those for Kota Kemuning. These areas mirror what happened in Mutiara Damasara and Bandar Utama which are now growing rapidly as a commercial strip all along Lebuhraya Damansara-Puchong (LDP). The way the question was asked suggests that you assume Subang Jaya is the epicentre.

Actually the epicenter is PJ, not Subang, and Ara Damansara is just the last frontier of PJ at its western edge, closer to the epicenter than Kota Kemuning. This is basically the simple organic growth of PJ which is a very established suburb.

Kit Au
You mentioned that the market may be heading for a boom.  Is the market heading for a bubble? Your rationale is that Malaysian market growth is not as drastic as that of countries in the region like China or Singapore. Look at Malaysia’s economy; it is not doing fantastically well and may be largely driven by speculators.
I did say that the condominium market is oversupplied and that prices are rising only for landed properties. You can see that in our CB Richard Ellis quarterly tracking and even in Ho Chin Soon’s illustrations. There is selective demand right now but there is a lot of money around, driven perhaps mainly by easy credit. I think we are pushing ourselves towards an almost consumer-led type of boom because of the easy credit.

This, however, does not mean the prices will rise across the board. It will be mainly for the landed properties. I was quite reluctant to call it a boom and wanted it to be more of a discussion but since I was asked my opinion, I thought a boom for the landed properties, including houses and shophouses, as people are chasing good housing.

I do not think we are into a bubble as landed properties are not coming on stream fast. The condo market is already a known one and most of the additional 12,000 units of supply we expect by 2012 have been launched. Even if the next 15,000 units coming in after that were launched, they would pull prices down instead. So I do not see a boom in the condo sector.

The Malaysian real estate market, like the economy, is always a step behind the other regional economies — that is why we are not doing so well. But each time the other markets do well, we follow — usually a little later — not usually because we are good but more because we are part of the map. So we are a default market, and this happened in 2007 when everyone started seeing us as being too cheap. Already the funds are coming back to invest because we are still better than Vietnam in terms of stock and in terms of maturity.

Strangely enough, we are less driven by speculation this time round than Singapore and China. There are a lot of multiple ownerships in Mont’Kiara condos for example and none of them has defaulted since 2008! This fact came from a bank.

Since the landed market has gone up a fair bit in PJ/Kota Damansara/Bandar Utama, is it risky for us, new buyers, to purchase (property) at this point of time? Is it high risk now, in that I may end up buying at the peak of this cycle?
I must admit I have always been wrong in the areas you’ve mentioned. I always felt during each cycle that we were at a peak and as a result I did not buy when Sierramas was offered to me at RM28 psf in 1994, Gita Bayu at RM32 psf in 1996 and the link houses in Mutiara Damansara at RM380,000. Since I was a consultant at the Curve (in Mutiara Damansara), I actually was also the valuer for the developer for the pricing before they went into the market and I had a problem justifying the price at that time!

I bought a piece of land at RM68 psf to build a house in Kota Damansara in 2008 and my friends said it was expensive as the original buyers bought had it at RM30+ psf. Today it has gone up to RM80 psf and is still rising. There is never a good time to buy property. It is hard to predict when  the peak is. Every time I compare with past prices it feels like a peak. I think there is still a lot of money around and so we are not at a peak yet.

Plus, we have a large base of households in link houses who can upgrade to better quality housing very quickly by disposing of their current assets or using them as collateral. No doubt it looks risky now to buy when prices are so high, but the real peak is difficult to guess, and I think we are still on an ascent.

Dixon Choy
The first rule of investing, regardless of property or stocks, is to ‘buy when the market is down’. In the current scenario where the market is picking up and, to some extent, hot, does this mean that, as an investor, I should refrain from buying or investing until the market consolidates or contracts?
Answer same as above.

Why do locals invest in foreign properties currently, despite the fact that our property prices are more affordable? Is it because of the returns, investment terms and requlations? Or is it because of other notable reason(s)?
There is a flight of money as a result of our political uncertainties. Also, other markets are looking hot, plus the ringgit is strengthening.

Why has the number of foreigners or expatriates investing in our country and property not increased as desired despite our government’s initiatives and the Malaysia Property Inc’s aggressive roadshows overseas?
Not qualified to answer this one, sorry.

In addition to pricing, what do you think our government should do in order to promote our country as a property haven or make our property more attractive than in other countries?
It’s a structural thing — we have to promote our standards to the workforce as well as improve our basic infrastructure in terms of removing bureaucracy and improving IT support, among many other things. People must want to live and work here compared with Singapore which is more expensive.

Ho Chin Soon

T K Lim
Do you think the development trend will push southwards due to regional development rather than from your centre-of-gravity concept?
The locational centre of gravity (LCG) is based on what is happening on the ground. If development is strong towards the south, then the LCG will move towards the south. So far, development taking place in the south is balanced by developments taking place in the northern portion of Klang Valley. Thus, the LCG will remain in Petaling Jaya New Town for some time to come; neither moving north nor south

Chow Sok Sin
Kota Kemuning has expanded with new neighbourhood townships like Kemuning Utama, Bukit Rimau and Mah Sing Kemuning Residence. In recent years, we saw the building of Carrefour and Columbia Asia Medical Centre in Bukit Rimau. With the expansion, would you recommend investing in commercial shop lots there and if yes, what would be a reasonable price for the property?
Even though a couple of things are happening (like you mentioned), the catchment of Kota Kemuning is rather restrictive as residents from neighbouring townships find it hard to drop by to patronise the commercial offerings. As for the pricing, you have to do your research to see what yield you can get.

What do you think about the commercial potential for Shah Alam, especially Section 7 with the development of i-City? Do you foresee the property values in Shah Alam going up?
I would prefer i-City to be on the east of Shah Alam but i-City is on the west of Shah Alam, which means it falls onto the second tier. In all my talks I have always stressed the importance of first-tier locations. Shah Alam is not exciting because of restrictive conditions like its 60% bumiputera quota.

What is your opinion of Klang Bukit Tinggi’s commercial and residential potential?
Klang Bukit Tinggi is reasonably okay and popular with Klang residents. However the location is just outside the second tier and suitable for those working and doing business in the Klang area.

Kit Au
You mentioned that the market may be heading for a boom. Is the market heading for a bubble? Your rationale is that Malaysian market growth is not as drastic as that of countries in the region like China or Singapore. Look at Malaysia’s economy; it is not doing fantastically well and may be largely driven by speculators.
I believe you are referring to Allan Soo’s comments. For middle-class suburban locations it is possible that the market is on a strong uptrend as the cycle is now in its favour. However, for the high-end high-rise market, it is expected to be flat for two to three years.  All our bubbles are small bubbles, comparatively speaking, in contrast with Singapore and Hong Kong. Inflation is one of the factors that will drive capital values for the middle-class housing market.

Since the landed market has gone up a fair bit in PJ/Kota Damansara/Bandar Utama, is it risky for us, new buyers, to purchase (property) at this point of time? Is it high risk now in that I may end up buying at the peak of this cycle?
As for moving in when values have gone up, it is up to you to evaluate where exactly we are in the cycle. In my opinion, values for properties in Petaling Jaya are reasonable and one can consider investing at this point in time.

All our bubbles are small bubbles, comparatively speaking, in contrast with Singapore and Hong Kong. Inflation is one of the factors that will drive capital values for the middle-class housing market. - Ho

Dixon Choy
I do agree that in property investment, one must consider the ‘location, timing and branding’ factors or mantras in order to ensure success. Having said this, the main property hot spots in Malaysia have been, for many years, concentrated geographically within the Klang Valley, Johor and Penang. In your opinion, what are the other potential states that will become property hot spots and why? I pick Melaka and East Malaysia (Sabah and Sarawak) as the next hotspots as I believe in their potential location and branding, among other factors. What do you think?
You have to understand that there is a global phenomenon called “The rise of mega cities” and I recommend that you download material from the web to understand rural-urban patterns happening worldwide. Then I hope you will agree with me that the Klang Valley is possibly the ONLY place to invest in Malaysia, followed by possibly Kota Kinabalu, Sabah. You are welcome to put your money in Melaka but I wouldn’t. It is your money.

I’m sure home buyer or investor-buying behaviour changes over time. But I realise your mantras (location, timing and branding) are still the same after many years. Do you have any new mantras moving forward? What about ‘sustainability’? 
I think ‘location, location and location’ has been around for several decades. That is so old fashioned! For real estate, the mantra location, timing and branding’ will be forever! As for ‘sustainability’, I am not in agreement. I plan to write about ‘selfish’ NGOs in Book 2. You’ll have to wait and see. (Ho Chin Soon recently launched his first book Chin Soon’s Real Estate Mantra — Location, Timing & Branding)

The property market usually experiences a boom and then goes bust within a 10-year cycle. However, lately, we experienced a very quick rebound due to pent-up demand, banks’ support and the government’s stimulus packages. The momentum recovered towards the 3Q2009 (after the worst period due to the global economic downturn in4Q2008). Does this mean that the property boom-and-bust cycle scenario does not apply anymore in a modern economy ? If so, can we forecast that the property boom will be happening this year in view of the projected GDP growth of around 5% to 7%? Mr Ho, I’ve purchased your first book. I hope I don’t need to wait until your second book for the answers!
Thank you for purchasing my first book. I believe the boom-and-bust cycle scenario will apply till the end of the world! This is because there is no perfect economic model. There may be a boom for middle-class housing in suburban locations. There will be none for the high-end high-rise residential sector which is expected to be flat for the next two to three years.

N K Tong

Dixon Choy
How would you advise any investor with ‘Y’ amount of funds, to distribute, in percentages, an investment portfolio among the three property investment options available — real estate, REITs and property stock/equity - in order to maximise return on investment as well as to minimise risks?
As I mentioned in my presentation, it really depends on each individual’s personal investment profile and risk appetite. For example, someone who is very conservative, but who may still want exposure to real estate, could probably put a higher allocation into REITs.  On the other hand, someone who has a passion for finding good properties, doing more work through innovative renovations, and has the ability to understand the tenant market and what they would want, may be better off putting a higher percentage into physical properties.

And of course, a person with an understanding of stocks and the psychology of the stock market in general would feel most comfortable investing in property stocks. Each individual with the discipline to understand and follow through in his or her area of expertise or preference will be able to maximise returns and minimise risks for that particular portfolio.

Would you consider allocating a portion of funds to other options of property investment such as land and land banking as marketed by many overseas agents now?
Also in my presentation were three popular personal investment books that I highlighted that seem to say totally different things: Dave Ramsey’s The Total Money Makeover, Robert Kiyosaki’s Rich Dad, Poor Dad, and Phil Town’s Rule #1.  There are many other such books in the market. Getting to know what resonates with you in terms of investment preferences will go a long way to determining the preferred mix for your personal investment allocation.

Likewise, for investment in land, or land banking schemes, I think an investor would do well to do the research and understand what the investment is really about.  If the investor is personally familiar with the investment opportunity, it increases his or her rate of success for that particular investment and whether it is priced correctly.

Investing in real estate is to take a very long-term view.. whatever time frame we originally had in mind is better doubled or tripled, to see if we would still be interested in such an investment - Tong

Tee K S
Do you foresee interest rates increasing after the government imposes the goods and services tax (GST) as inflation increases?
The interest rate policy set by the government is a very dynamic process. The direction of interest rates is not only dependent on local factors, but perhaps more importantly, on global factors. How the world economy is doing, what the response is from governments throughout the world, and how the government wants the country’s economy and its currency to be perceived (weaker or stronger), are just some of the factors that will determine the direction of interest rates going forward. 

More importantly, investing in real estate is to take a very long-term view.  As I mentioned in my presentation, whatever time frame we originally had in mind is better doubled or tripled, to see if we would still be interested in such an investment. 

A long-term view is one of the best indicators of probable success.  Taking a long-term view, we then have to expect the interest rate environment to be reasonably dynamic, and to expect periods of ups and downs.  How we structure our real estate investments then will determine how we ride through such periods and how successful we emerge, in the long run.

Kumar Tharmalingam

Dixon Choy
How would you advise any investor with ‘Y’ amount of funds, to distribute in percentage an investment portfolio among the three property investment options available — real estate, REITs and property stock/equity — in order to maximise return on investment as well as to minimise risks?
Your home is the biggest investment you will make. Property stocks of the top 10 developers of The Edge Top Property Developers’ Awards are a good guide. But it’s a capital-value play and not a yield play. REITs are defensive stocks that pay your living expenses, if you have adequate stock. In ratio terms, it is 50% in landed, 20% in speculative stocks and 30% in REITs.

Would you consider allocating a portion of funds to other options of property investment such as land and land banking as marketed by many overseas agents now?
Land banking is a long-term option and the only people making money up front are the promoters. I suppose if you have invested in a piece of land in Malaysia and waited long enough you will see capital appreciation. It’s a zero-sum game as there are annual costs such as quit rent; and if the land is near a growing city, local councils will demand that you clear the land often. If you can afford it, buy a bungalow lot from a reputable developer.

Tee KS
Why do REITs provide us decent yields but not capital appreciation? Take Starhill REIT, its share price has been around the RM1 range since 2008.
There are 12 REITs and the top three have performed both in capital value and yields. Starhill REIT wanted to purchase only six-star assets and it is only now beginning to find its balance. Its crossholding with a Singapore REIT promises to be exciting. Again, REITs are a defensive stock and despite the financial tsunami last year, they still gave out dividends. That must mean that they are doing the right thing. Don’t buy REITs to punt; it doesn’t work like that.

Bernard Ching

Dixon Choy
How would you advise any investor with ‘Y’ amount of funds, to distribute in percentage an investment portfolio among the three property investment options available — real estate, REITs and property stock/equity — in order to maximise return on investment as well as to minimise risks?
There is no one-size-fits-all asset allocation model as the risk appetite and investment horizon of each investor varies. There is a common perception that physical property is less risky than property stock and/or REITs. I disagree because a highly leveraged acquisition of physical property for a short-term flip (less than two years) can be as risky, if not more so, as investments in property stocks and/or REITs. The latter at least allow investors to cut losses quickly if market conditions become worse. Besides risk appetite, investors should also understand their investment horizon and liquidity needs before deciding on asset allocation. Physical property generally requires a longer time horizon (more than two years) and is less liquid than property stocks or REITs.

A fairly conservative investor is encouraged to invest in REITs which have a “balance” between capital appreciation and consistent dividend streams. Allocate some of the portfolio for exposure in physical property during initial property up-cycles, not during late up-cycles as investors may be stuck with the property when the cycle turns. Investors should not overlook property stocks as there may be opportunities otherwise not available in the physical market. During the late property up-cycle stage, property stocks allow investors to ride the last “frenzy” before the cycle turns. Since property stocks are liquid, investors can liquidate their positions quickly. Once the property cycle bottoms out, property stocks tend to trade at fire-sale prices compared to physical property and investors can also ride the recovery stage.

Would you consider allocating a portion of funds to other options (if any) of property investment such as land and land banking as marketed by many overseas agents now?
Besides location, the critical success factor of land investment is time. Investors must have a longer investment horizon, compared to physical properties, property stocks and REITs. As development activities take place in the vicinity of the land, value will appreciate over time due to increasing demand from larger populations and scarcity of land. However, since it is the most illiquid form of investment among those mentioned here, investors who have the risk appetite and time horizon should allocate the lowest proportion of their portfolio to land investment.

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

 

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