Lure of Singapore, London property

THESE two destinations will likely remain popular with Malaysian investors, although recent cooling measures implemented by the city-state may see more of them head for the UK.

After renting a flat for two years, Malaysian Au Yeong Siew Pheng, 33, and her husband took the plunge and forked out S$920,000 (RM2.3 million) for an apartment in Singapore.

Armed with a 40-year loan, the couple bought the 904 sq ft apartment because they work and live in the republic. But they also see investment opportunities.

"We could continue to rent but Singapore property offers great rental yields and capital appreciation. Low interest rates also make it possible for us to borrow. Property in Singapore is a sound investment for anyone who can afford a piece of the action," Au Yeong tells The Edge.

The couple belong to the thousands of Malaysians who view Singapore real estate as a solid investment with potentially high returns. Data from the city-state's Urban Redevelopment Authority shows that Malaysians were top foreign buyers of private properties last year, overtaking the Indonesians and mainland Chinese. According to Knight Frank Singapore, 26% of the foreign buyers were Malaysians.

Malaysians are also flocking to London in search of properties offering lucrative returns and capital gains. "London is seen as a safe haven for international investors due to its vibrant market, favourable laws, good yields and strong rental market," says Henry Butcher Marketing Consultancy director Jazmine Goh.

Malaysian individuals and their corporate counterparts are set to emerge as the top foreign buyers of UK properties in 2012. This is largely due to several big-ticket acquisitions by Malaysian funds such as the Employees Provident Fund (EPF), Permodalan Nasional Bhd and Lembaga Tabung Haji, which are investing in international real estate to diversify their portfolios. Since 2010, these funds have invested at least £2 billion in the UK property market.

Real estate consultants and experts are not surprised that Malaysians are investing more in Singapore and London.

"In the past, the general perception was that London properties were exclusive to the very rich. And more often than not, this group of people bought mainly for their children's use. However, in recent years, more young professionals and businessmen are buying for investment purposes," comments Goh.

Others say Malaysians are investing as a hedge against political uncertainty in the country. "I have some clients who have relocated their assets abroad because of uncertainty of what may transpire after the election," says a property consultant.

However, she adds, for most Malaysians, it is not fear but the need to diversify that prompts them to invest abroad.

Singapore has been a favourite destination due to the number of Malaysians working in the republic. Buyers like Au Yeong are not uncommon, but still, a huge capital commitment — which could easily buy two high-end properties in the Klang Valley — is required.

While yields in the Klang Valley and Singapore are comparable, Goh says it is easier for Malaysian property owners to secure quality tenants in Singapore.

"Landlords in Singapore are assured of tenants because demand outstrips supply. In comparison, some high-end developments in the Klang Valley suffer from fairly high vacancy rates due to the lack of a deep and quality rental pool."

In addition, investors in Singapore are assured of economic and political stability.

Interest rates are also more attractive in Singapore. According to Knight Frank Singapore, mortgage rates are between 1.2% and 1.5% compared with Malaysia's 4% to 6%.

Apart from borrowing costs, yields are also attractive. Goh says the average yield for Singapore property is 3% to 4% while property prices have risen over 30% since 2009.

Before 2012, private residential property gross yields were between 2.8% and 3.3% in Singapore, says Knight Frank Singapore. Due to price appreciation and limited rental increases, yields have trended between 2.5% and 3% since.

Not surprisingly, the Singapore government has been aggressive in implementing cooling measures since 2009. Its most recent move took effect on Jan 12 and features some of the stiffest restrictions on foreigners and permanent residents (PRs) in recent years.

PRs now have to pay 5% additional buyer's stamp duty on their first property purchase while foreigners without PR have to cough up 10% (see Table 1). Another requirement for foreign buyers is that they have to sell their Housing and Development Board (HDB) flats within six months of purchasing private property on the island. This is to curb the practice of foreigners using the rental income from their HDB flat to service their new home loan.

The loan-to-value ratio (portion of the property's value that can be borrowed) has also been tightened while the minimum down payment for second and third purchases has been increased to 25%.

Knight Frank Singapore says the latest cooling measures are the harshest to date and will impact the buying sentiment of Malaysians. "The proportion of foreign homebuyers is expected to decline this year. Foreigners are likely to hold off their investment plans for the time being to await any potential relaxation of cooling measures towards the end of the year," says Alice Tan, senior manager of research and consultancy at Knight Frank Singapore.

Maybank Kim Eng Research says private property will likely undergo a deep freeze over the next two to three months as developers and homebuyers grapple with the impact of the latest measures.

Nevertheless, experts like John Stinson, managing director of capital markets, Asia-Pacific, at Cushman & Wakefield, is not overly concerned as investments in Singapore are for the long term. "Buyers will focus increasingly on quality and location," he tells The Edge. As for commercial property, he believes Singapore will continue to offer higher total returns (than other major cities) due to its position as a global hub.

London as a safe haven

Apart from sovereign funds, Malaysian individuals are also increasingly flocking to London as it is seen as a "safe haven" for investment.

Important factors include London's transparent market and transaction process, its established legal framework, political stability, economic independence and liquidity, says Knight Frank's head of international investments, Jeremy Waters. "London properties enjoy strong capital appreciation and attractive income returns due to the city's reputation as a global financial hub," he tells The Edge.

Henry Butcher's Goh adds that residential properties in prime areas such as Mayfair and Kensington offer yields of 2% to 4% due to their higher capital values. Properties located in Zone 2 of central London can fetch yields of up to 7%.

She says demand is strong in London, so much so that some landlords can secure tenants for their units even before they are completed. "Not just Malaysians," she remarks. "London attracts the world."

The values of prime residential property in central London have rebounded over 20% since 2009, says Goh. Last year, property value in the core locations grew 4.1% while in the outer core areas, it was slower at 2.9%. The weaker pound in recent years has also resulted in Malaysian investment and attention shifting from the local market to London.

According to Knight Frank UK, Malaysians were the fourth biggest foreign buyers (in terms of transactions) of newly built residential properties in London. If commercial property is included, Malaysians will be the top foreign buyers in London — for the first time ever.

While demand is robust, Knight Frank's Waters says competition is stiff. "With a large weight of equity seeking prime income-producing assets, prices are at a premium."

For example, prime West End offices are trading at a 2.3% spread over gilts (British bonds) compared with 0.8% in 2007. But this also means that London property offers a strong hedge against inflation backed by long leases and rental rates that keep rising, says Waters.

In the UK, Malaysians are protected by laws that favour the landlords. For example, the full repairing and insuring term in the lease ensures that all repairs and insurance cost are borne by the tenants. "This helps derisk the investment and reduce day-to-day management," says Waters.

The recent cooling measures in Singapore as well as Hong Kong will also push investors to London.

More Malaysian developers are also expected to head to London. "There will be more Malaysian developers coming to London, especially after the successful release of Phase 1 of the Battersea station," says Caspar Harvard-Walls of the UK-based Black Brick Property Solutions. It is reported that 10,000 queries have been received for the 800 units in the Battersea Power Station project that is being jointly undertaken by S P Setia, Sime Darby Bhd and the EPF.

Other Malaysian developers with projects in the UK are Eastern & Oriental Bhd, Amcorp Group Bhd and IJM Land Bhd. Nevertheless, it will be a tough fight for both investors and developers to get a slice of London. "We continually see new entrants from Asia-Pacific ... and London is at the top of their radar," says Waters.

This story first appeared in The Edge weekly edition of Jan 21-27, 2013.

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