ashort_guide_toinvesting

Note: Home based entrepreneurs throughout the world have gotten involved – or are considering – real estate investment as an income stream. For those who want to look outside the U.S. to avoid the dangers of what some consider an overheating real estate market, Malaysia might offer some interesting possibilities. Knowledge is critical and risks are significant, but many are finding the potential and rewards to be excellent.

On July 5, 2005, 1 US Dollar (USD) = 3.79920 Malaysian Ringgit (RM)
1 Malaysian Ringgit (RM) = 0.26321 US Dollar

Despite the 1997 Asian financial crisis, Malaysia has over the years succeeded in sustaining considerable economic growth. Together with the impressive growth of tourism, the remarkable level of external investment, and the current costs of property, there is no denying that property investment opportunities abound and are thriving in Malaysia.

Investment opportunities in Malaysia are plentiful and lie hugely within the nation’s capital, Kuala Lumpur, and the North Western island resorts of Langkawi and Penang. That said, opportunities are not scarce in smaller resort areas and cities such as Malacca. Property consultants and developers are confident that the Malaysian property market will see even better days from 2005 onwards. In fact, investment advisers have no qualms naming the property market as the investment segment that will herald the best returns for the year.

The property market in Malaysia is also largely induced by significant external investment, specifically from investors based in regional hubs such as Singapore and Hong Kong, where much is in support of the strong growth in the present-day Malaysian tourist industry. Malaysia, being a melting-pot of people and cultures, bears an exotic heritage and natural beauty, coupled with an advantage of being relatively well-developed yet less expensive as compared to neighboring regions.

Investors keen on leveraging these opportunities would be pleased to learn of the positive expectation for property assets to further boom this year. Here are the factors that support the general consensus over the favorable expected performance of the property market.

Rising Interests in Commercial Property Sector

While the housing sub-sector is expected to resume taking the lead, there are some industry players who believe that the commercial sub-sector, specifically purpose-built office and commercial land, will pose as the main drivers for the property market’s recovery this year and onwards.

PPC International director Sarkunan Subramaniam concurs with the sentiments, citing that after being stagnant for the past years, purpose-built offices in Kuala Lumpur (the capital of Malaysia) and Petaling Jaya (mass commercial hotspot) are experiencing healthy growth in rental and occupancy rates, expecting prime commercial property yields to rise by some 50 basis points to about 7 - 8% as demand for space rises. He emphasized that purpose-built offices in the Golden Triangle are presently 85% rented while the situation is a whopping 90% in Petaling Jaya. Sarkunan trusts that the occupancy levels in Kuala Lumpur for the coming few years will tip at 90-92% and that rental for prime buildings will increase from the present average of RM 5.50 per square foot (psf) to RM 6.00 psf. It comes as little surprise then that he expects capital values for prime buildings to escalate in the next two years, growing from the current RM 500-550 psf to RM 600 psf.

Prime buildings are not the only investment that industry players are eyeing. Secondary buildings too are gaining interest from investors who have refurbishing and repositioning the properties in mind. Previous speculation for an abundance of vacant spaces resulting from the relocation of government departments from KL to Putrajaya was unfounded, with much of this space acquired by the education sector. Sarkunan reveals that this vacated space has been in high demand from private colleges mainly.
Positive indicators like these presage an uptrend for the growth of this particular segment of the property market.

Establishment of Property Trust Funds

While Bank Negara Malaysia has paved the way for further expansion in the property sector by lifting restrictions on lending for commercial developments, another driver behind the growth of the commercial sub-sector can be attributed to the establishment of property trust funds, also widely known as Real Estate Investment Trusts (REITs). Property Trust Funds, or REITs, are publicly traded entities which buy, manage, develop and invest in real estate assets, allowing investors to participate in a professionally-managed portfolio of real estate properties, which may include commercial spaces such as office buildings, apartment complexes, industrial facilities and shopping centers. The unfurling of the Budget 2005 yielded a promising outlook for the property market with the announcement of the exemption of tax income distributed by REITs; this will surely serve as a catalyst for the founding of REITs in Malaysia. The Employees Provident Fund chairman, Tan Sri Abdul Hali Ali, in the local dailies has conveyed an interest in the acquisition of property assets to boost the fund’s exposure to the property market, and will then consider infusing these assets into REITs.

While REITs have been in existence for more than a decade in the market, the renewed interest for it reflects investors’ greater understanding of property trusts as they now recognize the alternative avenues that REITs offer prospective investors for investing in the property market. This is not restricted to local investors, as property is fast becoming a big attraction for foreign investors as well. Foreign interest is deemed to escalate when occupancy levels hit 90% as those investors who know Malaysia well enough are setting their sights on office investment. There have been reports that a Singapore-led fund is vying for a 5-star hotel, while a reputable Kuwaiti property firm is scouring for joint venture opportunities with local developers. 2004 marked a year of big deals charged with the finalizing of many major transactions, namely the sale of MUI Plaza. It is small wonder that many industry players expect the commercial property segment continuing to spearhead the market.

According to Sarkunan, the REITs to watch should be those holding prime properties priced at fair market value (in order to justify rental yields of 7-8%), which would most likely be launched by respectable local property developers or owners or those involved in established international property trusts. In the beginning of the year, property developers like Naim Cendera Holdings Bhd and YTL Corporations Bhd have shown enthusiasm in launching REITs. Companies like CIMB Real Estate Sdn Bhd and Mapletree Management Sdn Bhd have already established a joint venture by combining their expertise in structured finance and real estate to provide real estate investment expertise in the country.

Despite the REITs being generally associated with large investments, individual investors should not be discouraged, since the top performing segment of the property market is also accessible to them. With the expectation of a 6-8% yield, the investments in commercial property such as shoplots around urban areas safely offer to compensate for risks involved, hence providing for capital appreciation and good yields.

Good News on Residential Property Investment

Individual investors, nonetheless, should also look at property assets of a different sub-sector – residential housing. The ongoing new launches to date of residential property indicates an unabated growth of the housing sub-sector. Sarkunan however, cautions that the performance of new launches should not be taken as a yardstick to measure the growth of this segment due to lessons from past experience, namely the sluggish secondary market in the second half of 2004, where lethargic demand, high asking prices and an increased supply of units in the primary market contributed to the lackluster performance of the secondary market.

He maintains however that the housing sub-sector in the Klang Valley will remain robust thanks to the young population and low interest rate environment. Investors may choose to time the market to identify periods most opportune to pick up properties, which are generally before any price hikes. See Kok Long, director of Metro Homes in local magazines, recommends investing in high-end condominiums or suburban shop offices to reap returns from rental. According to See, developers are expected to continue offering high-end housing units like luxury semi-detached units, bungalows and upmarket condominiums to leverage on the premium charge they can impose given the introduction of concept and lifestyle elements, backed by a strong demand for lifestyle homes.

Other industry observers, despite acknowledging that developers are venturing into the upmarket condo segment, and that impressive sales figures of the previous year, markedly in the Kuala Lumpur City Centre vicinity, show encouraging results, are quick to warn that this segment may not be a bed of roses. Adopting the supply-demand theory, Sarkunan for one, opines that the increase in supply, as well as increasing developments in the pipeline, hints a slowdown in the take-up rate. In addition, there is a ceiling to the occupational demand for such properties, causing a possibility of rents being steered downwards as more supply penetrates into the market.

Conclusion

While the overall mood of optimism spells a good year for property, industry players hold reservations for the uncertainties in the global economy which could be determined by rising oil prices, world geopolitics, and unrest due to flagrant terrorism. The downside risks borne by international factors notwithstanding, it is imperative that the local economy can sustain its growth given the hike of oil prices and its effect on the inflation rate. Nonetheless, while the interest rate has to a certain extent boosted sales, an interest rate increase should not dampen the property market if the fundamentals of the project and product (such as good location, functional and practical layout, optimum selling prices with a perceived value for money buys and developer track record) are in place and remain as the key selling points.

References

Smart Investor, January 20005, “Property Market to see Further Growth in 2005”

Malaysian Business, April 2005, “Property Is In”

Property Times, “Developers Bullish on Housing,” March 16 2004

The Edge Daily, “City and Country: Bid deals put focus on KL office buildings”

The Edge, “Condo Living Here to Stay,” July 13, 2004

The New Straits Times, “Highlighting Opportunities,” March 6 2004

Journal of Real Estate Literature, “Listed Property Trusts in Malaysia”

About The Author: Gobala Krishnan is a freelance writer, Internet marketer, and home business entrepreneur based in Kuala Lumpur, Malaysia. Visit his personal portal http://www.gobalakrishnan.com/. Written with the help of Ms. Ng Shwu Huey, an investment and financial expert in Malaysia.