By Willy Wilson | Sep 14, 2009
It is often said that investment in property is more satisfying than other forms of investment as one is able to physically see, touch and feel the investment.
Following the global property market crash led by United States, it seems like investing in property would be the last thing to do in many countries. But the same cannot be said of Malaysian property.
From prime area like KLCC to urban pocket area like Puchong, there are rarely a stagnant construction projects.
It is safe to say that in Malaysia property investment still provides the investors a good hedge against inflation, sustaining steady rental revenue and capital appreciation.
Property Investment vs. Other Forms of Investments
Sure, Government Bonds and other instruments backed by the Government are the safest investments. But while secure, these investments do not provide a high return and there is no appreciation on the capital invested.
The same kind of Investments offered by private financial institution offer slightly better returns compared to government-backed instruments.
On the other side of the equation, we have stock market investment; a volatile investment but with the possibility of very high returns to investors, and perhaps followed by capital appreciation for the long term investors.
Property valuers P.L. Lee comments, “We have seen in recent months how the share prices of AIG and Citibank, slid to new lows to the extent that at one time the market capitalization of Citibank was much lower than that of Maybank, CIMB and even that of Public Bank.”
According to Lee, real estate investment is somewhere between these two investment forms mentioned above.
In the case of Malaysian property, Lee says “While there may have been hiccups in its role as a hedge against inflation, generally it is not wrong to say that capital appreciation of real estate has been able to beat the inflation rate.”
Similarly the growth in capital value of real estate has been steady. An added bonus to the investors in real estate would be the regular incomes generated by their investments and these incomes will also grow as time goes by.
Property Investment: Making Money?
According to Lee, investors need to have sharp eyes on a piece of real estate which may invariably generate great potential growth in rental income as well as appreciation in its capital value.
“Investors should always look at ‘opportunity cost’. Most investors in real estate do not pay cash but rather a combination of cash and bank financing,” says Lee.
With deposit interest rates among the lowest in the last couple of decades, solely relying on bank interest is a losing game. One, indeed, is losing an opportunity to put his money for better use.
But it is not all gloomy; with low interest rates paid out by the financial institutions, interest rates charged on loans are also low.
“It would therefore be wise to invest in the right property through structured gearing by utilizing other peoples’ money (OPM), through borrowing, as the rental incomes obtainable from the property ideally would be adequate to cover the installment payments,” Lee suggests.
But renowned cartographer and property speaker Ho Chin Soon is not as optimistic. According to Chin Soon, with an annual inflation rate of 3 to 6 percent, to say that one will make money from property investment is an overstatement.
“12 years back, a house in Bandar Utama, KL, priced around RM178K. Now the same house costs about RM700K,” says Chin Soon, “But how much has standard salary increased in the past 12 years?”
A self-confessed old-school player, Chin Soon advises people to only spare their standby money to invest in property.
“Abruptly borrowing money from bank to invest in two or three properties concurrently could lead to a dead end, given the current inflation rate,” he says.
Which Property Range to Invest?
The generally accepted categorization of Malaysian properties is RM400,000 and below; between RM500,000 and RM1M; and RM1M and above.
According to P.L. Lee, properties in the RM400k and below are the most actively traded. Not surprisingly because this is the category where the majority of the population is and their level of income more or less allows them to trade within this price range.
“Within this category, it is fairly easy for properties to double in price over a short period of time, a RM200k selling for RM400k and above after a few years. This is brought about by the fact that the majority of the population could afford the prices of properties within this price band and due to such high demand, prices invariably shot up,” Lee explains.
Nevertheless, the RM1mil and above investment is lively, though not at the level of the RM400k and below. The reason being, there will always be a certain market for high end products in a growing market like Malaysia, where the wealthy tend to distinct themselves.
“It is therefore not surprising to see a RM1mil house selling for RM1.8mil after a few years as the rich gets richer,” says Lee.
But those priced at RM500,000 to RM1M are less active and as a result the rate of capital appreciation of properties within this price range is much lesser than the other two categories.
“This is probably because the number of investors capable of buying properties in this price range is small compared to the RM400k,” Lee observes, “While those looking at investing exceeding RM1mil are less inclined to consider properties within this price range.”
Lee, therefore, recommends that investors looking for capital appreciation to either look for properties in the RM400k and below price range or the RM1mil and above price range.
