KLCC condos: The path ahead

The Idaman Residence project in KLCC is expected to be completed by early 2009 and will have 248 condo units that span 800sq ft to 1,900sq ft.

With the weakening property market, the next six months will be an interesting period for luxury condominium developments in the Kuala Lumpur City Centre (KLCC) area as investors, speculators, developers and property agents assess whether the market can sustain current prices and maintain projected yields.

According to SK Brothers Realty Sdn Bhd general manager Chan Ai Cheng, buyers of KLCC condos belong to a very specific segment of the property market. They would only be marginally affected by economic conditions. They would have the necessary “buffer” to cushion themselves against any market uncertainties and sail through.

Chan Ai Cheng: Whether KLCC condos - priced at around RM2,000 per square foot - are still worth buying will depend on the “investment appetite” of the buyer.

KLCC condo prices are still the cheapest in the region, and with rising construction costs which have gone up 30-40%, it is very unlikely to see prices falling. Some units are going to be owner-occupied, therefore it is not a 100% investment market for KLCC condos. Owner-occupiers want the address and location. Yield doesn’t matter to this category of owners.

In the long term, property prices will still be on an upward trend. With rising inflation, the value of money will go down. Therefore, there are people who want to buy property now. Of course, those who are apprehensive of the weakening property market situation will hold back.

Those who have booked condominium units in the KLCC area are generally deemed to be steady investors. They are unlikely to cancel. Their purchase considerations are different from property speculators. But speculators will try to off-load at this point as they went in with very little.

Flippers

Developers refer to speculators as “flippers”, meaning those who will flip a purchase for an immediate profit. And this becomes more apparent when the condo units are handed over and the bank loans need to be serviced. And if there are many competing units offered for sale, buyers in a weak market situation can drive a harder bargain. In any case, speculators who booked a KLCC condo for only RM600 or RM700 per square foot -- some 24 months before the hand-over -- will still make a profit, as prevailing market prices would be at least RM1,000-RM1,200 per square foot or more now.

As to whether prices for KLCC condos have gone up in recent months, Chan can’t rule out such a possibility.

“Why not? In terms of land value, new benchmarks are being set with each new transaction such as Sunrise Bhd’s recent RM180mil purchase of the Wisma Angkasa Raya building (on 1.56-acre freehold land) directly opposite the Petronas Twin Towers for RM2,600 per square foot. Also, the YTL Group paid RM85 million to the Eng Lian Group for a one-acre plot on Jalan Stonor, which works out to RM2,000 per sq ft. There are still a few more parcels of land along Jalan Ampang under negotiations. Developers are not going to price themselves down.”

Chan is also of the opinion that it is unlikely that developers within the KLCC area and the vicinity, will be unable to meet their construction schedule.

“Not that I know of,” said Chan, “In any case, developers in the KLCC area are ‘branded’ with good track records and are considered financially sound. Quite a large majority of the developments are nearing completion around this time. The concern for investors is the issue of ‘rentability’, yield and profitability. But since the initial investment was at a low-entry level, yield should still be okay. That is, if they bought at the initial launch price.”

Whether KLCC condos -- priced at around RM2,000 per square foot -- are still worth buying will depend on the “investment appetite” of the buyer. The purchase will depend on the perceived value of the property to the investor. Different condo projects offer different features.

The fundamental question is the purpose or objective of the purchase. Is it for investment, rental or capital return. The buyer needs to inform the property agent:

· purpose of purchase

· investment criteria that includes size and special features required

· how to finance - with cash or high margin of finance?

If a buyer is in doubt, always go back to the fundamentals which are specific to each individual. Even in bad times, some people can still do well in the property market. But rental yield does not go up in tandem with capital appreciation. This means that if an investor bought a property at a low entry level price, the rental yield will be much more lucrative compared with buying a similar property from a third party.

By The Star (by Johnni Wong)