Making ringgit and sense in property investments

Making sensible property investment decisions, especially in the Klang Valley, is getting tougher in today's climate where real estate values are constantly spiralling upwards.

So, would buyers of recently launched properties in the Klang Valley be able to obtain decent rental yields of at least 5% per year after the units are completed in two or three years?

A recent report by property consultancy CB Richard Ellis notes that the average asking monthly rental rates of luxury condominiums, during the first half of 2011, in Bangsar and Mont Kiara were RM3.29 and RM3.13 per sq ft respectively.

The report points out that rental rates in the three main condo markets (Kuala Lumpur City Centre (KLCC), Bangsar and Mont Kiara) on a per sq ft basis had declined since 2007, reflecting weaker demand for rental units coupled with increased supply.

Two months ago, CB Richard Ellis executive chairman Christopher Boyd said: “In some cases in the KLCC area and Mont Kiara, condominium rentals have halved in the last two years.”

Meanwhile, those who are looking at swifter returns on their investments would be asking about the potential increase in value for such units within the next three years, as they want to “flip” their purchases.

A bank-backed property analyst explained that presently, there is a huge gap between the prices of recently launched properties and secondary market units.

“Recently launched properties offer better BLR (base lending rate) spread. Many property developers offer 10:90 schemes, and also absorb entry costs such as the stamp duties.”

However, he says within the next two years, it would be difficult to “flip” recently launched properties that were bought at above RM500,000 depending on unit size and location.

The analyst took the view that many buyers of recently launched properties are facing a “short-term gain, long-term pain” situation.

“I am not hopeful about “flipping” such units and getting a 20% price upside within two years. Buyers also need to pay exit costs like real property gains tax. You may end up with the same returns that real estate investment trusts (REITs) provide presently, which is about 6% to 7% annually.”

So perhaps, investors would do better in buying REITs in the current climate?

CB Richard Ellis executive director Paul Khong said the benefits of investing in REITs include their high liquidity, annual dividends ranging from 6% to 8% per annum and potential capital gain if prices increase.

“The quantum of investment can be small. For example, 1,000 shares in CMMT (CapitaMalls Malaysia Trust) would cost you RM1,440 and some brokerage fee. CMMT was listed (in July 2010) at RM980 per 1,000 shares. If you had invested on day one, you would have made more than 50% gain both capital value and dividends. REIT values are largely more stable and the dividends are usually very consistent.”

HwangDBS Investment Management Bhd equities head Gan Eng Peng concurs and notes that REITs tend to be well diversified, and property fund managers have advantages over individual landlords in terms of attracting tenants as they have “a larger network, reputation and backing behind them.”

“Also, the REIT property fund manager would have done the homework to ensure the property is a good investment and that the tenancy process is also sorted,” he said.

Gan said investors should adopt a longer-term view when investing in REITs.

“REITs are considered a defensive play within the equity asset class. Its performance moves in tandem with economic growth and business cycle.”

However, REIT investors have no direct control of what properties the fund managers invest in and there are annual management fee payments to the fund managers, says Gan.

Meanwhile, Khong took the view that investors who have the means should have both portfolios in physical real estate and REITs.

Khong says there is a “toppish” feel regarding increasing prices for recently launched residential apartments in the Klang valley, and many developers are offering more in terms of quality finishing and full furnishing.

“We note that 2011 has been a good year for the residential market with many new projects topping the charts in terms of pricing.”

Khong points out that the residential markets in areas like Petaling Jaya, Sri Hartamas, Bangsar, Damansara, Puchong and Seri Kembangan have seen substantial increases in capital values.

“Some of the newer strata projects have also done well during this period. These include The Greens @ TTDI, The Capers @ Sentul East, and KU Suites @ Kemuning Utama.”

Based on indicators in regional markets, he expects the local market to stabilise in 2012 with “some positive movements”.

However, property consultancy DTZ Nawawi Tie Leung executive director Brian Koh says, “2011 will see more moderate growth given that the second half was not fantastic. Next year will be more challenging given slower growth, and a tightening of liquidity through the imposition of lower financing margin and pegging to the net disposal income of borrowers.”

A property analyst says there are signs that financial institutions are more cautious in lending to real estate buyers nowadays.

“Unless the economic situation improves substantially, property investors may want to wait till the second half of 2012. There may be pressure on secondary market unit owners who are looking for quick “flips” to sell at lower prices.”

Gan also expects the Klang Valley property market to be softer in 2012.

“In particular, the oversupply of condominiums in Mont Kiara and KLCC, and offices in general, will cap the upside potential of these sub-asset classes,” says Gan.

However, Gan emphasies that this does not mean lower property prices as there is substantial real demand from young property upgraders as well as ample liquidity in the economy.

By The Star