Property prices have been climbing, especially in the high-end housing sub-sector. Is there more upside to residential property investment?
The answer is a resounding "yes" from panel speakers at The Edge Investment Forum on Real Estate 2007 held on Oct 27. About 500 turned up for the half-day forum.
In fact, the party has just begun. To quote one of the three panellists: "The party planner had just started to plan."
The panellists comprised Datuk Richard Fong, executive vice-chairman of Glomac Bhd and current Fiabci Malaysia (International Real Estate Federation) president; Lai Voon Hon, president and CEO of Ireka Development Management and Previndran Singhe, CEO of Zerin Properties. The session on whether Malaysian real estate was underpriced was moderated by Kumar Tharmalingam, regional president of Fiabci Asia-Pacific.
The consensus from the three-member panellist was that the local property market has "at least another five good years to go" and that Malaysia's real estate is indeed underpriced.
Several factors are responsible for this upbeat mood, the panel members share. Among them are the low interest rates, sustained growth in employment and wages, a young population and urbanisation, plus the government's efforts in promoting tourism. On top of these, Malaysia has also been on the radar screen of foreign institutional investors. It is one of Kuwait Finance House's "property picks" while Credit Suisse expects Malaysian properties to experience "property asset appreciation". The bottom line with Malaysia and the rest of Asia is that properties still offer good value.
On whether Malaysian properties are underpriced, Fong tells the amused crowd: "I'm a property developer. Of course, I'll tell you we're underpriced."
Fong, who opened the discussion, says it really depends on how one looked at Malaysia. "We may think prices are high but, if we compare ourselves to Singapore, we're dirt cheap."
In Singapore, a high-end condominium on Orchard Road is tagged at S$4,000 (about RM9,206) psf. But in Malaysia, Fong says, you pay only 10% of that (Singapore price) for a luxury condo in the Kuala Lumpur City Centre (KLCC). Besides, the KLCC condos offer world-class standards and designs as many developers now use foreign architects for their projects.
According to Fong, Malaysia is also one of the few countries in the world where commercial properties are cheaper than residential. He cites Glomac's new office development located at the junctions of Jalan P Ramlee and Jalan Pinang. Its Grade A building will be priced at RM1,200 psf, setting a new record for office buildings in KLCC.
Ireka's Lai couldn't agree more. Capital values of Grade A office buildings in KL are less than 10% of that in Hong Kong. "Even Ho Chi Minh City is higher than us", says Lai. Ireka has a presence in Vietnam.
It is not surprising then that foreign funds make up 23% of the total investment in KL's office space, says Zerin's Previndran. "The boom started sometime at end-2002 after the SARS (severe acute respiratory syndrome) outbreak ended. That's when Malaysia started seeing foreign investors coming in through institutional funds. They started looking at Grade A offices in the Klang Valley and are paying top dollar for them. It's the people behind these funds who are also investing personally in the residential market," says Previndran.
Rock bottom prices
Fong says there is no doubt that KLCC remains a magnet for foreigners because they can identify with the area. From Glomac's experience with Suria Stonor, a high-end condominium coming up there, the market is attracting a lot of Arabs.
"The foreigners are buying because we are so cheap. To me, there is no downside and prices can only go up. It's just a matter of time before we catch up with the region," says Fong.
"With land costs going up, our prices are really value for money," echoes Lai. He sees foreign confidence growing in Malaysia's real estate, saying the local market should not hope for prices to go any cheaper. "We are at rock bottom already and contractors can't continue building if it's any cheaper."
A bullish Fong says the market is only starting to move, with many foreigners like the Arabs and even Singaporeans beginning to invest in Malaysia. "They are looking at diversifying their wealth by investing in somewhere cheaper because prices are at a record high elsewhere in the region."
Lai notes that there were many astute investors who preferred to put their money in different countries. Malaysia is proving attractive because of its potential for capital gain.
The government's liberalisation of the economy — introducing several incentives to boost the property sector — has also augured well for the industry. "The government has shown that it is serious in wanting to promote Malaysian properties overseas. It has given a RM50 million grant and is seeking Fiabci's help to do so," says Fong. He feels that as long as the liberal policies continue with more foreign direct investments, the market will remain buoyant.
All three panellists agree that the suspension of the Real Property Gains Tax has helped boost market sentiments, with more foreigners looking our way. Lai says such policies show that the government is outward looking.
Previndran says the country's political stability is also a plus factor. "We are transparent in our dealings and the only reason Singapore is hotter than us is that our transactions take longer to process."
Talking numbers
In Lai's opinion, several causes are driving the property market here. These include capital value, rental yield and capital gain. Besides, Malaysia's currency exchange, economy and demographics have also a role to play, he says.
Based on Ireka's case studies, he says Ireka's projects in Mont'Kiara enjoy a return of equity of between 18% and 23% per annum (see table). "Which bank will give you that kind of interest?"
Lai believes the currency exchange rate also had something to do with Malaysia being attractive. "From a foreigner's perspective, the ringgit is undervalued and there is huge potential for the ringgit to appreciate."
Data by Zerin Properties showed that in July this year, 5,613 high-end condos were sold with 31% of the transactions involving foreigners. This works out to 1,700 units being retailed to foreigners. According to Previndran, the sales were concentrated mainly in the KLCC area.
"It's a fact that KLCC is popular because these foreigners can relate to city living, coming from big cities themselves. The numbers show that there is definitely investor demand.
"How much can one invest in Singapore? Besides KLCC, we have other places to offer foreigners. I think KL could be the next property play after Hong Kong and Singapore," says Previndran.
On yields, Fong says Malaysian real estate still enjoys good returns. "The days of 8% to 9% yields are gone. A 5% yield is considered very reasonable today."
The numbers show that there is still a lot of room for yield compression, adds Lai.
What and where are the foreigners buying?
All three agreed that high-end residences are the draw in the market for foreigners. Apart from the luxury condos in KLCC, resort and holiday homes are also getting popular, says Lai. He also sees potential in offices in prime areas and retail and shopping centres through the REIT (real estate investment trust) market.
Without a doubt, the Klang Valley continues to be the main attraction. The Mont'Kiara/Hartamas address was a favourite with the panellists, with Fong and Previndran also highlighting Bangsar/Damansara Heights. Fong also picked KLCC while Previndran feels Ampang Hilir showed much potential. Lai agrees that KLCC and its vicinity remain hot, as is the U-Thant/Embassy Row area.
Outside the Klang Valley, both Lai and Previndran say places to watch will be those in Sabah. According to Previndran, one of Sabah's latest properties called Kudat Riviera had its launch in the UK only and is sold out.
Elsewhere, Lai feels Langkawi and the east coast of the peninsula are places to watch, while Previndran believes Penang and Johor will be popular.
"There is a good MM2H (Malaysia My Second Home) following in Penang, coupled with a thriving hospitality industry. The first Hard Rock Hotel is going to be built there," says Previndran. On Johor, he says the Iskandar Development Region is attracting great interest and it is a "location in waiting". He feels that the airline price war between the low-cost carriers (LCC) is also contributing to the popularity of other destinations outside the Klang Valley.
Property destination
While we are reeling in the foreigners because we are cheap, Kumar asks a pertinent question: "Why are we cheap? Is there 'something wrong' with our market?"
Fong reasons that a lot has to do with supply and demand, coupled with consumer power and the average Malaysian income. "I feel that Malaysia has not reached the sophistication of other cities like Singapore, Shanghai and Hong Kong. At the moment, we're like a 'jaguh kampung'.
"We have to build our image and create awareness because many still don't know how easy it is for foreigners to own property in Malaysia," he says.
Fong's sentiments are echoed by Lai who thinks that Malaysia needs to be promoted as an international property destination.
Previndran says it all has to do with marketing and the government should also look into the efficiency of the civil service delivery system.
The Malaysian story needs to be told.
By The EDGE MALAYSIA
Mayland, which owns 12 per cent of L&G, is believed to have won a greater say in the company after Unioncity Enterprises Ltd, a company linked to corporate raider Datuk Ishak Ismail, disposed of 60.64 million L&G shares on September 30.
"We hope to take a 50 per cent stake in this project and our partner is likely to be a Penang-based company," he told the Business Times.
"We have had a lot of interests and enquiries for the the other two (unsold) properties especially the office space. We have the option to dispose of the business park if the price is right or we may consider setting up a REIT," CHHB managing director Tan Sri Lee Kim Yew said.
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