Real property in Malaysia
Based on National Property Information Center’s statistics, the house prices in Malaysia had risen rapidly in the early 1990s. In 1996 the house prices had increased by 116.8% compared to 1990. However, in 1998 after the Asian Financial Crisis the property market had experienced a slump. In 1999, the detach house price had decreased by 19.1% compared to 1997.
Following the financial crisis, with the rapid economic growth and development the house prices had appreciated steadily since 1999 till 2014. In 2014 the house prices had appreciated about 123.8% compared to 1999. Certain states and locations had been performing better than others due to development. For example, the Kuala Lumpur's house prices had outperformed the rest of the country, especially after the economic downturn of 2008-2009, when the property market was boosted by the Greater Kuala Lumpur Plan with the expansion of the public transportation infrastructure such as the launch of the MRT Project, extension of the existing LRT connections, etc. From 2005 to 2014, Kuala Lumpur house prices surged by almost 107%, while the national house prices had appreciated by 82.5%.
Following the global economy slowdown in 2014, the commodity prices (e.g. oil & gas, palm oil, rubber, etc.) and manufacturing outputs have decreased due to lower market demand. The pessimistic economic climate together with other internal factors such as the weakening ringgit, reduction in subsidies (for vehicle fuel, sugar, cooking gas, etc.), introduction of Goods and Services Tax (GST), etc. have generally increased the consumer and reduced consumers’ purchasing power that has directly driven down the property market.
In June 2017, Bank Negara Malaysia (BNM) had published a report warned that Malaysia’s property market is facing an oversupply of non-affordable homes and idle commercial space, while the demand for affordable housing is not being met. This undersupply of affordable homes is likely to worsen going forward given current trends in income and demographic factors.
Moving into year 2018, the property market in Malaysia is expected to continue the slow growth due to continuous oversupply in the market and affordability issue, which will still require time to normalize.
The increase of stamp duty rate on transfer of property worth more than RM1 million from 3% to 4% starting on 1st January 2018 is expected to further affect the market sentiment.
Despite of the gloomy outlook, several catalytic developments have emerged in Greater Kuala Lumpur, which includes Tun Razak Exchange, Bandar Malaysia, Warisan Merdeka (KL118), Bukit Bintang City Centre and Kuala Lumpur-Singapore High Speed Rail. These developments are expected to provide stimulation to the KL’s property market. At the southern part of peninsula Malaysia, the Iskandar Malaysia development project is expected to provide similar catalytic effect to the property market in Johor state.
In addition, in order to boost sales, property developers have been offering attractive packages to the potential property buyers and investors, such as early bird cash rebate/discount, low down payment, free legal fee, semi-furnished design, etc. The secondary market has also reacted to the depressed market climate with lower asking prices.
Is it currently a good timing to enter into the property market? Have the property prices bottomed out? These are some of the questions that remained to be assessed by the property buyers and investors.
In general, the increase in the number of rental properties in the current market environment has also favoured tenants in the rent market as they would have more options and bargaining power to negotiate the rental with the landlord. In order to maintain the occupancy and monthly cash flow, property owners may have to keep the current rent increment on hold or to offer a lower rental rate to new tenants so that to be able to cover at least a part of their investment.
Property investment involves the purchase, ownership, management, improvement, rental and/or sale of a property for profit. Conventionally, investing in properties offers competitive risk-adjusted returns, where the property has the capacity to increase in value as time passes even as an effect of economic fluctuation.
Based on National Property Information Center’s statistics, the house prices in Malaysia had risen rapidly in the early 1990s. In 1996 the house prices had increased by 116.8% compared to 1990. However, in 1998 after the Asian Financial Crisis the property market had experienced a slump. In 1999, the detach house price had decreased by 19.1% compared to 1997.
Following the financial crisis, with the rapid economic growth and development the house prices had appreciated steadily since 1999 till 2014. In 2014 the house prices had appreciated about 123.8% compared to 1999. Certain states and locations had been performing better than others due to development. For example, the Kuala Lumpur's house prices had outperformed the rest of the country, especially after the economic downturn of 2008-2009, when the property market was boosted by the Greater Kuala Lumpur Plan with the expansion of the public transportation infrastructure such as the launch of the MRT Project, extension of the existing LRT connections, etc. From 2005 to 2014, Kuala Lumpur house prices surged by almost 107%, while the national house prices had appreciated by 82.5%.
Following the global economy slowdown in 2014, the commodity prices (e.g. oil & gas, palm oil, rubber, etc.) and manufacturing outputs have decreased due to lower market demand. The pessimistic economic climate together with other internal factors such as the weakening ringgit, reduction in subsidies (for vehicle fuel, sugar, cooking gas, etc.), introduction of Goods and Services Tax (GST), etc. have generally increased the consumer and reduced consumers’ purchasing power that has directly driven down the property market.
In June 2017, Bank Negara Malaysia (BNM) had published a report warned that Malaysia’s property market is facing an oversupply of non-affordable homes and idle commercial space, while the demand for affordable housing is not being met. This undersupply of affordable homes is likely to worsen going forward given current trends in income and demographic factors.
Moving into year 2018, the property market in Malaysia is expected to continue the slow growth due to continuous oversupply in the market and affordability issue, which will still require time to normalize.
The increase of stamp duty rate on transfer of property worth more than RM1 million from 3% to 4% starting on 1st January 2018 is expected to further affect the market sentiment.
Despite of the gloomy outlook, several catalytic developments have emerged in Greater Kuala Lumpur, which includes Tun Razak Exchange, Bandar Malaysia, Warisan Merdeka (KL118), Bukit Bintang City Centre and Kuala Lumpur-Singapore High Speed Rail. These developments are expected to provide stimulation to the KL’s property market. At the southern part of peninsula Malaysia, the Iskandar Malaysia development project is expected to provide similar catalytic effect to the property market in Johor state.
In addition, in order to boost sales, property developers have been offering attractive packages to the potential property buyers and investors, such as early bird cash rebate/discount, low down payment, free legal fee, semi-furnished design, etc. The secondary market has also reacted to the depressed market climate with lower asking prices.
Is it currently a good timing to enter into the property market? Have the property prices bottomed out? These are some of the questions that remained to be assessed by the property buyers and investors.
In general, the increase in the number of rental properties in the current market environment has also favoured tenants in the rent market as they would have more options and bargaining power to negotiate the rental with the landlord. In order to maintain the occupancy and monthly cash flow, property owners may have to keep the current rent increment on hold or to offer a lower rental rate to new tenants so that to be able to cover at least a part of their investment.
Property investment
Owing to the positive relationship between Gross Domestic Product (GDP) growth and demand for properties, investing in properties can offset inflation. As economies expand, the demand for properties would drive rents higher and this would in turn results in higher capital values. Hence, properties have the tendency to maintain the purchasing power of capital, by passing some of the inflationary pressure on to tenants and by incorporating some of the inflationary pressure, in the form of capital appreciation.
There are 2 general approaches in generating profit from property investment: buy-and-rent, and buy-and-sale.
Buy-and-rent
In the buy-and-rent approach, a person will buy a property and rent it out to a tenant. Ideally, the rent collected would be adequate to cover all of the expenses (i.e. mortgage, taxes and housing community monthly maintenance fee) to maintain the property. In a best case scenario, the rent collected may even generate sustainable profit to the owner. However, in reality particularly for a relatively new property and because of the market competition usually the common strategy (in order to maintain higher occupancy rate) would be to only charge enough rent to cover the expenses (e.g. the owner may have to cover part of the principal amount of the monthly loan repayment) until the mortgage has been paid, when at that time the majority of the rent becomes profit. The rent may be adjusted during periodic review or on change of tenant to match the latest market rate, and this progressive increment would eventually generate a sustainable monthly net gain. Similarly, for properties located at areas that have continuous economy growth, because of the market demand the rent may eventually increased to generate a sustainable net income to the owner. Furthermore, the property may also have appreciated in value over the course of the mortgage, leaving the property owner with a more valuable asset.
For investors seeking an income stream from rental properties, the most important aspects to consider are property location and market rental rates. For example, the residential properties at PJ Section 17 and SS2 are used to be popular areas for students from University of Malaya and UNITAR International University where students are likely to want to rent the houses.
Despite of the potentially good prospect from the buy-and-rent strategy, things may not always turn out to be as ideal as it was thought to be as the property owner may end up with a bad tenant who damages the property or, worse still, end up having no tenant at all that results in a negative monthly cash flow. This means that the property owner will have to dig into his/her own pocket to completely cover the mortgage payments plus other expenses .
Buy-and-sale
For the buy-and-sale approach, property buyers would buy properties with the intention of holding them for a short period of time and to sell the properties as soon as possible for a profit. This is usually based on buying properties that are either significantly undervalued or are in a very hot area. When the property market is good, one may purchase a property upon the launching of the project and to immediately sell the property the upon collection of the key to avoid paying for the mortgage. In other circumstances, the property owner may consider to hold the property for more than 5 years to waive the Real Property Gains Tax (RPGT) before unloading the property. However, if the property buyer is unable to offload the property in a bad market, he/she could be caught in a difficult situation to maintain the cash flow to pay for the mortgage and the associated expenses.
In a different strategy, the property buyers can make their profit by buying reasonably priced properties and adding value by renovating them before selling the renovated property for a higher price. This strategy would require additional resources and experience to manage the cost and contractors of the renovation.
Risks of property investment
The main risk of property investment is the relative difficulty in converting a property into cash and vice versa. Unlike a stock or bond transaction, which can be completed in seconds, a property transaction can take months to close. In case, the property owner is having cash flow problem to pay off the monthly mortgage, the property may end up in auction.
Other risks associated to property investment are given in this link.
About this Blog
This blog share information on real estate news, property investment, buy, sale, rent and lease markets in Malaysia. The information presented in this blog is intended to be for reader's information only. It does not constitute an advice for specific needs as the information cannot disclose all of the risks and other factors necessary to evaluate a particular situation, where any interested party should assess the actual situation carefully.
About this Blog
This blog share information on real estate news, property investment, buy, sale, rent and lease markets in Malaysia. The information presented in this blog is intended to be for reader's information only. It does not constitute an advice for specific needs as the information cannot disclose all of the risks and other factors necessary to evaluate a particular situation, where any interested party should assess the actual situation carefully.
