Pitfalls of Investing in Malaysian Properties

I recently paid a 2% deposit in a freehold condominium in Gelang Petah, called Nusa Heights. As a foreigner, according to developer MahaBuilders, I am obliged to pay a further 10% downpayment. Of course I was reluctant to do so because my IRR would fall below 30%! Although the condo is around S$160 psf, and Singaporeans who flock to luxury condos are paying double of that, I was not sure about the quality of the finishing (see picture 1)

Picture 1: Nusa Heights. Looks nice on picture. But when TOP in 2015, what will it actually look like?

 

Also, I visited another condominium nearby called Nusa Perdana (Pictures 2, 3 and 4). Although the swimming pool was ok, the common areas were badly maintained. It was only around 5 to 7 years old. The building facade looked badly in need of a paint job. The interior looked extremely bad. Furniture was spartan. Mattresses were used as beds, without any frames. The bathrooms' ceilings were damp, indicating that it was leaking from upstairs. I was told that it is common that neighbours above will refuse to pay for the repairs for the leakage to the ceilings of those who lived below them. The MCST usually does not care and you do not know where your conservancy fees go to. Let's just say that accountability is not a strong point in Malaysia.

Picture 2: Looks like a HDB with a nice frontage!


Picture 3: Nice looking HDB


Picture 4: What's the concrete in the middle of the condo??



The unit that I viewed in the Nusa Perdana was on a corporate lease to people working on a hotel project nearby. It smelled of stale cigarettes. The overall condition of the flat was worse than our HDB. But at S$80 psf, or S$80,000 per unit, and with a rental of S$600 per month (gross 9%), who's complaining? In the common area, I could see grafitti liken to loan sharks demanding debt repayment. It felt like the worst HDB estates in the 80s. It's a very good investment for citizens of Malaysia because the owner bought it at around S$35,000 just 5 years ago and the rental he was collecting was S$400 per month, which works out to over 13% gross yield! I worked out his IRR, which turned out to be 27.7% per annum unleveraged! With a 5x leverage, and at 5% interest rate, I believe it will be over 100% per annum!

Picture 6: Nusa Perdana. Typical condos in JB. Doesn't come with furniture because tenants are not expected to maintain them. They may even disappear so the deposit is something you might wish to hold on to tightly!

Picture 5: Hmmmm.... Although no view, but still better than our closely packed HDB!

My Malaysian friend, who bought over the unit, knew the risks, but is going to collect 9% gross yield (assuming he can collect rent). But at S$80 psf, he is buying at local prices. Singaporeans are buying freehold condos in Iskandar at S$200 - 300 psf which I think was a greater fool theory. My friend will make good returns I'm sure. But for Singaporeans like me, such condos are off-limits. I have to buy above RM500k and I believe no Malaysian will buy from me at above RM500k! My gross yield at Nusa Heights is only 5 or 6% from my calculation and I doubt it will increase very much even in 2017 because of the massive supply coming on stream!

I decided to forego my purchase because first, I wasn't sure if I could find a tenant who was willing to pay S$1,200 per month for my 1005 sq ft unit once it's completed. I mean there will be over 300 units competing for tenants once TOP. Second, I wasn't sure that I could find good tenants that will take care of the apartment, let alone pay on time. I used to have a Malaysian businessman as a tenant, who refused to pay by GIRO. He would often be over 20 days late. It is the norm in Malaysia to delay payment as long as possible. This is just not Singapore, mind you.

Third, I was afraid that the condo would not be well taken care of. I only trust Capitaland projects, or even UEM Land. But MahaBuilder was a private company. My parents invested in JB condominiums in the 70s. After paying over S$30k, the developer went bankrupt. They could retrieve nothing after 10 years!

I was told that the full sum of my 2% deposit would be refunded if I decided to cancel my purchase. Only RM 1,000 will be retained. It has been over a month and I have not seen a cheque from them. Everytime they will say, "ok", but no response.

I believe it is a problem with the rule of law in Malaysia. Enforcement is just lacking. Nobody cares about doing the right thing. If they can avoid payment, they will do so.

I urge all Singaporeans to be careful when investing in Iskandar. There are many issues when it comes to buying-to-let.