My property portfolio has grown over three times from 2010 July to today. My passive income from rental is 15% of my wife and my annual income. With six properties, which comprise of one in Malaysia, three in the UK, one in the US and one in Singapore, obviously my quest will not end. I intend to invest at least two more times for this year and the next. By 2015, rental income must comprise around 20 - 25% of my household income.
But a big problem has arised. I'm all out of cash. My bonus was woeful and disappointing. For weeks, I was rather downcast about this prospect. I could pun on several high confidence stocks, hoping for a three bagger so that I could earn another 200 to 300k of profits, or I could offload some of my properties that is sitting on several hundred thousands of profits. But the first option may take several years. The second option may require that I sell properties with potential for further upside. I live in a house that will see Raffles Education being completed very soon, and an MRT station just next door at Liang Court completing by 2017. My place is still just 50% the price psf of luxury condos nearby!
But I stumbled on a solution. I know that there are close friends and family members who are not working, sitting on a cash pile and not knowing how nor where to invest. I could co-invest with them, using their cash for downpayment, while I slowly increase my stake by paying fully for the mortgage installments. It means that I will need to slave away for another three to four years.
Saturday 30 March 2013
Sunday 24 March 2013
Buying Luxury Property Will Kill Most Singaporean and Asian Investors
To many dear Singaporeans who flock to exhibitions with their cheque books, I suggest you check with iProperty and search for properties for rent around the area which you are about to buy. You'll find that in Iskandar, non-gated homes are renting for RM1,300 to RM1,800. Only locals will rent. They sell for RM250k so the yield of 7.2% is ok for investors. For condos, the existing ones in Gelang Patah are asking RM1,300 - 1,500. Nusa Perdana is asking for RM250k, so the yield is also around 7%.
For gated landed, asking rent is around RM3 - 3.5k. Asking price for sale is around RM1 - 2m. Rent is around 2.6%! Not even enough to pay for interest! For condos, Ujana is asking for RM3k to rent and RM850k to sell. That's only 4.2% yield.
I feel that many many Singaporeans and non-Malaysians will be burnt when the flood of properties start to TOP between 2015 - 2017. There will be oversupply. Yields will fall and we could see a correction in prices. Singaporeans, Japanese and western expats will move to Iskandar for sure. But I don't foresee them moving to Iskandar in droves. It'll be more like 10k - 20k per annum, boosting demand for homes by between 4k - 5k. If I add another 10k - 20k of Malaysians who work in Jurong and Woodlands deciding to live in Iskandar, I'll add another 5 - 10k. That adds 2 - 2.5k of demand. Total, we have 6k - 7.5k of new demand. Iskandar will see over 15k of completions per year during that period.
Everytime an off-plan property approaches TOP, rental will be bad at the start because 100 to 400 units compete for tenants. Many will be empty for sure!
I've also checked the rental situation in London. If you look for the properties that drop their asking prices the most, they are mostly luxury apartments asking for GBP400 per week and above for 1 bed and 600 per week for 2 beds. These luxury properties are selling at GBP350k - 450k for 1 bed room and 550k - 700k for 2 bedrooms. That's around 5.2% for 1 bedroom and 5.0% for 2 bedrooms. Many of these luxury flats dropped their asking rents to 350 and 500 pw for 1 and 2 bedrooms respectively.
The ones that get rented out first are those below 300 pw for 1 bedroom, which is where I operate and because my entry price is low, I can still achieve 5.6%.If there is a recession, people living in luxury apartments will downgrade to a mid tier market. If economy is doing well, people from the working class will upgrade to a mid tier market. Either way, I won't do too badly!
My point is, always buy something that locals buy. If you buy stupidly, based on nonsense that agents tell you, you'll be in for a fall. Agents will sell you the beautiful apartment with an upmarket feel. But the UK is facing a recession now. Housing budgets are being cut. People are now more price sensitive.
For gated landed, asking rent is around RM3 - 3.5k. Asking price for sale is around RM1 - 2m. Rent is around 2.6%! Not even enough to pay for interest! For condos, Ujana is asking for RM3k to rent and RM850k to sell. That's only 4.2% yield.
I feel that many many Singaporeans and non-Malaysians will be burnt when the flood of properties start to TOP between 2015 - 2017. There will be oversupply. Yields will fall and we could see a correction in prices. Singaporeans, Japanese and western expats will move to Iskandar for sure. But I don't foresee them moving to Iskandar in droves. It'll be more like 10k - 20k per annum, boosting demand for homes by between 4k - 5k. If I add another 10k - 20k of Malaysians who work in Jurong and Woodlands deciding to live in Iskandar, I'll add another 5 - 10k. That adds 2 - 2.5k of demand. Total, we have 6k - 7.5k of new demand. Iskandar will see over 15k of completions per year during that period.
Everytime an off-plan property approaches TOP, rental will be bad at the start because 100 to 400 units compete for tenants. Many will be empty for sure!
I've also checked the rental situation in London. If you look for the properties that drop their asking prices the most, they are mostly luxury apartments asking for GBP400 per week and above for 1 bed and 600 per week for 2 beds. These luxury properties are selling at GBP350k - 450k for 1 bed room and 550k - 700k for 2 bedrooms. That's around 5.2% for 1 bedroom and 5.0% for 2 bedrooms. Many of these luxury flats dropped their asking rents to 350 and 500 pw for 1 and 2 bedrooms respectively.
The ones that get rented out first are those below 300 pw for 1 bedroom, which is where I operate and because my entry price is low, I can still achieve 5.6%.If there is a recession, people living in luxury apartments will downgrade to a mid tier market. If economy is doing well, people from the working class will upgrade to a mid tier market. Either way, I won't do too badly!
My point is, always buy something that locals buy. If you buy stupidly, based on nonsense that agents tell you, you'll be in for a fall. Agents will sell you the beautiful apartment with an upmarket feel. But the UK is facing a recession now. Housing budgets are being cut. People are now more price sensitive.
Wednesday 20 March 2013
Definition of New Builds
In my last three posts, I used the term "new builds" and realized I may not have defined it clearly. There are two types of new builds; off-plan and new stock. Off plan means the stuff you buy from show flats, often before the developer has even broken ground. New stock means properties that are around three months from completion or are already completed, but developer has not managed to sell it. My broad definition of new builds refers more to off plan than the new unsold stock that developers are keen to offload. Hope this clarifies.
Sunday 17 March 2013
An Anatomy of a Property Bubble: Case Studies On Malaysia, Singapore, the UK and US Part 3
Properties in Singapore reached their inflexion points in 2H2009. For KL, it never fell (but I don't trust the property indices because they comprise newbuilds which are at premiums). Central London properties recovered in 2H 2009, but greater London properties have still not recovered. It's funny because newbuilds prices in greater London started recovering in 1H 2012. It's a two tiered market like Iskandar. For Iskandar, newbuilds and resale started to recover in 2H 2012. The US reached the trough in 1H 2012. For most of Europe , prices are still falling.
The US presents by far the greatest opportunities. The average gross yield in New York is around 6% against a borrowing cost of 3%. But property, income taxes whip away pretty much your yield spreads. Conservancy fees, or service charges as they call it in the UK, or conservancy charges as we call it in Singapore makes the nett yield almost zero in New York.
Yields are higher in cities like Houston , which can reach7-8% gross and around 1-3% nett. There's also capital gains tax of around 15% when you sell it.
A greater opportunity is found in single family homes. They cost around USD15k - USD150k. Can give you yields of up to 9% net. This is an incredible spread of 600 bps. This is the sale of the century.
Since the inflexion point is only 1 year ago, supply is still in short supply at least until late 2015 (takes 3 years to build a condo and 1 year to build a single family home). From now till 2015, recovery will be like what Singapore and Hong Kong experienced between 2009-2012. Many new millionaires and billionaires will be minted, especially those with deep pockets.
Price to income ratio is the lowest in the world. Again I would avoid New York because it is a crowded trade. I would go for cities with strong employment growth. Population must be over 1.5 million and growing.
It is very difficult to Lena bunch of single family homes if you live far away. The best thing is either to migrate or live there, or invest in a private equity fund like Blackstone or Colony capital.
I am now exploring non UK European properties because I believe they are still in a downturn and the banks are not lending.
I love to buy properties in Countries where the banks are so hurt that they are unwilling to lend. The UK mortgage market is only just beginning to open up. The US banks now only begin to lend to institutions but not to retail. In Europe, few banks are lending. That's where I will operate. When banks cannot lend, you can be sure prices will be depressed. When the mortgage market recovers the masses will push up prices.
The US presents by far the greatest opportunities. The average gross yield in New York is around 6% against a borrowing cost of 3%. But property, income taxes whip away pretty much your yield spreads. Conservancy fees, or service charges as they call it in the UK, or conservancy charges as we call it in Singapore makes the nett yield almost zero in New York.
Yields are higher in cities like Houston , which can reach7-8% gross and around 1-3% nett. There's also capital gains tax of around 15% when you sell it.
A greater opportunity is found in single family homes. They cost around USD15k - USD150k. Can give you yields of up to 9% net. This is an incredible spread of 600 bps. This is the sale of the century.
Since the inflexion point is only 1 year ago, supply is still in short supply at least until late 2015 (takes 3 years to build a condo and 1 year to build a single family home). From now till 2015, recovery will be like what Singapore and Hong Kong experienced between 2009-2012. Many new millionaires and billionaires will be minted, especially those with deep pockets.
Price to income ratio is the lowest in the world. Again I would avoid New York because it is a crowded trade. I would go for cities with strong employment growth. Population must be over 1.5 million and growing.
It is very difficult to Lena bunch of single family homes if you live far away. The best thing is either to migrate or live there, or invest in a private equity fund like Blackstone or Colony capital.
I am now exploring non UK European properties because I believe they are still in a downturn and the banks are not lending.
I love to buy properties in Countries where the banks are so hurt that they are unwilling to lend. The UK mortgage market is only just beginning to open up. The US banks now only begin to lend to institutions but not to retail. In Europe, few banks are lending. That's where I will operate. When banks cannot lend, you can be sure prices will be depressed. When the mortgage market recovers the masses will push up prices.
An Anatomy of a Property Bubble: Case Studies On Malaysia, Singapore, the UK and US Part 2
The UK: About to Take Off
My take on UK is this: there are not many cities within the UK that are worth investing in. Student accommodation is a sham unless you buy it within the campus. Otherwise you are just competing with other homes. Forget about student accommodations in Manchester or Liverpool. Far cheaper to buy houses.
Hotels are a shortage in London and nowhere else, except maybe in Manchester and Liverpool. There's no tourism anywhere else. Room rates are shooting through the roof for London. There are few planning permissions granted in the last 5 years. A four star hotel in zone 1 can set you back by £200-300 per night during the April season.
Storage space is a new asset class that I've yet to explore. I believe the nett yields can reach 10%. But it may be difficult to exit because buyers are unable to obtain bank loans. Also the operator may just decide to hike management fees every year so a lot depends on how the deal is structured.
Newbuilds in London : same problem as in KL and JB
Asians are buying newbuilds in zone 1 and canary wharf, which are usually priced 10-30% above the resale market. But in the UK , the government plans a lot better than in malaysia. The developers have to get very strict planning approvals from local councils to prevent an over supply of luxury apartments that will end up empty, stealing valuable land from much needed affordable housing.
Newbuilds increasingly need a component of affordable housing to get approvals. Nevertheless, I believe the same problems will persist for foreign buyers: they often buy at future prices and will see their homes underperform for many years to come.
That is why as a rule, I dislike buying newbuilds unless they are strictly marketed to locals. The locals can sniff a deal better than foreigners so I follow the hound....
London's population is growing even faster than Iskandar. It's growing at 50-100k per year, similar to Singapore. There is a strong demand for homes , new offices and shops in London. The student population is growing in the UK, bringing opportunities to those who own homes near campuses...
The newbuilds in zone 1 are likely to give around 3-4% gross. This is around the same as the borrowing cost. On normal valuations, zone 1 is likely to be a bubble except for several differences between London and malaysia:
1) there is very little empty land in central London , unlike in Iskandar. The situation is quite similar to KLCC but better. In KLCC, you could still clear up squatters, kampungs right in the city centre for a penny and a song to build sky high mixed developments. But London cares a lot more for the environment, it must have public parks, retail and offices within the zone. Very well planned. Almost the same standard as Singapore's town planning.
2) the rule of law in London is unparalleled. It is of a higher standard than Singapore. In Singapore I have a bad experience of Living above a thai pub called Hi-So that banged away until 4 am. Despite gathering evidence of overwhelming noise pollution, and several tenants breaking their leases, the police refused to act. The MP also stayed silent on the matter.
3) London is a proven international city for education, finance, politics and general tourism. Even if yields are low the rich all over the world will want a stake in zone 1. Is like Sentosa Cove where yields are around 1-2%, but prices doubled in 4 years. Iskandar is unproven. Malaysia is third world and you can read the papers everyday about the problems that beset malaysia.
4) there is a perpetual shortage of homes in zone 1. Many wealthy londoners own one home in the country and another in the city centre. I don't think the supply will ever catch up with demand so rents will continue to rise even though yields are low. For Canary Wharf, I don't see much empty land either. Canary wharf employs 100k people and only 10k of them live there. Rents in luxury canary wharf are around 4-5% gross.
I believe those that bought zone 1 luxury properties , at £900-1500 psf, will not suffer as bad a fate as those who bought luxury homes in Iskandar. Prices have already appreciated by 20-30% since the 2008 crash and I don't think they will appreciate at the same pace.
Prices in luxury properties in canary wharf will probably do better. The Cross Rail will shorten the traveling time to west end London. It will raise the prices of east end London like woolwich arsenal, Canary Wharf and Stratford. It will not do as much for zone 1 London though. The office space in canary wharf is expanding north , west wards. There will be more jobs created and rents will rise as fast as in zone 1.
I believe newbuilds in canary wharf could rise by 4% per year for the next 5 years, and those in zone 1 by 5% per year. This is about half of what the appreciation of resale homes. It's just too bad that developers cream off half the appreciation by luring buyers with snazzy brochures, exhibition halls , promises of superb rentals, pictures of unblocked views. The Asians really lap up those newbuilds sadly and there is little trickle down effect to the masses.
Plenty of opportunities in the resale market
Now before you accuse me of favoring London because I've bought several properties there, it's not true! I believe that US properties present the greatest opportunity, that's why I invested colony capital single family home fund. I think next year we will see European properties rise through the ashes, like in Dublin, Madrid, Barcelona, Athens, Milan and Rome.
Resale is typically 20-30% cheaper. I believe it gives me far greater capital appreciation than newbuilds. As usual, always buy somewhere near employers, transport links.
Mature boroughs with very little land plots left are the best and I believe zone 1, croydon and canary wharf have the greatest potential.
Cities like Aberdeen have very high income due to the oil and gas industry, thus presenting opportunities too. The price to income ratio of Scottish properties are the lowest in the UK.
I also like Dublin but I don't have the time to visit the place.
My take on UK is this: there are not many cities within the UK that are worth investing in. Student accommodation is a sham unless you buy it within the campus. Otherwise you are just competing with other homes. Forget about student accommodations in Manchester or Liverpool. Far cheaper to buy houses.
Hotels are a shortage in London and nowhere else, except maybe in Manchester and Liverpool. There's no tourism anywhere else. Room rates are shooting through the roof for London. There are few planning permissions granted in the last 5 years. A four star hotel in zone 1 can set you back by £200-300 per night during the April season.
Storage space is a new asset class that I've yet to explore. I believe the nett yields can reach 10%. But it may be difficult to exit because buyers are unable to obtain bank loans. Also the operator may just decide to hike management fees every year so a lot depends on how the deal is structured.
Newbuilds in London : same problem as in KL and JB
Asians are buying newbuilds in zone 1 and canary wharf, which are usually priced 10-30% above the resale market. But in the UK , the government plans a lot better than in malaysia. The developers have to get very strict planning approvals from local councils to prevent an over supply of luxury apartments that will end up empty, stealing valuable land from much needed affordable housing.
Newbuilds increasingly need a component of affordable housing to get approvals. Nevertheless, I believe the same problems will persist for foreign buyers: they often buy at future prices and will see their homes underperform for many years to come.
That is why as a rule, I dislike buying newbuilds unless they are strictly marketed to locals. The locals can sniff a deal better than foreigners so I follow the hound....
London's population is growing even faster than Iskandar. It's growing at 50-100k per year, similar to Singapore. There is a strong demand for homes , new offices and shops in London. The student population is growing in the UK, bringing opportunities to those who own homes near campuses...
The newbuilds in zone 1 are likely to give around 3-4% gross. This is around the same as the borrowing cost. On normal valuations, zone 1 is likely to be a bubble except for several differences between London and malaysia:
1) there is very little empty land in central London , unlike in Iskandar. The situation is quite similar to KLCC but better. In KLCC, you could still clear up squatters, kampungs right in the city centre for a penny and a song to build sky high mixed developments. But London cares a lot more for the environment, it must have public parks, retail and offices within the zone. Very well planned. Almost the same standard as Singapore's town planning.
2) the rule of law in London is unparalleled. It is of a higher standard than Singapore. In Singapore I have a bad experience of Living above a thai pub called Hi-So that banged away until 4 am. Despite gathering evidence of overwhelming noise pollution, and several tenants breaking their leases, the police refused to act. The MP also stayed silent on the matter.
3) London is a proven international city for education, finance, politics and general tourism. Even if yields are low the rich all over the world will want a stake in zone 1. Is like Sentosa Cove where yields are around 1-2%, but prices doubled in 4 years. Iskandar is unproven. Malaysia is third world and you can read the papers everyday about the problems that beset malaysia.
4) there is a perpetual shortage of homes in zone 1. Many wealthy londoners own one home in the country and another in the city centre. I don't think the supply will ever catch up with demand so rents will continue to rise even though yields are low. For Canary Wharf, I don't see much empty land either. Canary wharf employs 100k people and only 10k of them live there. Rents in luxury canary wharf are around 4-5% gross.
I believe those that bought zone 1 luxury properties , at £900-1500 psf, will not suffer as bad a fate as those who bought luxury homes in Iskandar. Prices have already appreciated by 20-30% since the 2008 crash and I don't think they will appreciate at the same pace.
Prices in luxury properties in canary wharf will probably do better. The Cross Rail will shorten the traveling time to west end London. It will raise the prices of east end London like woolwich arsenal, Canary Wharf and Stratford. It will not do as much for zone 1 London though. The office space in canary wharf is expanding north , west wards. There will be more jobs created and rents will rise as fast as in zone 1.
I believe newbuilds in canary wharf could rise by 4% per year for the next 5 years, and those in zone 1 by 5% per year. This is about half of what the appreciation of resale homes. It's just too bad that developers cream off half the appreciation by luring buyers with snazzy brochures, exhibition halls , promises of superb rentals, pictures of unblocked views. The Asians really lap up those newbuilds sadly and there is little trickle down effect to the masses.
Plenty of opportunities in the resale market
Now before you accuse me of favoring London because I've bought several properties there, it's not true! I believe that US properties present the greatest opportunity, that's why I invested colony capital single family home fund. I think next year we will see European properties rise through the ashes, like in Dublin, Madrid, Barcelona, Athens, Milan and Rome.
Resale is typically 20-30% cheaper. I believe it gives me far greater capital appreciation than newbuilds. As usual, always buy somewhere near employers, transport links.
Mature boroughs with very little land plots left are the best and I believe zone 1, croydon and canary wharf have the greatest potential.
Cities like Aberdeen have very high income due to the oil and gas industry, thus presenting opportunities too. The price to income ratio of Scottish properties are the lowest in the UK.
I also like Dublin but I don't have the time to visit the place.
An Anatomy of a Property Bubble: Case Studies On Malaysia, Singapore, the UK and US
As I laze around in my castle on a Sunday afternoon, my mind wandered into the phenomena I am seeing in Johor Bahru, Kuala Lumpur, Singapore, London, and a dozen US cities. In Asia, property prices are shooting through the roof, governments are struggling to contain the spiraling prices in order to placate the angry masses who have been priced out of the markets, and to rein in inflation which threatens real GDP growth. In the west, property prices are still sluggish, with some cities just turning around from the decades low prices. The rich in Asia are flocking to western gateway cities, buying newbuilds, which gives rise to interesting opportunities.
I attempt to analyse various markets, hoping to make sense of the patterns that lay in front of us.
Johor Bahru
Luxury New builds
This is obviously a two tier market. Singaporeans are flocking to buy newbuilds along Nusajaya, Danga Bay etc. I would say that 70-80% of the capital gains are over. 2H 2012 is the tipping point. Singapore started to announce increasing number of investments in Iskandar. With the completion of Legoland in dec 2012, Singaporeans' worries all but disappeared.
However, I dare say that I will NOT pay over RM650 psf for condos in Iskandar. JB's average income is 1/3 of Singapore's. If a Woodlands condo that is freehold is selling for S$1k psf, I will pay no more than S$333 psf for a condo in Iskandar. Don't forget that Woodlands already has an MRT whereas Iskandar is just TALKING about building an MRT in the distant future. There is no way that an undeveloped place like Iskandar can sell at 1/2 the psf of Singapore.
My guess is that 3/4 of the newbuilds that Singaporeans bought are over priced, or priced at 2017 levels. This is a bubble to me. It means that the majority of these condos will not see much capital appreciation until 2016/27, and thereafter underperform the Malaysian average.
The buld of these landed and condos will be completed in 2015 - 2017. Many of them will find it difficult to find tenants who are willing to pay the 180 bps spread above borrowing cost when TOP. For example, by 2015, if borrowing costs rise to 5.2% from 4.2%, will owners be able to get a gross yield of 7%? A condo in Ujana is asking for RM800k for a 1k sf. The asking rent is around RM3 k. It's works out to only 4.5% gross yield. This is a completed project so I can gauge the "real value" of a property this way.
My guess is the resale market for the majority of newbuilds sold to foreigners above RM650 psf will lose money. The resale market will dry up. By 2016, if borrowing costs rise above 6%, a small number of foreign owners will dump their properties at a loss. The majority will hold and either shift to iskander to live in them or suck up their losses.
Now for the best case scenarios for these luxury newbuilds? For Iskandar to become a hot investment ground, it has to become a "Singapore", or "Monaco". This requires a lobotomy of the Malaysian government and its people's mindset. There must be greater transparency, better enforcement of laws, honoring of contracts, less corruption, and a total revamp of the bumiputra laws. Affirmative action must be replaced by meritocracy and social safety net that is not race or religion based. Can I see this happening? Not in this decade. That's why this is an optimistic scenario. Under this scenario, the rich and famous the world over will invest, start business and live in Iskandar. The spanking luxury apartments will be well maintained. Resale price data will be transparent for investors to see. Only then will cap rates fall even further for luxury apartments.
If you take a drive around Iskandar, you will notice that there is indeed a lot of land. There is so ,uch land that I cannot see the need to buy condos unless it is for security sake. Developers can keep selling newbuilds to cater to the insatiable appetites of Singaporeans , Japanese and other foreigners. It will definitely be a very tough buy-to-let market in future.
Town planning also leaves a lot to be desired. Medini, Puteri Harbour , Danga Bay, Core central JB. where exactly will the centre of Iskandar be ? Malaysia is filled with small towns, like Bukit Indah, with no industry other than for workers to live, and shopping malls after malls. If you place your bets wrong, you could end up in the middle of nowhere, with a mall that is empty. The developers love to hit and run. They build many malls, sell the strata shops and offices, sell the condos and run. The maintenance is in shambles. If an MRT line eventually fails to stop near your condo, how will your prices fare? For is reason, I'd prefer to go for the mature towns where everything is built up.
Better opportunities in resale market and other asset classes
Now the rush of newbuilds sales will not benefit the general population. Ony the agents, and the developers will benefit. The shopkeepers, food sellers will benefit only if more foreigners actually live in iskandar. Right now the population growth in Iskandar is below 2% per annum, or less than 34k of people per year. This translates into only 8.5k of nett new dwellings per year.
The wealth effect or trickle down will be slow. It could be hastened by land being used to build luxury apartments that will be unoccupied instead of being used to build housing for mass market or for affordable homes.
A lack of supply for mass market homes may result, which means those homes priced from RM200-650 psf may start to rise. I especially like resale market because of the following reasons:
1) you see the actual quality of the condo after it's been built.
2) there is no risk of the developer defaulting
3) what the heck, all newbuilds become old over time
The gross yield should be at least above 6% to make it worthwhile. I believe many core JB town condos and landed provide this type of yields. The problem is foreigners cannot buy houses below RM500k. Perhaps landed homes are a better bet, if you can take the security risks because many of these landed homes are non gated.
Kuala Lumpur
My take on KL properties is similar to JB. I don't think there's much value in buying newbuilds. In fact, and I know developers will hate me for saying this, the same problem of overpricing occurs in most countries. It's like buying a new car versus buying a one year old car. The difference between a new car and a one year old caris almost 30%!!
I believe the oversupply situation in KL is as acute in Iskandar. The high speed rail will encourage more people to commute to work instead of renting or buying in Singapore. It is like what Shenzhen does to Hong Kong. But if you look at hong kong's property price now, the gap with Shenzhen is widening again.
There is even less upside for KL properties because I believe most of the FDIs are heading to Iskandar.
I attempt to analyse various markets, hoping to make sense of the patterns that lay in front of us.
Johor Bahru
Luxury New builds
This is obviously a two tier market. Singaporeans are flocking to buy newbuilds along Nusajaya, Danga Bay etc. I would say that 70-80% of the capital gains are over. 2H 2012 is the tipping point. Singapore started to announce increasing number of investments in Iskandar. With the completion of Legoland in dec 2012, Singaporeans' worries all but disappeared.
However, I dare say that I will NOT pay over RM650 psf for condos in Iskandar. JB's average income is 1/3 of Singapore's. If a Woodlands condo that is freehold is selling for S$1k psf, I will pay no more than S$333 psf for a condo in Iskandar. Don't forget that Woodlands already has an MRT whereas Iskandar is just TALKING about building an MRT in the distant future. There is no way that an undeveloped place like Iskandar can sell at 1/2 the psf of Singapore.
My guess is that 3/4 of the newbuilds that Singaporeans bought are over priced, or priced at 2017 levels. This is a bubble to me. It means that the majority of these condos will not see much capital appreciation until 2016/27, and thereafter underperform the Malaysian average.
The buld of these landed and condos will be completed in 2015 - 2017. Many of them will find it difficult to find tenants who are willing to pay the 180 bps spread above borrowing cost when TOP. For example, by 2015, if borrowing costs rise to 5.2% from 4.2%, will owners be able to get a gross yield of 7%? A condo in Ujana is asking for RM800k for a 1k sf. The asking rent is around RM3 k. It's works out to only 4.5% gross yield. This is a completed project so I can gauge the "real value" of a property this way.
My guess is the resale market for the majority of newbuilds sold to foreigners above RM650 psf will lose money. The resale market will dry up. By 2016, if borrowing costs rise above 6%, a small number of foreign owners will dump their properties at a loss. The majority will hold and either shift to iskander to live in them or suck up their losses.
Now for the best case scenarios for these luxury newbuilds? For Iskandar to become a hot investment ground, it has to become a "Singapore", or "Monaco". This requires a lobotomy of the Malaysian government and its people's mindset. There must be greater transparency, better enforcement of laws, honoring of contracts, less corruption, and a total revamp of the bumiputra laws. Affirmative action must be replaced by meritocracy and social safety net that is not race or religion based. Can I see this happening? Not in this decade. That's why this is an optimistic scenario. Under this scenario, the rich and famous the world over will invest, start business and live in Iskandar. The spanking luxury apartments will be well maintained. Resale price data will be transparent for investors to see. Only then will cap rates fall even further for luxury apartments.
If you take a drive around Iskandar, you will notice that there is indeed a lot of land. There is so ,uch land that I cannot see the need to buy condos unless it is for security sake. Developers can keep selling newbuilds to cater to the insatiable appetites of Singaporeans , Japanese and other foreigners. It will definitely be a very tough buy-to-let market in future.
Town planning also leaves a lot to be desired. Medini, Puteri Harbour , Danga Bay, Core central JB. where exactly will the centre of Iskandar be ? Malaysia is filled with small towns, like Bukit Indah, with no industry other than for workers to live, and shopping malls after malls. If you place your bets wrong, you could end up in the middle of nowhere, with a mall that is empty. The developers love to hit and run. They build many malls, sell the strata shops and offices, sell the condos and run. The maintenance is in shambles. If an MRT line eventually fails to stop near your condo, how will your prices fare? For is reason, I'd prefer to go for the mature towns where everything is built up.
Better opportunities in resale market and other asset classes
Now the rush of newbuilds sales will not benefit the general population. Ony the agents, and the developers will benefit. The shopkeepers, food sellers will benefit only if more foreigners actually live in iskandar. Right now the population growth in Iskandar is below 2% per annum, or less than 34k of people per year. This translates into only 8.5k of nett new dwellings per year.
The wealth effect or trickle down will be slow. It could be hastened by land being used to build luxury apartments that will be unoccupied instead of being used to build housing for mass market or for affordable homes.
A lack of supply for mass market homes may result, which means those homes priced from RM200-650 psf may start to rise. I especially like resale market because of the following reasons:
1) you see the actual quality of the condo after it's been built.
2) there is no risk of the developer defaulting
3) what the heck, all newbuilds become old over time
The gross yield should be at least above 6% to make it worthwhile. I believe many core JB town condos and landed provide this type of yields. The problem is foreigners cannot buy houses below RM500k. Perhaps landed homes are a better bet, if you can take the security risks because many of these landed homes are non gated.
Kuala Lumpur
My take on KL properties is similar to JB. I don't think there's much value in buying newbuilds. In fact, and I know developers will hate me for saying this, the same problem of overpricing occurs in most countries. It's like buying a new car versus buying a one year old car. The difference between a new car and a one year old caris almost 30%!!
I believe the oversupply situation in KL is as acute in Iskandar. The high speed rail will encourage more people to commute to work instead of renting or buying in Singapore. It is like what Shenzhen does to Hong Kong. But if you look at hong kong's property price now, the gap with Shenzhen is widening again.
There is even less upside for KL properties because I believe most of the FDIs are heading to Iskandar.
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