What's the Rental Yield for Iskandar?

I first looked at Iskandar in 2006. Back then it was mainly jungle and there was plenty of skepticism. The land was aplenty. Houses were very cheap but crime was rampant in JB. A friend even got his car stolen in JB while having lunch.

In 2009, I re-looked at Iskandar. I could see the region developing and could understand why it has to be a hinterland for Singapore. There is no way that Singapore could continue to grow without a cheaper manufacturing base nearby. Iskandar will be to Singapore what Shenzhen will be to Hong Kong.

Interests gathered with international investors in 2011. Horizon hills terraces around 3300 sf were sold for MYR730k. That's slightly over MYR 200 psf. Just a few years back, in 2009, it was at 500k. I believe I have missed that opportunity.

But Iskandar draws many parallels with the great gold rush in the US in the 19th century, with Dubai between 2004 - 2008, and Dublin from 2000 - 2007. During the Great American Gold Rush, the prospectors rushed in, many did not strike rich. Instead, the ones who sold spades and machinery to explore gold made it rich. During the Dubai property boom, prices escalated exponentially. One key ingredient was missing, the was no yield. The number of homes surpassed the population of Dubai.  There was never a reference to cash flow, just future capital appreciation. Movie stars, football stars bought homes in the desert oasis based on this premise. Of course it crashed over 70% between 2008 till now. At the moment, it is still trying to clear many years worth of inventory. If you play the Iskandar game, you have to get out before the music stops or you'll be left with the baby!

Dublin had more fundamentals. But like Singapore, its planning permission was far more ambitious than the realized population growth. Yields were low, but unlike Dubai or Iskandar, they were around
 3 or 4% gross. Speculators did not care that mortgage rates were at 6% then. Another eerie similarity between Dublin and Iskandar was the lack of transacted data. No one could tell exactly what the last transacted price was. Dublin's property price collapsed 57% and is just beginning to bottom.

Abandoned Towns in Malaysia. If you buy them too far away from any commercial activities, this could happen.  

These landed are not gated. but you could buy them at a fraction of those sold to Singaporeans

Iskandar's properties will have little yield. The bulk of the completions will occur from 2014 onwards. If you bought a bungalow for MYR1.5m at 4.2% interest, for a 30 year loan, at 85% LTV, you would have to pay MYR 71k per year of mortgage, which works out to almost MYR 6k per month. If interest rates rise to 6% ( average interest over 20 years was around 7%), the monthly payment rises to above MYR 7k per month. I believe some investors will start to put their homes on the market if they cannot find tenants. That's when the day of reckoning occurs. I do not have the existing housing stock in Iskandar because data is scanty. So there's no way to gauge the extent of over supply in Iskandar. All I know is the population is around 1.7m and anything over 380 spells over supply. Also at a growth rate of 3% per annum, any completions of over 11k net per year spells trouble.

The next point is, like the Geat Gold Rush, why be a prospector and put your capital at risk? The developers tend to sell at a 10-20% premium above resale market. This is similar to London. But in Singapore, the premium has narrowed due to the tightening measures. There is plenty of land and the developers will just keep selling. They don't have to care about the lack of rental demand. I would not buy from a developer at a premium but only from the resale market if I wish to buy because I know that there will be desperate sellers in the next 2 years.

The developers also know that  those earlier units that were completed will turn competitors starting starting from june 2013. I know that developers are selling horizon hills latest phase at 1.5m for the same size (over MYR 400 psf) so I could drive a hard bargain to bid for completed homes for around MYR900k to 1m. As I will have hundreds of choices I could drive a hard bargain. In any case, I am sure that I cannot get 6% yield so I won't bother. In any case, the developers will not have it easy once those that they sold in 2011/12/13 are completed in 2013/14/15. When competition between resale and new is fierce, prices will stabilize. Only then will we know what the real price is.

In terms of price to income ratio, Iskandar is certainly cheap. Price to income wise it's around 12x. 30 year average is around 10. Singapore's price to income is 25x and average is 15. It's likely that Singapore will hover or fall until it reaches the average. Iskandar will take many years to edge up due to the land supply. Mind you, Iskandar is not Penang which is an island. The average for global mega cities is around 15x.

A few friends asked me about shop houses. I find that the yield is insufficient, although the fundamentals better than houses. The problem is only the first floor is a shop. The second and third floors usually have little value. So the yield is hardly 6% at all. More like 3-4%. Owners of shop houses with yields over 7% are smart.  They will not sell at those yields but at 4-5%.the fundamentals are even worse than in Singapore because our yields are 3.5% and mortgage rate 1.6%!

There will always be exceptions in Iskandar. Occasionally you might find an undervalued gem, or a location few have known about that will be very popular in future. But those chances are few and far in between!

11 May 2013, The Straits Times

INVESTORS prefer stability to uncertainty. So with the Malaysian general election out of the way, investors are likely to make their way back into the market across the Causeway.

Consultants are confident that Malaysia’s economic transformation programme will continue. This will pump some US$440 billion (S$541 billion) into sectors such as oil and gas, tourism, financial services and urban infrastructure.

This bodes well for all investments, not least for the property market which has been a little subdued in the past two months.

Activity is likely to pick up again now, analysts said.

“Now that the election is out of the way, the property market appears to be re-energised and we are confident of seeing substantial gains over the next three years in both Peninsular and East Malaysia,” said Mr Christopher Boyd, executive chairman of CB Richard Ellis.

However, this may not have an immediate impact on values, he added, as there will likely be a corresponding rise in supply from developers who held back new releases ahead of the election.

“From the third quarter onwards, we anticipate that continued high liquidity, additional public expenditure on infrastructure and renewed confidence in the future will all combine to bring residential property values to new highs,” he said.

Mr Alex Bellingham, director of property consultancy IP Global, is also bullish, saying: “Malaysia has the second-lowest property prices in South-east Asia on a per sq ft basis.”

Consultants see good prospects for property in Klang Valley, which includes Kuala Lumpur and its suburbs.

“There are a couple of launches coming up in the KL city centre area, such as Platinum Park,” noted Mr Brian Koh, the head of research and consultancy at DTZ Malaysia.

He expects Malaysian property prices to rise by 5 per cent to 10 per cent a year over the next few years, with the steepest increases in the Klang Valley market.

“We haven’t seen a lot of launches around KLCC in the past year and a half, so this … should be quite exciting.”

Mr Boyd agreed, saying there are still plenty of prime units in the Klang Valley that can be picked up on the cheap.

“Bargain hunters should be looking at areas like Mont Kiara, where condo prices have lagged in response to a very full supply picture,” he said, referring to the affluent township just outside the KL city centre.

“In addition, almost any reasonably well-located terraced house in the Klang Valley under RM1 million (S$414,000) is worth considering. Don’t forget foreigners are permitted to buy landed property.”

Many Singaporean investors have been keen on Iskandar. Although prices there have doubled in the past two years, analysts warn it is an untested market.

“Who will rent the houses in Iskandar? Will it be easy to sell the units in future? Long-term liquidity is still a concern,” said Mr Bellingham.

Mr Koh agreed, saying the price rises in Iskandar might not be backed by fundamentals.

“I would say Klang Valley continues to be fundamentally strong, while Iskandar is more speculative at the moment, at least until commercial activities become more established,” he added.