I was considering some condos in KL recently. The proposition is very attractive: No money down, 110% financing. The price of the condo can be RM560k for a 1000 sq ft unit, freehold. The bank lends you 600k. 40k excess is for you to pay for renovation, and service mortgages. It is indeed very attractive because if there is no downpayment, the IRR can be theoretically infinite if prices moves up by even 10%!
But here're the problems:
1. Over supply of KL properties in the next 5 years! The population of KL is around 1.7m. For the state of Selangor the population is around 5.4m. KL's population grew at around 1.5% per annum in the last 5 years. So what's the increase in population annually? 25,500. On average, there are around 4 people per household. So annual increase in demand is only 6,375. In the luxury segment alone (defined as above RM500 psf), around 5k - 6k of new condos will be completed annually. Mid tier and social housing will account for another 10k. Total supply is 15 - 16k!
2. Based on point 1, I believe rental will continue to fall in greater KL, not hold steady. KL's gross yield used to be 8%. It is now around 6%. It may fall to 5.5% in next few years. Borrowing cost of 4.2% may be high to most Singaporeans, but it is the lowest in decades. So the spread is likely to be only 1.3%. This is worse than Singapore's current spread of 1.7% (borrowing cost of 1.5% and average yield of 3.2%). When interest rates start to rise from 2015, I think there will be a lot of forced selling in KL.
3. There is no transparency of transaction anywhere in Malaysia! This is my biggest problem. A sales person in Iskandar recently chided me for not buying a condo. He said that he sold it for 500k when he previously wanted to sell me for 350k in the earlier phase. I asked to look at the Sales and Purchase Agreement and he said that it was confidential! Of course it is! But when I asked him to show me the contract with the names of the buyer concealed, he refused too! Frankly, even if he showed me the contract, he could have given a 20% discount on the SPA price so even if it showed 500k, it could actually be 400k! Everybody tells me that prices in Iskandar and KL are rising, based on iProperty's advertisement. But those are asking prices! The bid-ask spread could be very wide! Agents could easily manipulate and create a perception that prices are indeed asking. Unlike in most developed countries, I am unable to check caveats lodged and their prices! In the UK and US, I can check the date of the transaction and the price for every house/apartment, right down to the exact unit and the exact floor! Singapore should move towards that level for transparency! In UK, no developer is allowed to give discounts on the declared price so perhaps Singapore should enforce that too! Otherwise it is no point gathering data on transacted prices. I believe prices in most Core Central Region's new projects have already fallen by 10 -20% after discounts, but the property price index showed that prices continued to inch up!
4. Secondary liquidity is untested. I do not know how easy it is to sell your units on the resale market. I suspect that prices tend to rise slowly as an off plan unit approaches TOP, but start to depreciate after TOP. If your unit is 3 years old, you may have to price is at around 10% below the new launches nearby. But if it is over 10 years old, depending on how well the condo is maintained, it may be 20 - 40% cheaper than new launches!
5. Title deed may never be transferred to you! Many developers fail to transfer title to you after TOP, even if you did not take a loan! The legality of this ownership is in doubt in this case. This may mean that the developer has not paid off all its loans to the banks.
6. Nowadays, developers require you to take a bank loan before you can buy. In the past, this is not required and many buyers default on their purchase just before TOP, especially when prices fell. Now, the buck is passed to the banks. With a 110% financing, what would happen to the banks if prices start to tank? It could be a repeat of the Asian crisis again. This was exactly what happened to Spanish banks in the current crisis.
