Why I Seldom Venture Into Real Estate in Developing Countries (KL, Manila, Iskandar). Must Read!

USD350k for a Manila luxury apartment, only USD150k for a Phnom Penh condo, USD400k for a KL apartment! I avoided them all! 

http://ifonlysingaporeans.blogspot.sg/2014/06/mega-reclamation-project-off-johor.html

I have been raising concerns since beginning of 2013 about the lack of proper planning by Iskandar authorities and the flood of supply coming on stream. Iskandar has currently around 1.7m inhabitants, and require just 350k of housing units. Currently there are around 400k of homes, with another 180k coming on stream in the next 5 years. There is enough homes for 2.61m. Yet the population growth in Iskandar has been below the expected 3.3% per year, more like 1.5%. I expect residential vacancy rate to shoot up to 30 - 40% in the next 5 years. This is similar to Iskandar's office space, which has a similar vacancy rate.

Refer to the hyperlink above, they are even building on reclaimed land that has not been allowed to settle for 10 years. This is a danger to the structures being built! Yet the developers have the cheek to start selling units to foreigners. Ask any local and they will tell you that they will never buy in Iskandar, other than the existing JB old town.

Building Already Has Begun in Newly Reclaimed Land!!

 

If you read the blog below, crime is increasing in Bt Indah. This is exactly what I thought would happen once more foreigners settle there. The situation has not improved unfortunately.

http://horizonhills.wordpress.com/

A YouTube Video of a Dramatic Car Break In

https://www.youtube.com/watch?v=0H8cMX_Iysg
 

I also understand that several projects in Danga Bay are being sold without permits. I guess it is quite a cowboy town.

There is no scarcity of land in Iskandar, and with the massive oversupply, I expect rental return to be non-existent. When Bank Negara hikes rates, and Singapore enters into another recession within 3 years, we should see firesales occurring. I think only people who own residential land before mid 2013, or who bought landed properties before 2011 will stand to make money.

KL is another bubble, but to a smaller extent than Iskandar because the city is mature. Still, there is no shortage of housing in KL. Just look at Mont Kiara, half the tower blocks are dark at night.

Investing in third world countries is very tricky, especially when you buy off-plan properties. The money goes straight to the developers. If the developers abandon the projects, you get nothing in return. In developed countries like Australia, UK, your deposits are insured by the government and you only pay 10% downpayment, with interest deferral schemes. If you wish to venture in to third world countries' real estate my suggestion is to go for existing properties where you see the final product. Get a good lawyer to act for you and make sure the title is yours. Better still, get financing from a local bank so that they will do even more due diligence than you. Remember, property without leverage is never as good as stocks / bonds. Global Stocks appreciate 10% per annum for the last two decades. In Singapore, it's 8% per annum for properties without leverage. In KL, only 8% as well. But if you leverage at 80% LTV, your IRR rises to around 28% SO the return dynamics change dramatically. I can't understand why one would take cross-border risks, developer risks, and liquidity risks to invest in real estate without leverage involved.

We could see a hefty correction in Asian real estate in the next 3 - 5 years. This is just my personal opinion. But I've called several turning points correct; the bottom of the US property cycle in 2012, the bottom of the London prime market in 2009, Greater London recovery in 2013, peak of Singapore and Iskandar in 2013.

Finally remember in finance we have risk premium. In a third world country, I'd require a much higher risk premium to compensate for the risk, meaning I require double the return. If I project New York real estate to appreciate 6% per year excluding leverage, and 25% IRR post taxes and costs, I would expect a Manila project to give me 12% per year ex leverage and 50% IRR! Without that, I'd never buy. Remember, 25% IRR or cash on cash return out of a 1% risk is much better than a 49% IRR on a 25% risk!

Stay safe, and remember Warren Buffett's advice, "rule number 1, don't lose money. rule number 2, remember rule number 1" :-)