When we speak about property investments today, the general assumption is that it is a GET RICH QUICK SCHEME. The true essence of investing in properties has been blurred with many seeking to make quick profits where properties are treated like commodities rather than an appreciating asset. In good times, properties are traded or resold in short periods of time. This is usually referred to as FLIPPING.
A SHORT HISTORY
Over the last 15 years or so there have been many investors who have actually made money in the short term. This started in early 2001, after the Asian Financial Crisis. Property prices were flat and many were unable to repay mortgage payments. Effective 1st January 2001, the government waived the Real Property Gains Tax (RPGT). This was used as a stimulus for property transactions and to encourage property development.
Over the next few years, the property market picked up steam and prices of properties started to climb. This then spurred on the developers as well and it was all honky dory with many new projects launched over the next few years. However, this eventually ran out of control. Property prices started to escalate furiously and the MANTRA was: If You Don’t Buy Now, You Will Not Be Able To Buy In The Future.
MISGUIDED, PROPERTY INVESTMENT ACTIVITIES
Property investments became the hottest topic at all social functions and the media paid a huge amount of attention to this. Many made handsome profits in short periods of time and that prompted others to follow suit as it was deemed to be the road to riches. With that in mind monies profited from the early sales were reinvested in other properties which further accelerated investing activities.
Soon after, there were many Self- Acclaimed Gurus who were hosting seminars on striking gold via property investments. The market was a buzz and thousands of people invested heavily in new property developments merely to resell upon completion of the project. At this point the basic fundamentals on property investments were ignored or should I say grossly misunderstood. It was all about buying in and cashing out upon completion. It was about making quick profits.
GREED AND EMOTIONS
Initially the investors were happy to purchase one or two properties. Then greed set in, investors began pooling their resources together to qualify for loans. There were all kinds of offers and deals being offered by developers. Discounts on the purchases, No Money Down Schemes, Guaranteed Returns and so on. The buying frenzy carried on.
To further escalate the buying frenzy, developers introduced the Differed Interest Bearing Scheme (DIBS). This scheme allowed investors to pay a minimal down payment and thereafter only start servicing their loans upon completion of the project. This scheme made purchasing a property very easy and further enhanced speculation. The response to DIBS was over whelming as from a cash flow perspective, it was perfect.
In the midst of this frenzy, Bank Negara became concerned as many of these investors were over gearing themselves and property prices were escalating at a feverish pace.
Then came the cooling measures imposed by Bank Negara in January 2012. The new buzz word was Responsible Lending Guidelines. The implementation of the new guidelines had an impact on the volume of sales and suddenly, property investments seemed like something from the past, a forgotten misadventure. Today, many who had purchased to cash out upon completion of the developments they had invested in are caught.
THE REALITY IN PROPERTY INVESTMENTS
Property Investments in Malaysia, is generally safe and secure. Historically, since our independence, property prices have gradually increased in value. While the property market did experience downturns in 1986, 1997 and 2008, prices very quickly recovered and surpassed previous levels. This is largely due to our Asian culture, where a great amount of importance is placed on property ownership.
What all investors must realize, is that property investments work well when a long term approach is taken. Rental incomes grow over the years and with inflation creeping in every year, values also tend to appreciate.
THE OPPORTUNITIES AVAILABLE
Today, there are numerous opportunities to invest in, office spaces and shop offices offer investors good long term tenants with escalating rental reviews. Factories tenanted by multi- national companies are also available for sale with long term tenancies locked in.
The problem today is that the returns on investment (ROI) average at about 4 to 5% annually, this does not meet the criteria set by most institutional investors and the individual investors are not particularly excited with these kind returns as well. This is because, with a 7% ROI, the rental returns covers the monthly mortgage payments. This is the ideal investment scenario.
It is my humble opinion that, not only in Malaysia but even globally, margins on safe and traditional investments are becoming thinner as the demand for safe and secure investments are highly sought after. Pension Funds, Insurance Companies, Investment Houses etc are constantly looking for opportunities with such returns. The more volatile investments definitely offer better returns and are readily available. So if you are a little more adventurous there are many investments out there that will give you returns in excess of 10%. However be prepared for the unexpected.
A REALISTIC APPROACH
For the individual investor, my advice is simple, buy in now with 4 to 5% returns and hold on to your investment for 5 to 7 years at least. Rental values will be reviewed and in the longer term achieving a return of 7 to 8% will become a reality. Additionally, your properties would have appreciated in value should you decide to liquidate.
In conclusion, property investments generally are safe and secure, but to ensure a profitable exit strategy, do not over gear on your borrowings and ensure that you are willing to hold on to your property for a minimum of 5 years. Property Investments call for careful planning and patience.
By Nixon Paul.