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FOREIGN EXCHANGE AND PROPERTY INVESTORS

Real estate investors come from two different perspectives; the locally-based investor and the internationally-based investor. Depending on which one you are, there are different ways of factoring in the exchange rate and the way it affects your property investments. Foreign exchange trading allows someone to further diversify their investment portfolio and if you are an investor in international real estate, you cannot underestimate how useful this can be to your investing strategy. The link between foreign exchange and investing in international real estate is quite simple to understand, and with due diligence it is possible to make sound investments.

Over the past year there has been significantly increased volatility in the global currency markets and if you are an investor in international real estate, it would not surprise me in the slightest to hear that you have noticed that investing in international property has become very expensive in some places, and likely far more attractive in others. If you invested in property in the United States a year ago, you would have noticed that the USD has since strengthened against most major currencies. That means that just one year later, you could sell your investment and more likely than not make a healthy profit.

On the other hand, if you invested in either Japan or Europe, you may not be feeling as confident as you would have noticed that these currencies have weakened dramatically against the USD over the past year. This means that if you sold your property in Yen or Euro’s now, you would have more likely than not noticed that you have lost money on your investment. What about investing now? Both Japan and Europe will be an attractive addition to most portfolios because their economies are supposed to improve in the future, which more likely than not means their currencies will also appreciate in the future too. Purchasing in either of these two markets would therefore be a long-term strategy.

What about Malaysia? Well, investing in the Malaysian property market from the point of view of an international investor has become a very attractive option, because the Malaysian Ringgit has received complete punishment against a basket of currencies over the past half-year. Due to the continuous pressure the Ringgit has faced, international investors can expect to receive far more money when transferring money into Ringgit than they would have previously anticipated. This means Malaysian property has become attractive to investors, and it would not surprise me to learn that more overseas investors are investing in Malaysia.

Locally-based real estate investors in Malaysia with USD or Euro savings abroad may think of purchasing land by first exchanging foreign currencies into Ringgits and then paying for their property, thereby benefiting from a favourable exchange rate, regulations permitting. Speaking about the global economy, things are looking more positive than they were this time last year. While the dramatic tumble in commodity prices has inspired unexpected pressures on those economies reliant on commodity exports and concerns over declining economic momentum in China are continuing, both the US and UK economy are performing on a consistent basis. Job creation is the star performer of the US economy and has become the backbone of the economic revival in the United States, while the economic outlook for the UK is the envy of developed economies.

Although the pace of economic progress has been questionable at times, there is finally some signs of improvement in both Japan and Europe. The pace of improved economic data from these two major economies has come under scrutiny in the past, despite this we have seen signs that both economies are benefiting from their dramatically weaker currencies in recent weeks. This is something that will need to continue in the second half of the year, although an improved economy in both Japan and Europe would improve the global market sentiment ten-fold.

With that being said, the economies that are reliant on commodity prices have been hit hard by the dramatic decline in the price of crude oil since the middle of last year. This decline has also affected global inflation expectations, and to be honest, only the US economy has managed to escape the downside pressures such an unexpected phenomenon has presented. In regards to those economies that have been negatively impacted by the decline in the price of oil, it is mostly the emerging markets that have felt the brunt of the force and this has result in continuous pressure on currencies such as the Malaysian Ringgit, Indonesian Rupiah, Nigerian Naira and even the Russian Rouble.  

The combination of the decline in the price of oil coming at the exact same time optimism emerged over the Federal Reserve being in a position to begin raising interest rates has truly pressured the Malaysian Ringgit. While it is true that the decline in crude oil has inspired downside economic burdens, the economy of Malaysia is still performing at an acceptable level and the recent GDP report was still stronger than some expected. It is the trader attraction to the USD that has inspired the downfall of the Ringgit, with this being the major catalyst behind the currency depreciating dramatically to a multi-year low against the Dollar this year. As mentioned above, this is not an impact that has just been restricted to Malaysia and we have also encountered a 12-year low in the Indonesian Rupiah, while also seeing record lows in the Nigerian Naira and Brazilian Real.  

The anticipated timing of a US interest rate rise will unfortunately be coming at a time when the emerging markets will have a strong preference towards avoiding any more additional pressure on their currencies. This may be unavoidable, however, the likely US interest rate rise in the next couple of months will mean further downside pressures on the emerging markets in the months ahead. However, the Federal Reserve being in a position to finally begin raising interest rates should provide confidence in the global economy with a massive boost, and this is something that can also help the emerging markets and global economy in the longer-term.

 

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THE ULTIMATE GUIDE TO REFINANCING

Mortgage is a very unique bank product. Why? This is because the collateral being used to secure a loan from the banks is property. Of all facilities you have taken up with your banks, your mortgage is one very unique product where the property value appreciates over time, while your loan depreciates over the time. With this in mind, this positive value asset can then be used to generate additional cash flow for you. Best of all, its nearly a free cash flow for you. More on why it is nearly free will be explained at a later part of this article. How this is achieved is via mortgage refinancing. Refinancing a mortgage means paying off an existing loan and replacing it with a new one.

There are many common reasons why homeowners or investors refinance their properties.

  • The opportunity to obtain a lower interest rate (This is where the mortgage was taken sometime ago when it was more expensive back then)
  • The chance to shorten your mortgage loan tenure
  • The opportunity to tap on the property latest market value in order to finance a new purchase;
  • Debt consolidation
  • The desire to convert to a different mortgage product type (fixed mortgage term loan, flexi mortgage loans or semi-flexi mortgage loan)

1b

REFINANCE FOR LOWER INTEREST RATES/ EFFECTIVE LENDING RATES (ELR)

This is pretty straight forward, if a competitor bank offers you a 1% or 2% reduction in interest rates, you will definitely save from paying more interests. This also translates into a lower monthly installment. If you are renting this property out, you may be able to improve your rental cash flow position from a potentially negative to positive cash flow since the installment is lower now. See illustrations below.

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SHORTEN MORTGAGE TENURE

You may shorten your mortgage loan tenure when you refinance your house. This would allow you to have savings on total interest that you need to pay to the bank. See illustration below.

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Do take note that when the loan tenure is shorten, you will need to pay a higher installment every month moving forward. However should BR or BLR drops in the future, you can opt to refinance to a shorter tenure by maintaining nearly the same monthly installments. This means that you pay the same as you have always been but you are still able to pay off your mortgage in a shorter period of time.

CASH OUT TO FINANCE A NEW PURCHASE OR OTHER NEEDS

Refinancing to cash out with the purpose of making a new property purchase is something, which needs thorough thinking. Though it sounds exciting cashing out from your property that has appreciated by 50%, do note that the cash out should be spent on assets, which will generate further income or appreciation.

The cash out from refinancing are often used on home improvement / renovation, which can tremendously, improves on the property that leads to a better market value on the property. There are homeowners who refinance with the purpose of child education, wedding funds, oversea dream trips, purchasing expensive goods such as furniture, fixtures, cars and etc.

In view that most of the banks in Malaysia do offer flexi-mortgage, if you decide to refinance your property with additional cash out and have no idea on what to do with the funds yet, leave it in your mortgage flexi account in order to save some interest. As such, you will have standby cash on hand without the need to pay additional interest on this cash until you utilize it.

DEBT CONSOLIDATION

Mortgage is the cheapest financing options in town as compared to overdraft, auto-loan/hire purchase, credit cards and personal loan. Refer table below on the financing rate comparison.

With regards to debt consolidation, refinancing would help if you have chalked up debts where their interest rates are relatively higher than of a mortgage loan. For example, a credit card charges with an effective rate of 15-18% and up to as high as 20% for a personal loan. Comparing to the mortgage interest rate of <5%, credit card and personal loan’s interest rates is like 3-4times more expensive. A savvy consumer, like yourself since you are reading this article now, will use the refinancing money to pay off the credit card or personal loan outstanding balance to enjoy potentially three times or up to four times interest savings.

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CHANGING TO A DIFFERENT MORTGAGE TYPE

If you are having a variable rate loan (pegged against Base Rate (BR) or Base Lending Rate (BLR)) but anticipate that there will be major interest rate hikes (for instance higher OPR rate adjustment), it would be great to refinance your mortgage into a fixed rate loans now. This way, your monthly installment amount does not increase even if BR/BLR increases.

Conversely, converting from a fixed-rate loan to a variable rate loan can also be a sound financial strategy, particularly in a falling interest rate environment. If rates continue to fall, the periodic rate adjustments on BR or BLR will result in decreasing ELR and lower monthly mortgage payments, eliminating the need to refinance every time rates drop.

WHAT IS THE COST INVOLVED?

Before you take action in your home refinancing, there are a few items you would need to take note.

  1. a) Moving Cost

This refers to money you would need to spend on in taking up a new loan. Items such as valuation fees, legal fees, disbursement and stamp duty is payable when you refinance. If you are refinancing to save on interest, take note of this amount and compare it against the savings in interest you would obtain through refinancing.

5b

  1. b) Mortgage Lock-in Period

When you are ready to payoff your existing loan early (before the tenure expires), check if your existing loan has a lock-in period and if you are still bounded by it. Banks normally charge a penalty of 2% to 5% (on your original loan amount) if you fully pay off your mortgage within the first two to five years. This “two to five years” period, where you will incur a penalty for early settlement, is essentially the “lock-in period” of your mortgage.

SO HOW DOES ONE REFINANCE? WHAT IS THE PROCESS INVOLVED?

The process is quite similar, just like applying for a new mortgage. The steps to refinance your mortgage are as follow: (assuming you have identified your objectives of refinancing)

  1. Firstly check your current mortgage. Take note on your current mortgage whether it is still within the lock-in period.
  2. Contact a few banks to find out the deals that they are offering. The things need to be taken into consideration on this will be on the ELR, the moving cost, whether it is zero moving cost or partial moving cost are absorbed, and check if there is a lock-in period. Evaluate all these deals and which of them are important and align to your objectives set earlier. For example, if your intention is to cash out where funds may not be used now but later, getting a flexi loan but required to sacrifice to a longer lock-in period would be ideal. Only submit to the bank which meets your objectives.
  3. Always negotiate for a better ELR if you are not in a hurry to cash out. Then compare all your banks offer before deciding which to proceed.
  4. FINALLY, sign up and enjoy its benefits!

 A COMMON MISCONCEPTION ON THE CASH OUT FROM A REFINANCING LOAN.

The debt service ratio of the additional cash out portion of your newly refinanced loan application will be calculated based on a 10 years repayment period. The portion used to pay off your existing mortgage will still be based on normal mortgage tenure, that is up to 35 years. But the above is merely the calculation affordability or debt service ratio. It has no impact to your actual refinanced mortgaged tenure. This is illustrated below:

Customer A has an existing mortgage of RM250,000 outstanding balances and refinances the said property with the market value of RM600,000 mortgage application. Then, the cash out amount, although your bank officer informs you that they would compute your repayment capacity based on 10 year tenure, it has no impact on your actual mortgage tenure and, most importantly, your monthly mortgage repayment. This is done to ensure that you have strong repayment capacity.

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WHAT IS THE ALTERNATIVE BESIDES REFINANCING?

Top-Up loan will be the alternative. It is an additional loan on top of the current mortgage outstanding amount and it is based on the appreciated market value of the property. Some banks may open a new account for the additional top-up (i.e. 2 accounts to be serviced) while some banks may just top it up on the same account, which means to continue with the same account. Top-Up loan can only be done with the same bank from your original loan and most of the time, the bank will follow all the terms and conditions of the existing mortgage features.

The Pros & Cons of a top-up loan are explained below

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FINANCIAL FREEDOM

Meticulous research and sub-sale strategies prove winning ways for a young property investor

By: Aidil Mohammad Noor

Young Magdeline Lim, fresh from college graduation in 2010, first came to realisation that she needed to start an investment because she knew eventually she needed a safe and secure investment for when she retire and can no longer work. After some research, she discovered that property is the safest form of investment that had the longest leverage with the longest loan tenure. Her early strategy was buying to rent, she decided, because she needed to increase her income.

“Property prices back then was still manageable, and the prices weren’t as scary as it is now. Then again, people are not so keen to invest in property as they are now,” Magdeline tells.

Her first property was from a sub-sale market. “It was the safest form of property investment for me as I could see and touch the property before purchasing it. Secondly, the market and amenities and infrastructures are all already there to assess the demand of the unit,” Magdeline explains.

She then narrowed down her choice to Subang Perdana Goodyear Court 7. “I observed the area to understand the traffic flow and population density there. After a while, I found that the area has high traffic and high density population with offices and residential areas and shopping malls within 5km vicinity, and I thought this is a HOT area!” says Magdeline.

After three months of conducting the research, she knew all the Subang Court units along with all the sizes, rental demand and even the market value. “I even knew what kind of families stayed at which type of courts,” she adds.

With only RM7,000 for initial down payment and legal and valuation fees, she finally bought her first property from an agent who’s willing to sell one unit for 20% below market price. But she did not go and seal the deal alone; she went there with her team. With a contractor in her team, she could make a rough calculation on the repair costs needed and, with that as an argument, she managed to get the deal for much lower than the market price.

Good rental yields

Even now, her strategy is still the same: go for sub-sales. “For the past three years, I’ve been investing into sub-sale properties. As you know, there are two ways to make money from properties: buy to rent and buy to sell. All these while, in my 10 years, my aim is to increase my monthly income. Thus that’s why I chose to buy and rent out my units,” she explains. Most of her property portfolio consists of low- to medium-cost units. According to Magdeline, these types of properties generate the highest rental yields. All her units are giving her minimum of 9% rental yields.

For her, the justifications for choosing sub-sales are as follows:

  • Since the property building is already up, she can see and feel and touch the properties, thus eliminating the odds of any possible half-completed projects. She can also use any defects in the units to negotiate for lower price.
  • The demand and supply are all already existent, so it is easier for her to assess the demand for the unit she is buying. Moreover, most infrastructures would already be up and running, which draws the population to that area.
  • She can study and narrow down the demographics of her potential buyers/renters since there are people already buying and/or renting the unit. She would already know exactly what type of people would want to rent her properties – singles or family, locals or foreigners, students or working people. She would even have sufficient data to analyse the yearly trend from the last few years.
  • Since she can safely project and asses the future developments as most of the infrastructure is already present, it is also useful for her in spotting the next area for potential growths, and the credibility of new development projects nearby.

For the past 2-3 years, however, Magdeline thinks that there has been too much supply of properties in the market at ridiculously high prices, and the developers were making this scenario worse off by offering easy entry to allow many buyers to easily buy a property that they financially cannot afford.

“If you have noticed, most of those properties were those small ones like SOHOs, SOVOs, etc., all under the Commercial title to capture the investors who were facing the LTV 70%. So, in the next year or two, I’m expecting a rise in desperate sellers who finally feel the pinch of having to fork out high monthly instalments,” she adds.

“First, if all those projects are finally completed, there would be an oversupply of properties for sale/rent, and the owners will be facing a stiff competition to rent/sell out their units. Second, with the GST and the increased cost of living these days, it’s going to be much tougher to sustain such a high monthly instalments. And this is especially so for those who carelessly bought into more than two units at one go without considering this factor,” Magdeline explains.

This shows how not many people are going into sub-sale market, which lessen her competition in purchase and rental transaction. “Continue to focus on this and soon one will lead to market dominance,” she adds. Also, small spaces being marketed at high prices per square feet are targeting potential buyers/renters earning above RM4, and this means not many are catering for the people who earn lower income range.

Due diligence

Magdeline advises that despite new rules and regulations to control Malaysian property prices, there will always be loopholes. So, she urges investors to talk to more bankers and seasoned investors who know the in-and-outs at the back of their hands, and learn from them. For example, she illustrates, while most people stop at buying properties just because of the LTV 70%, not many know that LTV is applicable for residential properties.

“Hence, why not focus on commercial properties that can still give us 80% margin of financing? Some smarter investors who have a bigger portfolio can easily use companies to invest into commercial properties and still leverage on the higher margins,” Magdeline adds.

In public perception, commercial properties are expensive, yet investors can still get a commercial property that is less than RM300k in certain areas, according to Magdeline, and if investors are creative enough, they would know how to maximise that commercial space to maximise on the rental yields, provided that they do their own due diligence with proper research on the market demands and supplies. “So, buy low and rent out high = good money,” she concludes.

As for 2015, her strategies will be as follows:

  • Remain looking into residential properties in the sub sale market since still not many looking into that area, yet;
  • Keep buying to rent properties because it is still too expensive for many consumers to buy a property of their own;
  • Always be on the lookout for desperate sellers by keeping tab of potential areas; and
  • Last but not least, keep a much closer relationship with bankers and lawyers to share more tips on getting more loans to finance her property journey.

Magdeline now owns a number of properties, and currently she is one of the team members in Freemen, a company that started in 2009 with the objective of sharing the knowledge of investment, and has now become a community that invest together to make their financial lives a success.

“Since I started investing, I’ve always been a fundamentalist, and I am proud to say that I am a prudent investor,” Magdeline says.

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Real estate remains a sound investment

The depreciation of the ringgit will not lead to real estate prices crashing as property remained a sound investment despite the current economic climate.

“Holding property is always better than holding cash.”

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PETALING JAYA: The depreciation of the ringgit will not lead to real estate prices crashing.

The Malaysian Institute of Estate Agents (MIEA) president Eric Kho said property remained a sound investment despite the current economic climate.

“Holding property is always better than holding cash,” he said.

Kho acknowledged that demand for primary or new developments had slowed but not as a result of weakening currency.

He said the slowdown was due to Bank Negara guidelines for banks to be more prudent when providing loans as well as increased construction cost due to the Goods and Service Tax (GST).

Kho said construction cost had increased by up to 15% and some developers were holding back on launching new properties.

He said developers who had launched projects were offering huge discounts to attract buyers.

Kho said there was also a slowdown in the secondary market and those looking to buy could expect to pay between 5 and 10% less, depending on location.

Kho, however, expected this situation to be temporary and said property would eventually appreciate.

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7 things I’ve learned in the real estate business

1. It is key to find the best possible staff and pay them the best you can. In turn, they will usually repay you ten-fold with their commitment and hard work.

2. Ensure you set your goals and have a strategy to achieve them. This will keep you on track and striving for more.

3. Make sure you listen to everyone, because all input is useful. Sometimes even the cleaner has the best ideas.

4. Be tough on those people who do not pay your bills, and don’t accept excuses. This will help to keep you financially ahead of the curve.

5. Make sure you give your staff continual praise. Remember they are your best assets and make your business;  money and credibility, not the buildings, brochures or  products.

6. Lead from the front and be prepared to get your hands dirty. You get more respect this way, and will ensure that the success of the business is a real team effort for everyone involved.

7. Always use professionals as they usually know their job better than you do and it is important to draw on their talents and expertise.

With hindsight one can always say “I should have done it this way or that way”, but experience is about making mistakes and learning from them – and you never stop learning!

It is surprising how sometimes you learn from a mistake in one part of your business operation and it helps teach you something in another part. There is no apprenticeship for running a business and learning is an evolution of trial and error, you just cannot afford to make expensive mistakes.

The best judge is still your own gut reaction but you should always try to get third party opinions to help you decide if your original gut feel was right. Make sure your family support you and use them as a sounding board; sometimes you are too involved to see the bigger picture and a loved one can usually  see the right way through the problem.

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Imagination and the real estate market

“When we imagine the future, we only see today.”

In order to accommodate economic and population growth, a city can either move outwards or upwards. Moving outwards was a trend that was popular in the 80s and 90s that led to the birth of “Bedroom Townships”, such as Subang Jaya, Bandar Utama, Sri Hartamas, Mont’ Kiara, Bandar Sunway and Puchong, to name a few.

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I WAS fortunate to attend a series of lectures in conjunction with the “Business of Innovation 2015” Conference organised by the London Speaker Bureau earlier this month which featured Sir Bob Geldof of “Live Aid” fame.

During his speech, he asked the audience what would be the most disruptive technology this century will witness. Lacking an answer, he removed his smartphone from his pocket and reminded everyone there that we all should pay attention to the power of what we hold in our hands and how it will reshape our collective future.

The digital economy has arrived  

It started with the Internet back in the 1990s and as bandwidth expanded to allow the streaming of movies and music coupled with the birth of social network and the rapid digitalisation of our business, a revolution was created in the online world.

Its impact on the way we do business is beginning to be felt in many industries that did not see it coming, and have had to scramble to change their business models or face collapse.

We are witnessing the great transformation of the digital age. Among its victims are the following industries – newspaper print edition, brokerage, insurance, publishing, travel and now, the big box retail industry. All have had to make rapid changes to their business models, resulting in broad changes to their real estate requirements.

Professor Douglas McWilliams, one of UK’s leading economists, just launched a book called The Flat White Economy: How the Digital Economy is Transforming London and the Other Cities of the Future. In it, he describes the cultural shift over the past decade from the champagne-soaked city to the coffee drinking technophiles. The flat white economy -technology, creativity and marketing made up 7.6% of the UK’s GDP (gross domestic product) and is expected to rise to 15.8% by 2525.

The next wave of demand
So, how do we look into the future and see how our economic demand for real estate will evolve? The key is to see if we too will follow the path of technological innovation and predict how those companies and their employees will view their office accommodation choices. This revolution will also affect the entire civil service as we are witnessing an unprecedented move by governments to adopt online solutions for dealing with the public/government services interfaces. Counter services could be a thing of the past.

For companies today, staff retention is high up on the agenda. Losing starfee earners, whether they be from the capital markets or technology companies, is damaging for businesses, and many are realising that even the cost of replacing support staff can be higher than the rent paid on their workstations.

In order to accommodate economic and population growth, a city can either move outwards or upwards. Moving outwards was a trend that was popular in the 80s and 90s that led to the birth of “Bedroom Townships”, such as Subang Jaya, Bandar Utama, Sri Hartamas, Mont’ Kiara, Bandar Sunway and Puchong, to name a few.

However, such decisions break up business clusters and create the traffic chaos that we witness today as more and more people live away from the city and have to find their way to work every day.

A skyscraper boom?
Today, world cities are in the midst of the skyscraper boom (defined as a building exceeding 350 ft in height). This is seen as a means of resolving the major economic and geographic changes facing cities. London has added 23 new skyscrapers since 2000 compared to 17 in the preceding 40 years.

Meanwhile, New York has added four new towers last year alone. The new enthusiasm for vertical buildings in cities is the change in the perception of companies in relation to their  workers. In the 70s and 80s, it was always a question of cost that companies wanted to minimise but with little thought on how to boost productivity.

However today, firms are viewing real estate as a means of controlling a much bigger cost due to staff retention. This has coincided with a move back to the city centres to live. In short, they are wanting to create a work/life balance for the new generation of employees.

Companies are now approaching space from the perspective of:

  • Creating an office space that staff want to be in.
  • Changing working habits through office design, thereby enabling a higher degree of collaboration among staff members in the workplace.
  • Encouraging the new workforce to move into city centres to be near their workplace.

We have seen an unprecedented building boom of new skyscrapers, with much more to come. Will every developer get it right? Probably not, but there are some very attractive new developments with integrated F&B (food and beverage) outlets and accommodation blended into a single offering.

I believe that the next wave of workers in the cities will be looking at city living with all the amenities close at hand and to their place  of work. Demand for knowledge workers is increasing so is the need to accommodate them in buildings that they find attractive.

The future success of these new skyscrapers may take many of us by surprise. If we had any imagination, we would have seen it coming.

>> Datuk Stewart LaBrooy is the chief executive officer of Axis REIT Managers Bhd.