Watch out for 2013

In Greece, the economy will have to shrink by a fifth since 2008, GDP fall by 6.2% in Q1 2012 with no sign of recovery and youth unemployment topping 50%. Overall, unemployment spike to record high of 21%; more than 100,000 small businesses closed; wages and pensions have been badly cut. Its budget deficit, despite stringent efforts to consolidate, will reach 7.3% of GDP, and increase to 8.4% in 2013; by then, it debt/GDP ratio will rise to 168%.

The above is just an excerpt from an article in The Star’s Biz Week (Saturday, 19/5/2012). I believe most of you noticed that there are many headlines about world crisis in whatever you read, particularly on what’s happening in US and Europe. Even China is showing sign of economy slowing down this year.

The whole world seems so wrong but Malaysia is doing so well. Our stock market (KLSE) has just touched all time high recently. Bank Negara has to tighten the lending guidelines to cold down the property market because everyone seems to buy properties like buying vegetables (although property prices are also at all time high). Everything seems so unreal.

It’s not too hard to understand. Every time there’s an election, the government will spread out as many good news as possible, spends as much money as it can to stimulate the economy so they get votes. So the economy is going to look better than it does normally. Many expected our General Election (GE) by Q2 or Q3 this year. United States Presidential election is on Nov this year. Expert predicted more challenging times ahead for the world economy in 2013; after Malaysia’s GE (from micro perspective) and US Presidential election (from macro perspective).

Watch out for 2013 and starts bulletproof your portfolio.

Yield Compression

Rental yield (or simply known as “yield”) is a common indicator to gauge performance or returns of your investment. In laymen term, yield is percentage of rental return (in one year) from your property if you buy it with cash. For example, if you buy a low cost apartment for RM120k and total rental for a year is RM12k (i.e. rental of RM1k/month). Then yield (or more appropriately known as “gross yield”) for this investment is 10% per annum. This also means, if you have RM120k cash in your bank account that probably giving you up to 3% interest per annum. It’s more advisable for you to buy an apartment because that investment will give you “extra” 7% per annum. Besides, rental yield that one’s may enjoy in yearly basis, there are also potential upside from capital appreciation of your property.

For “net yield” calculation, you may deduct expenses such as building management fee, fire insurance, assessment (cukai pintu), quit rent (cukai tanah) and etc from your annual rental. For example, if all your expenses add up to be RM2k; then, net yield of your property is (RM12k – RM2k)/RM120k = 8.3% per annum. Bear in mind that all the above calculation is based on assumption that you buy the property with cash.

Based on Klang Valley housing property monitor (1Q 2012) published in City & Country recently @ 14 May 2012, we can see a drastic drop in gross yield. This phenomenal is also known as “yield compression”. Yield compression happen when rental increases at a slower rate compared to rate of property price increment; or worst if the rental remains the same but property price increase over the years. The table above shows gross yield for terrace houses has been reduced from 3.2 - 5.4% in Q1 2008 to 2.5 - 3.8% in Q1 2012. On the other hand, gross yield for high rises residential has been reducing from 5.2 – 8.3% in Q1 2008 to 4.3 – 6.6% in Q1 2012.

However, I want to highlight that although the average gross yield has been declining for properties under limelight (those being monitored by property consultancy firm), it’s still possible for one’s to get a property that giving yield at high side. Just 1 month back, I have a friend that bought a shoplot at 7.2% yield and my sister bought an apartment at 7.5% yield! For me, yield is just part of the story because tenant (rental) may come and go; more importantly is the property long term potential.

What’s the yield of property you acquired or acquiring recently?

All time high property prices

Whoever you meet and in any conversation, high chances that the conversation will touch about high property prices, investing in properties or investing in stocks. Awareness in investment seems to be all time high in conjunction with all time high KLSE Index and all time high property prices.

In Q1 this year, we see demand for properties has soften due to tightening of the lending policy by Bank Negara such as 70% loan for 3rd residential properties (onward) and use of net income (instead of gross income) for Debt Service Ratio (DSR) calculation which in turn used by Bank to decide on loan approval. According to bankers, loan approval rate had come down; but we know the property prices still inching up. 

In fact, property prices in Kajang (place I live) have gone a bit insane. For example: 2-storey terrace in TTDI Grove known as Acacia (Phase 9) is selling for above RM680k – RM720k ; serviced apartment in Taman Kajang Sentral is selling for RM368,544 for 1047sq.ft unit which work out to be RM352/sq.ft. For comparison, I bought my 2-storey terrace house (22ft x 70ft) from sub-sale market in 2008 for only RM160k and current asking price for similar houses is nothing less than RM280k. My portfolio growth in tandem with escalating property prices in Kajang because I owned few of my investment properties here. This is what I’m waiting for, since I start investing in properties in 2006. However, I’m in mix feeling; feel happy but at the same time a bit worry on sustainability of property prices. Warren Buffet has stress again and again “Be fearful when others are greedy and be greedy when others are fearful”

I like point brought up by Datuk Alan Tong in yesterday The Star’s Biz Week (Saturday, 12/5/2012) titled Food for Thought: Applying the brakes – made for the short term – can be dangerous. According to him, the basis for rising property prices now is largely due to the direct and indirect impacts of quantitative easing programmes i.e. the increase of money supply, carried out by governments around the world since the start of the global financial crisis. This phenomenal is called “value slump”. When there is too much money chasing too few goods, prices will increase but not necessarily value. In reality, we are facing a situation where there is too much money in the system, causing a decrease in the real value of money and pushing up prices of goods and services including construction materials.

He gave an example, in early to mid 2000, a condominium in Mont'Kiara which was sold around RM500k would now cost us about RM800k today, equal to a 60% increase. But if we measured in a different “currency”, that condominium would have cost us 8kg to 10kg of gold in early to mid 2000 and today, only worth about 5kg of gold. This is a sharp decline of 38% to 50% and is an illustration of how prices are going up due to the drop of currency value because of worldwide inflation and pump-priming policies.

Property developers will always “justify” the high property prices was due to increase in construction cost and land cost. This has been pointed out by Daniel Lim, COO of Property Development Division in Sunway Group during his presentation at The Edge Investment Forum on Real Estate 2012. But seriously; how long can it sustain if we are currently facing “affordability” issue? The income for average Malaysian is still too low for the high property price. The short answer is “I don’t know”. But my advice to those wants to buy property for investment in 2012 is to be careful and think long term. And remember that “you make money when you buy the property, NOT when you sale”.

Follow Your Own Passion

When Jim Rogers being asked (in an interview) "what is your advise for someone just came out from college in their twenties?" 

His answer is "All you need to do is to figure out your own passion and follow your passion. That's how you are going to be successful in life"

The Edge Real Estate 2012 - Presentation Slides

For those who missed the opportunity to attend The Edge Real Estate Investment Forum 2012,   
I would like to share the presentation slide with you guys here. I hope the organiser and sponsors will not object. Those slides are REALLY good. Check it out!

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Step 5: The password to open the presentation slides is "edge2012"

The Edge Communications

Heritage hotels in the heart of Penang

By DAVID TAN
davidtan@thestar.com.my
Photos by LIM BENG TATT and CHARLES MARIASOOSAY

http://thestar.com.my/metro/story.asp?file=/2012/5/9/metrobiz/11236253&sec=metrobiz

TWO well-known Penang-based companies — Public Packages Holdings Bhd (PPH) and Gan Chai Leng Sdn Bhd — are undertaking the development of three heritage hotel projects with an approximate development cost of around RM75mil at George Town’s central banking district, which will further boost the reputation of inner George Town’s World Heritage Site (WHS) status.

The plans for the three hotels have been submitted to the local authorities for approval.

PPH is undertaking the RM50mil development of the two hotel projects located at Church Street Ghaut, off Beach Street, which is popularly known as the central banking district.

The third hotel, a RM25mil heritage hotel project by Gan Chai Leng Sdn Bhd, is located at Victoria Street, off Beach Street.

PPH hotel project manager Tony Koay says the advantage of carrying out infill development work for heritage hotel projects was that one could maximise the interior of the buildings to suit the needs of modern business usage.

“A problem with restoring a heritage building for hotel usage is that the interior of such heritage buildings restricts the utilisation of space.

“We are doing two five-storey boutique hotels, of which one has a total built-up area of 9,451 sq metre (128,000sq ft), 120 rooms, a business centre, and meeting rooms, and 47 car park bays, while the other has a total built-up area of 2,517sq m (26,900sq ft) and 39 rooms,

“The architectural style for both hotels follows the design of late 19th and early 20th century port offices and warehouse buildings in George Town.

“We are targeting the upmarket tourists,” Tony says.

The cost per sq ft to develop a heritage hotel from scratch is about RM1,000 per sq ft, which is inclusive of finishings, says Tony.

The cost to restore a heritage building is around RM300 to RM400 per sq ft, depending on the quality of finishing use.

Both hotels, scheduled for operations in 2016, are located on a 0.6ha (1.5acre) land, which were previously occupied by godowns in the 19th and early 20th century.

PPH director Tommy Koay says the group invested in the projects because it saw the potential of heritage hotels in the central banking district after George Town received the WHS in 2008.

“We bought the 0.6ha land 15 years ago and have been waiting for the opportunity to start the right business.

“Last year we spent about RM97,000 to restore a 2,000sq ft heritage building located on the 0.6ha site for use as a vegetarian restaurant, which is now operating as Quay Cafe.

“As the business has received overwhelming response, we decided to proceed with the plan to develop two heritage hotels,” he says.

PPH is a main-board listed company specialising in manufacturing packaging products.

Meanwhile, Arkitek ZAA Sdn Bhd managing director Teoh Min Khean said the five-storey heritage hotel by Gan Chai Leng Sdn Bhd was an infill development project, which would be designed after late 19th and early 20th century colonial institutional buildings.

“The five-storey hotel, which has a built-up area of 4,300sq metre, will have 80 rooms and 148 car park bays.

“The project was in line with Unesco’s heritage guidelines.

“The architectural theme of both projects complements the other heritage buildings in inner George Town.

“Both projects should help revitalise the tourism belt of inner George Town,” Teoh says.

Gan Chai Leng is one of Penang’s pioneering developers who developed the famous Chai Leng Park in Seberang Prai in the 1950s.

Another heritage boutique hotel-cum-commercial development project at the central banking district that is scheduled for opening in 2013 is the RM285mil Rice Miller Hotel & Residences, now undergoing development at Weld Quay, the heart of the banking district.

The project, a partial infill development and restoration project, comprises a 48-suite hotel, retail space with 17,000 sq ft of lettable area, two five-storey office blocks, and 99 units of city residences.

One of the well-known heritage hotels in George Town that inspired other heritage hotel restoration projects is the Yeng Keng Hotel at Chulia Street, owned by Datuk Ong Gim Huat of Hoo Kim Properties Sdn Bhd.

Ong spent about RM5mil to restore the 150-year old heritage building into a 20-room heritage boutique hotel in 2009.

The hotel, which started operations in 2010, enjoyed an occupancy rate of about 70% in 2011.

“The renovation of the Penang International Airport, scheduled for completion in September 2012, should help to boost tourist arrivals in Penang and our hotel occupancy rate for this year,” Ong says.

One of the latest restoration heritage hotel projects that opened for business late last year is the Chong Tian Hotel at Rope Walk Road off the famous Campbell Street in inner George Town.

Local entrepreneur Seah Kok Heng says he spent RM3mil in 2008 to acquire three derelict, triple-storey shophouses located at Rope Walk Road.

“I invested about RM10mil to restore the heritage properties and furnish them with antique furniture and porcelains from Tang and Qing dynasties.

“At today’s market value, the hotel with the antiques should be worth around RM20mil.

“Since opening, our monthly occupancy rate is around 50% to 60%. Most of our customers come from Europe, China and Singapore,” he says.

Building blocks: The site of the two hotel projects that PPH plans to undertake at Church Street Ghaut.

Restoration work: An artist’s impression of the PPH hotel project at Church Street Ghaut.

Inviting: The exterior view of Yeng Keng Hotel at Chulia Street.

Splish splash: The pool view of Yeng Keng Hotel at Chulia Street.

Property Investment Stories (Part 1)

Story 1

One of my close friend’s father together with his partner bought a piece of land in Saujana Impian, Kajang about 30 years ago. For those familiar with Kajang, that place was formerly known as Sungai Kantan Estate. They paid about RM600,000 for the 20 acres land (RM30,000/acre). Today, the land is surrounded by shop offices, high end terraces and semi-Ds. It’s worth about RM1,000,000/acre today! This is increase of 35 times over a period of 30 years or 13% grow in value (every year consistently) for last 30 years. What other investment can give you such return consistently for so long? The lesson is; THE BEST INVESTMENT ON EARTH IS EARTH!

Story 2

During one of our visit to my relative’s house in Pahang, my relatives told us (me & my wife) that it’s time to get a “walker” for my daughter. She needs to learn how to walk very soon.  They recommend us to buy the “walker” from a Bicycle Shop nearby. After lunch that day, we drop by the Bicycle Shop to look for a “walker”. The shop run by a husband and wife team, I think their age is between 60 to 65 years old. The lady boss served my wife and I’m chit chatting with her husband. I later found out that they bought that shophouse about 35 years ago for only RM20,000 and most recent transaction was RM850,000. He subsequently shared that they also bought another 2 shophouses in the same row; one for RM250,000 and another for RM450,000. The RM450,000 unit is adjoining to their Bicycle Shop. I believe it’s just matter of time before big corporation or bank will pay high premium to acquire the 2 adjoining units. This is not an example of impressive property portfolio but the lesson learnt here is how hardworking, prudent lifestyle and saving can ensure everyone a good retirement.

Do you have any story to share with me?