Since the start of the year, I’ve notice that the real estate market has somewhat quiet down a bit. A lot of people have asked me since, what my prediction of the market would be like.
My genuine answer is “The market is plateauing at the moment, and… it is about time it did!”
Now, I’m not a sceptic of the market, rather, all I am saying is that it’s about time the market consolidated and people took time to really digest what has happened in the market for the past few years. We have experienced one of the most exciting times in recent years, where we saw prices in some areas doubled, if not tripled in value. Perhaps it is time for us to take it all in and let the dust settle a little before the market starts to rally up again.
Many people are concerned when the market starts to slow down while many others are hoping for the upward rally to continue. My personal feeling is; it shouldn’t. The property market is not like any other commodity markets, for example, the stock market, at least not in Malaysia. Multiple factors can lead to the overheating of the real estate sector, also potentially leading to a meltdown. While I do believe we haven't reached that level, we certainly have the potential of reaching that level.
I would like to share my personal points of view on why I say the market should definitely slow down, and I’ve summarized it into the following 3 main points:
We all know that the best reasons to invest into properties is mainly because of the ability for us to stretch our investment ringgit to the max.
Just imagine, with just RM 100,000 (100k), most of us can qualify to take a loan up to 10 times that amount, which is RM 1,000,000! The leveraging factor is simply amazing for this class of investments. While we have experienced our loan to value ratios to be reduced tremendously to 70% since 2010, we can still buy 2 residential properties and take 90% loans before being capped.
The alternative is also to buy commercial properties for investments, as the banks are willing to grant a loan up to 80% of the value, giving us a 1 to 5 (1:5) ratio for the value of our money.
Now, of course we need to repay our loans, which means we need to allocate a certain amount of cash for the monthly instalments.
There have been many investors whom have looked for smart ways of taking up more loans, while minimizing the repayment instalments as much as possible. Several ways in the past are like the Developer Interest Bearing Scheme (DIBS) schemes (which have stopped since end of 2013), where the developer finances the instalment until the completion of the property.
Perhaps you were the prudent one to purchase only one or even none. During the past 3 years, I assure you there were quite a few that bought more than just one of these types of properties.
Assuming Mr Tan was a little bit more aggressive, and went on to buy 3 properties of similar price. Upon completion, he would need to bear an instalment of a total of RM8,094 per month. Within 6 months, he would have paid RM 48,564 and in 1 year, RM 97,128. Assuming even if Mr Tan earned RM 10,000 a month, paying a monthly fee of RM 8,094 would still be a burden to him, right?
The simple term for this, is overleveraging. For many investors, in this situation, what was initially the intention of making money work for you, turned out to be you working for money.
Now, you are probably asking, why would people like Mr. Tan invest so heavily into properties? Well in the past 5 years since 2010, we have seen property prices escalate due to a surge of demand in the market. Where is this surge coming from? Is there a sudden burst of population or foreign migrants coming into our cities?
Well, both yes, and no. While the initial boom was triggered by real demands from home buyers, it was the later years of 2012-2013 that we saw swarm of investors coming into the market, hoping to invest and make some money out of the real estate market. Places like Cyberjaya and Iskandar (Johor) saw property prices rise to new highs, as well as development properties snapped up overnight.
The DIBS scheme was abolished in 2013, to encourage responsible lending. While it is a scheme in the past, I would like to use it as an example to share how this might be one of the property investment traps that exist in the market.
Assuming a Mr. Tan bought Property A, which has the following characteristics.
Property Value = Rm 500K
Mr Tan took a loan of 90% at 6% interest for a 30-year tenure.
Loan amount = RM 450,000
Instalments borne by developer throughout the development period.
Instalments after property completed = RM 2,698 per month.
Upon getting the Certification of Completion and Compliance (CCC), the DIBS scheme stops, and Mr Tan now has to pay the instalments in full. Now, whether you are selling the property or renting it out, you should consider adding just a little bit of renovation to the unit to make it stands out from the rest. Let’s not forget, if you bought it new, there are probably hundreds (if not thousands) of similar units going for sale and rent simultaneously. However, Let’s put this aside for now. Think, if you were Mr. Tan and you had an offer to purchase properties with little or no money down and no financing required for at least 3 years, how many of such units would you buy?
“What was the intention of these investors?” you ask. While I am only speculating, I believe there were mixtures of several intentions. Some of these investors were in for the potential returns from renting, while while my gut tells me that most, were interested in the potential capital gains, in other words to buy and sell quickly to make a quick buck.
So, why would people like Mr. Tan buy so many properties so suddenly? Probably to sell one or two off quickly, for capital gains, since he notice that the property market was on an up cycle.
If Mr. Tan were to expect a 30% gain, he would be expecting to sell his property which he bought at RM 500K, at about RM 650K within 3 years. Now here’s the thing, in 2013, our government reinstated the Real Property Gain Tax (RPGT) to 30%. If Mr. Tan were to sell his property now, he would make almost nothing from it, forcing him to reconsider holding it a little bit longer to make a fair amount of gains from the investment. Now remember, Mr. Tan has to pay RM 8,094 per month for 3 of his properties. If he is not ready to put in more money to do up the place to rent, or ready to hold it for a longer term, he might just get caught in a fix.
I guess this is where I draw the line between investing, and trading. To me, there are much deeper fundamentals in real estate investment that a person must understand in order to get the best out of it. If a person is to ask me how I evaluate the property in determining its value, my answer would be, I do not.
There is little or no true value in the property itself, rather, how the property serves the market, the population, and the needs of the target market where it is situated at the right timing that brings out its true value. It will take some time to study and understand all these factors before one can make a solid judgement whether or not to invest in the properties of said area, and I call this Value Investing.
I felt that in the past years, a lot of investors have misunderstood this point entirely, and have rushed into deals without truly understand its value. When this happens in a large scale, it creates a mob effect, hence surging the market forward without any true fundamentals.
And thus comes my final part. Hearing all that I have said, perhaps one might be asking now, does that mean people like Mr. Tan is going to lose his money? The answer is, “Maybe”.
While the situation may sound morbid, the good news is that the property market especially in Malaysia is rather forgiving. If Mr. Tan were to be able to hold through, the market may eventually settle and starts to pick up again. I would like to defer my view a little from those who are skeptical about the market. While I do believe that we are going through a period of adjustments in the market and we are seeing and expecting the market to be slower in months to come, I am rather confident that the market will start to pick itself up again.
There is a short term over supply in the market and while this may be present, I do believe in the longer term there are still real demands. Holding the local and global economy factors constant, the need for a place to stay will continue to be there.
On a longer term prospective, I do believe that property is like wine. Unlike any other types of investments, there is true economic value in real estate. Give it time to mature, and real estate will eventually serve its rightful place in fulfilling the needs of the population.
So for the impatient few, perhaps it is time to reset your outlook on the properties you have bought and look on a broader horizon to see the bigger picture on how to bring the best value out of them.
A market slow down isn't necessarily a bad thing. Perhaps, similar to wine, this is just an ageing process to boost up the value of real estate.
I am many things, an entrepreneur, an investor, a speaker, and a coach. I am a person who has a thirst of life, and have experienced many failures and successes to make me who I am today. Most importantly, it was the great people I surrounded myself with, and whom have served me, that has made me bigger than who I am.
In return, I now dedicate my life’s purpose to helping as many people as I can to achieve their freedom through properties and beyond, in my company, FREEMEN. We run courses to educate people and coach them to living life beyond just a normal 9 to 5. I am proud to say that we have the largest life-changing network through property investment in Asia, being Number 1 in Malaysia, Thailand and Hong Kong.
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