The Edge Investment Forum on Real Estate 2018: ‘Make sure there are traffic jams’

This article first appeared in City & Country, The Edge Malaysia Weekly, on April 16, 2018 - April 22, 2018.
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There are many more aspects to consider apart from location when it comes to property investment, according to Reapfield Properties group chief operating officer Jonathan Lee. He was speaking at The Edge Investment Forum on Real Estate 2018, themed “Opportunities in a Challenging Market”, organised by City & Country.

The 12th edition of the annual forum was presented by Sunway Property and supported by It was held at Sunway Pyramid Convention Centre in Petaling Jaya on April 7.

Lee's presentation was on  “Buy-to-rent: Zooming in on properties RM500,000 and below”. Noting that the economy does affect the property market, he said it is crucial to understand the current situation in the micro environment before investing in a location.

“There are three main things to consider — federal government intervention, the involvement of the state government and lastly, the private sector. The MRT, LRT and the like are all federal government initiatives. The state government will take care of things such as land acquisition, and the private sector will then come in to develop the location. So, if you want to invest in a location, make sure these three things are in play,” he advised.

Touching on the 12 key initiatives in the Economic Transformation Programme, Lee said the first initiative was to increase the population in Greater KL/Klang Valley, which will have an impact on the property market.

“In order to do that, there is a need to increase high-impact economic activities. When you are investing in a property, ensure that the surrounding areas have a good number of high-impact economic activities.

“In short, make sure there are traffic jams in the area. No jam, no gain,” Lee said to laughter from the participants.


Exciting times

The Kuala Lumpur-Singapore High-Speed Rail (HSR) — targeted to start operations by 2026 — and the upcoming MRT Line 2 and Circle Line are expected to impact the economy.

“These projects will create jobs. I echo what Foo Gee Jen said earlier in his presentation — we need to increase the population of good foreign labour and bring back the expatriate market to be involved in economic activities.”

Foo, the managing director of CBRE/WTW, had covered the topic “Market Outlook: Which sectors are expected to perform better this year?”.  Answering a question from the audience on the possible impact of the new rail lines, including the HSR, on certain locations, Lee stressed that based on the history of cities with excellent transport systems, there will definitely be improved demand for properties near the connectivity points.

“However, our behaviour will first need to change. A lot of us still prefer to drive. There is a gestation period for a shift in behaviour for the majority of the population to move towards public transport because we grew up driving. So, if you look at your investment from this perspective, I would encourage a longer-term view on your assets,” he said.

The government has projected 28,700 new jobs by 2020 from the HSR project. Lee noted that Jack Ma, founder of the world’s largest retailer Alibaba, had chosen to set up its regional distribution hub in Malaysia, and believes it is due to the multicultural and well-educated population.

Looking at gross domestic product growth in Malaysia, Lee said despite a dip, the economy is still growing, albeit at a slower rate.

GDP growth is at its strongest level since March 2015, with average annual growth of 4.76% from 2000 until 2017, he noted. Private consumption rose at a faster pace in most sectors too.

“We can potentially see some positive economic movement in the country. It’s important too, to take note of the fact that the median age of our population now is 28 years, and that the most active age — between 15 and 64 — made up 69.4% of our population as at 2016. This means we have the most productive generation right now and we are still considered a young population. The majority of your prospective tenants will come from this group.

“We will potentially see more urban migration into Greater KL by 2020 and as that happens, demand for properties will increase. We are living in very exciting times right now,” he said.


Understanding the consumers

A good chunk of the tenant market will be the younger generation as they enter the workforce as well as those migrating from other states.

Zooming in on Gen Y, Lee said it is important to understand their expectations and behaviour before investing in a buy-to-let property. He noted that while some of the older generation may find certain designs confusing, the younger generation may like them.

“Nowadays, we have apartments with balconies bigger than the actual unit or properties with private gardens, even though it is hot or wet all year round here and people will hardly use the garden. But they sell. A lot of tenants like it because it’s cool.

“What is important to the younger generation is the experience. Think about this: you buy coffee in Starbucks for RM15 but you can get a good cup of coffee in a kopitiam for RM2.60. Why do you go to Starbucks? Because people remember your name ... it’s the experience,” Lee joked.

“Remember, a tenant’s perspective is short term. There are many reasons why people are renting. For example, those moving from other states may not be sure where to stay so they will try out a place or location to see if they like it. Giving them that experience is important. Know what the location and the surrounding areas can offer.”

The challenge, in his view, is that some of these younger customers in the market do not have a very high budget. The good news is that these days, a lot of properties are being sold at a more affordable range of RM400,000 to RM500,000.

“We have more options now. There is a difference between buying to stay and buying to let. If it is the former, that is very subjective — it all depends on the needs of the buyers. If it is the latter, it is important to understand what the tenant wants.

“The key to getting good tenants is knowing how to add value to a person’s experience. There are some very creative developers today that come up with good products. Make sure you buy from a developer that takes the initiative to understand the consumer and designs accordingly. I’ve always believed that when it comes to investing, your biggest partners are the developers because they are the ones that will be creating value, not only for the development but the surroundings as well. The price is only an indication; the whole ecosystem is important,” said Lee.

Citing Sunway Property’s Grid Residence in Sunway Iskandar as an example, Lee said the developer empowered the buyers by allowing them to design their own layouts.

“Empowerment is very important to the younger generation and the development has done very well,” he said, and such products may be what your tenants like.

A participant asked about taking a longer-term market view for the older generation who want to live closer to their children and what types of property to consider.

“We still have a very Asian culture that places emphasis on family. I myself live with my wife, son, two dogs and my mother-in-law. Having expanded families is pretty common for us. So, a dual-key apartment may be a good option,” he replied.


Opportunities in gentrification

Gentrification is something we are seeing more of in the Klang Valley and Lee believes there are good opportunities in areas that are being gentrified.

“Take a look at Section 13 in Petaling Jaya. It used to be an industrial area and now, we are seeing commercial and mixed-use developments coming up. This is the kind of location you should look at. I always encourage investors to look at heavily-populated areas with lots of amenities and high-impact economic activities because there is always a lot of demand there,” he advised.

The location must be integrated and sustainable, with amenities such as schools and hospitals.

“In the old days, people did not want to live near hospitals and now, they want to. Why? Because both groups are afraid to die,” he joked.

“In all seriousness, it’s convenient to live near hospitals these days, and schools and higher education institutions are important to a location. If you invest in a property near higher education institutions, especially private ones, you will get potentially good rental returns.

A participant asked Lee about the recent launch of 204 units of landed property in Sepang, which were sold out within hours despite the distant location and the current economic situation. The houses carried price tags of RM479,900 to RM684,000.

“Sepang sits on the edge of the Klang Valley and is home to KLIA and klia2. I believe buyers are buying for their own stay. There are a lot of upgraders from older locations in Sepang. This is an example of gentrification where developers come in to build and redevelop. There are already a few big developers in Sepang. China’s Xiamen University has a campus there and there are lot of people working in the two airports.

“That phase only has 204 units, which is a good number to sell. If it had been 2,000 units, the story might be different. I believe the developer is selling bite-sized phases. I think buying for own stay was the key driver for the strong performance. It is probably a clear case of demand matching supply,” he said.

On a question on whether there are statistics on vacancy rates in KL to give a more accurate picture of the oversupply situation, Lee said unfortunately, there have been issues with the collection of rental data.

“It has been a challenge for all of us. There simply isn’t any rental data in Malaysia. We don’t have a registry of tenancies. In places like Singapore and Hong Kong, you can get rental data by the week, if I’m not mistaken. This can create a very transparent market.

“I know some people try to gauge the occupancy rate of a high-rise by driving past at night to see how many windows are lit but it’s hard to guess the rate based on this alone. The people living there may have an active lifestyle or may be working late ... we don’t know.

“I hope in the future, we will have access to more timely data. A lot of groundwork needs to be done to help us better understand the market. Right now, if possible, go to the ground and talk to an agent specialising in the location you’re interested in and get them to show you around so you will have a better understanding and make more informed decisions,” he advised.

He ended his presentation with this piece of advice: “There are lots of opportunities ahead. There are seasons with more opportunities and seasons with less. I believe it is the former now. Investors, do your research. Look at both the primary and secondary markets. This is the right time to look for opportunities.”