I had gone over to The Mentor’s sprawling retirement estate in Nilai for a cuppa on a breezy Saturday evening. Earlier in the week he had messaged me that he had bought a newly launched condominium unit in the KLCC enclave at RM2,000 per square feet – a steep price by anyone’s standards. Knowing that he was bearish on luxury properties for the past few years I really needed to ask him.
The Mentor took a sip of his favorite Earl Grey.
“I know you’ve been bearish on luxury properties for a couple of years now. So I guess the question is… why?” I asked.
He merely smiled.
“Khai Yin, do you remember the glut of high end KLCC condominiums which flooded the market back in 2006 to 2008?”
I nodded. “Yes, of course I do. I remember going to one of the launches where one of the developers pulled me aside and told me that they were expecting rentals of some RM20,000 per month. I thought he was insane.”
The Mentor laughed. “Ah, yes. Those were the heady days of upmarket properties which mushroomed all over the KLCC area. And then the global financial crisis came, and those luxury condominiums took a real hit. You know who rents these super expensive apartments, don’ t you?”
“Yes. Expatriates. Mostly, anyway.”
“Exactly. With many multinationals restructuring all over, those expats either moved out of the country or moved into cheaper apartments.”
“I guess mid-market condominiums benefited from this?” I took a guess.
“Well, I personally knew some who moved to Mont Kiara. But it’s not that Mont Kiara is much cheaper, really, despite what most people think. The current rental levels of KLCC condominiums are approximately RM5 to RM6.50 per square feet. Mont Kiara is marginally less at about RM4.50 to RM6,” he explained.
“But those were insignificant,” he then continued. “The rental market took a real beating with expatriates leaving Malaysia. Sadly, many of the high end condominiums didn’t recover even today. Occupancy rate had gotten down to as low as 20%.”
“I remember driving through the KLCC area last week at around 10pm and saw some really dark residential buildings. I thought they were all out partying at the Beach Club or something.”
The Mentor chuckled softly at this.
The Mentor took out some newspaper cuttings and put on his reading glasses. “Well, according to this article from The Star, in the first half of 2012 the average occupancy rate for upmarket properties was as low as 60%. Rental rates also took a hit of some 30-40%. And so you know why I have been bearish on upmarket condominiums for a few years now,” he explained.
“I don’t understand this,” I said. “Why did you buy that new KLCC apartment unit then? All this data doesn’t seem to favor your decision at all.”
The Mentor smiled. “I thought you’d never ask.”
Lessons From A Seasoned Realtor
I‘ll explain everything in a while. You told me that you went to The Edge’s Investment Forum on Real Estate at Royale Bintang last May. How did it go?” asked the Mentor.
Greater Kuala Lumpur will see its population grow from the current six million to ten by the end of this decade, and the property market will swell up to meet this demand.
Previndran Singhe, Zerin Properties
“I really enjoyed it. Lots of meaty content. Kinda short though. It was only half a day.”
“Did you meet Previndran?” he asked.
Previndran owned a real estate agency in Damansara, and widely seen as a thought leader in the industry. Last year, when I told Suresh Thiru that I had wanted to start a property site, he told me to go work for Previn to learn about the industry. And so I spent three months interning for him.
“Yep! It had been a couple of months since I last talked to him, and when I went over to say hi he gave me a huge bear hug. And the dude’s lost some weight!”
“I see. So what did you learn from his talk on that day?” the Mentor queried.
I took out my trusty notebook and flipped the pages. I took lots of notes during the seminar as one would.
“Previn’s got a pretty bullish outlook about the property market this year. According to him, the growth in population and the economy is underpinning the market uptick in the next couple of months and may well extend to next year. Greater Kuala Lumpur will see its population grow from the current six million to ten by the end of this decade, and the property market will swell up to meet this demand.” I read from my notes.
“You know, I agree with him. In fact, population growth is one of the main considerations I take if I want to know if an area is going to be hot. But did he mention anything specific about upmarket properties?” he asked.
I closed my notebook and looked up. “I remembered that he mentioned specifically about the appeal of branded developments. One example that he gave was the Four Seasons Place, and he expected to see more brands come in which would also attract foreign investment.”
The Mentor gave a broad smile.
The Rise Of Branded, Upscale “Hotel Homes”
Interesting that Previn mentioned about Four Seasons Place,” I continued. “I remembered reading an article in The Star back in April which reported the sale of two penthouses at some RM37 million each. That worked out to be nearly RM3,000 per square feet, which was a record of sorts.”
“Yes, that was the highest price ever in the history of Malaysian residential real estate. However, on a total price basis, the record is still held by a Binjai triplex unit at RM38 million.”
“So you reckon that branded developments like this would be the trend in the coming years?” I asked.
He nodded. “Indeed. I see more developers tying up with lifestyle and luxury hospitality brands in order to increase the value of a development. In addition to the perception of prestige, concierge and room services are an important factor that differentiates these branded residences against other types of properties. Also, it’s not uncommon to see cigar bars, wine cellars, fine dining restaurants, business facilities and even private cinemas in these branded properties.”
“I suppose for the premium you’d also expect much higher expectations from the tenants.”
“Surely! Consistency of service is a strong selling point. Security and service levels are usually maintained strictly. This can hardly be matched by any unbranded property,” he remarked.
“Some seem to think that this is catching on only in the emerging markets such as China, Southeast Asia and Russia where “leagues” of millionaires are being minted rapidly, but this is not exactly accurate,” he continued. “There’s One Hyde Park in London, serviced by Mandarin Oriental, is perhaps the top-of-mind example of a branded residence. It has got the unverified status as the world’s most expensive residential building 1.”
“Ritz-Carlton Dorado Beach in Puerto Rico, Blue Hyatt Residences in Miami and The Residences at Ritz Carlton Towers in Boston are a few more examples.”
“So this is not exactly a new thing then,” I offered.
“No, not at all” said the Mentor. “It’s new here in Malaysia, though. And it’s going to catch on, and I’ll tell you why.”
Strong Brands = Better Prices
Personally, I like branded properties because of its capital yield for the long term. And good brands last for a long time. And for someone with a marketing background, you should be able to appreciate the inherent value of a strong brand and how that builds up over time.”
I nodded. “Definitely. Stronger brands means better prices. This is the oft-repeated mantra in the consumer goods industry for example, but I wonder if it also works in the property space.”
“Well, the figures speak for themselves. The median price point for KLCC properties is at around RM1,300 PSF. It’s probably at RM1,000 PSF at Mont Kiara right now. Banyan Tree was at RM2,000 PSF when it was launched back at in 2011, and all 441 units were snapped up2. St Regis Residences is at RM2,500 PSF, and Four Seasons average around RM2,700 PSF.“
“That’s pretty awesome. But with prices as high as that, I guess the addressable market is really small.”
“That’s true to a certain extent. It’s a low volume, high value business. With beautiful margins. And given that this market is still in its nascent stage in Malaysia, the upside is high.”
“Apart from St Regis and Banyan Tree, what’s in the pipeline?” I asked.
“Well, let me see. The RuMa Hotel & Residences on Jalan Kia Peng in the KLCC enclave is a prominent one. Harrods on Jalan Bukit Bintang is more of the integrated development kind with a mall, hotel and residential towers. Four Seasons Place will also feature a retail mall. Ritz-Carlton Residences, developed by Berjaya Land on Jalan Sultan Ismail is another notable example.”
The Dangers Of Overvaluing The Brand
It does seem that a lot of the premium hinges on the value perception of the brand. In some industries we do see some brands getting virtually destroyed overnight due to bad press, often stemming from decline in product quality.”
As long as there is wealth being created AND retained domestically the demand for good branded residences will always be there.
“That’s a good observation,” the Mentor replied. “The reality is that since the developer and the brand owner are two separate entities, there could be some underlying friction if their interests are not aligned. Additionally, construction and operational problems will affect the brand, and for this reason, potential buyers must check if the developers adhere to the requirements and guidelines of the brand owner.”
“Alright. Any other watchouts that one must look out for?”
“While I am optimistic about branded properties as an investment, these are still early days. As such, we will need to look at actual transactional data in order to validate the assumption that branded homes have higher resale value,” he explained. “But given the trends that we see elsewhere, there are good reasons to be bullish about branded developments. High Net Growth Individuals (HNGIs) are growing in numbers, and as long as there is wealth being created AND retained domestically the demand for good branded residences will always be there.”
- The branded homes niche is still in its nascent stage in Malaysia with tremendous upside potential. Its appeal lies in its purportedly strong resale value and long-term capital yield.
- Average uplift over non-branded luxury properties tended to be around 50% or even higher at launch. RM2,500+ PSF seems to be the benchmark.
- Not all “brands” are the same. Some commands a higher premium than the others, and this will impact your capital yield for the long term.
- Don’t overlook developer reputation and quality, and its adherence to branding guidelines set by the brand owner.
- For the cautious, wait for the first resale cycle and analyze the transactional data to determine the actual resale uplift.
- If you’re into property flipping, then follow this guide – it’s also applicable to branded residences.
- As “bait and switch” schemes are rife especially in the luxury segment, it’s important to engage a reputable agency to help you. If you are already looking at specific opportunities and would like an independent opinion, get in touch with us.
Addendum – Q&A
Are both the hotel section and the residential section managed by the same body?
Typically, no. The franchiser of the brand will manage the hotel, while the residential apartments will be managed by a typical joint management board set up by its residents.
What is the franchise fee?
The franchise fee is the monies paid by the developer to the brand owner, and this fee ranges from 4-12% of the total GDV (gross development value). In many cases, this fee is one-off, but some last for a period of say, 25-30 years. When this period ends, then the terms may be renegotiated.
Are there any restrictions on a resident’s renovation plans?
Yes. Since there are certain standards to be upheld in terms of branding and overall look-and-feel, any renovation plans will have to be approved by the franchisee.