Property Prospecting 101: Is This Place Gonna Be Hot? (Part 1)

GoodPlace Girl

Unlike guru talks and seminars which often offer nothing more than anecdotes about “upcoming hot property areas”, you can in fact do the prospecting for an area rather accurately – simply by running a set of simple numbers. In fact, you can be assured that most savvy investors are more analytical in their approach; they do not completely “rely on (their) gut” as much as regular folks would think that they do.

I’ve asked The Mentor over last weekend’s tea and scones session at his sprawling estate at Nilai about his opinion on the subject of “gut vs numbers”, and his answer was simple:-

Trust your intuition, but make sure that the numbers add up.
The Mentor

I was thinking of writing up a short guide on prospecting an area when this email came in –

Email from GoodPlace reader

Christopher was one of the earliest readers of the GoodPlace Digest (at the time of publication of this guide, we are already hitting the 2,700+ subscriber point), and someone who I talk to (via email) to get reader feedback. And yes, I read and reply to every email and call that I get 🙂

So here’s what you need to know…

Before you plonk down your hard earned dough on a property, remember that prices of properties, like everything else, are a function of supply and demand. When demand exceeds supply, prices go up. Obviously, the reverse is also true.

pricing-diagram

And so, to figure if a place will be “hot” – and assuming that “hot” here means that prices go up – then you’ll only need to look at the drivers of supply and demand. You will therefore want to invest in places where supply lags demand, which then pushes up prices and rent levels. If you know the elementary techniques of property valuation (an example here), you will be able to ballpark the increase in prices of property in a particular area. Also, the steps outlined in this short guide are relevant whether you are investing for the long term, or if you have the intention to flip.

Now let’s first look at the drivers of demand. The following are some macro factors that drive demand, arranged from possibly the strongest to the weakest:-

  1. Growth in population.
  2. Adjacency factors.
  3. Availability of jobs.
  4. Income levels.
  5. Ease of doing business.

This list may not be exhaustive, but is sufficient for those who want a “screener” of sorts to quickly identify good areas to invest in. Now let’s go through these factors one by one.

Step #1: Check Population Growth

Identify if the population in your area is growing or declining. Are more people moving in or out of the area? Especially in the case of “fringe” townships in the Klang Valley, it’s good to check where the heaviest growth is, and the possible reasons, too.

For example, Cyberjaya was (is?) growing because of multinationals setting up IT shops and the blossoming of colleges which attract local and international students into the area. Also, be wary of “dying” townships, too. In the US, for example, I’ve seen a 2,400+ sq ft landed property being advertised for sale for $1 (yes, one buck) – see the screenshot below.

House in Detroit, Michigan being advertised for sale for $1. Ad seen at Trulia

House in Detroit, Michigan being advertised for sale for $1. Ad seen at Trulia

The house was in Detroit – where the population has fallen from 1.9 million in the 1950’s to merely 700,000 in 2012, and the declining trend is set to continue. To sidetrack a little, here’s some (strangely) beautiful pictures of abandoned buildings in Detroit.

Action Step: Identify the trend by looking at the number of people moving into (or out of) the area.

Step 2: Adjacency Factors

Often, when an area is “bursting at its seams” the adjacent areas will get the (positive) spillover effect. You can easily identify upcoming (adjacent) areas by looking at the evidence that the area is reaching its limit:-

  1. Are there traffic jam problems?
  2. Are the prices or rental rates going (shooting!) upwards?
  3. Is there a perception that “land is running out” in this area?

Emerging adjacent areas often attract people who want to avoid the escalating prices in the “main” area as well as worsening living conditions resulting from rapid growth. An example would be the “North Kiara” as well as the rest of the Segambut area – which is adjacent to Mont Kiara.

Mont Kiara, Segambut

The Mont Kiara enclave is set to get “enlarged”, eating up what’s left of Segambut

Action Step: Do a shortlist of areas which are experiencing rapid growth for the past 24 months, and map out the adjacent areas which may get the spillover.

In the Part 2 of this mini-guide, we’ll talk about the rest of the drivers of demand (economical and income considerations) as well as the supply factors (new + existing developments and infrastructure). Click here to continue…

About Khai Yin

When I am not writing for GoodPlace.my and helping my readers find properties though the DealMatcher service, I spend time doting on my three kids: Wenyi, Qinyi and Eian. My personal stuff, some published essays and contact details can be found at khaiyin.com

Comments

  1. Gd advise, Monk Kiara already over supply, most unit cant rent out, plaza damas 3 also facing same problem, guess many units cant rent out n price r falling. Any advice on plaza damas3 as I was almost bought a unit. Owing one studio unit at Mayfair service apart. Plaza damas4 stopped work for quite some time due to plaza damas3 poor respond of selling by some speculators whom enjoyed DIBS n debate n unit was over price, buyer r paying future’s price. Pls advise.

    • Yes, there is a terrible glut at Mont Kiara. Personally, if I’m going to invest, I’ll make sure I have the staying power (and not rely on rental yield), and then wait for the imminent firesale.

      On a broader sense, I’ll check if there’s possibility to generate immediate (and substantial) cashflow for any property I’ll buy, and it does seem that at this moment not many Mont Kiara properties will fulfill this criteria. YMMV. 🙂

  2. Its true developers r selling future values, yet people/investors still buying , guess is the greater fool theory, or ignorance, as many investor r 1st timer, developer’s sale packages made their property seem affordable vs subsales.
    Question wld u buy a office unit here at Megan Avenue II ab 2,000 sf for RM1.4 m with current rent of RM7,000 with a net return more than 5% after less service charges & maintenance than to buy one project across the road selling for RM1,500 psf + completion in 3 -5 yrs time , no not knowing what wld b the value apprciation like.

  3. Any idea abt I-city in Shah Alam – looks very promising giving the msc status there and the Central Plaza Mall just next to the few blocks of condos and a super huge hotel, The Jewel also coming soon there with LRT next to it in the future. Need yr advice whether I shd go for it. Size of unit 466 sq ft from RM350k and 566sq ft from RM460k.

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