How To Invest In Upmarket Properties

A rather nice looking girl at GoodPlace.my office lounge :)

After publishing my last guide where I stressed the importance of putting yield ahead of potential appreciation, I was asked if I was bullish about places like KLCC, Bangsar and Mont Kiara (given that luxury properties have a history of depressed yield).

Upmarket properties have always been tricky because unlike the mass market, prices are not that elastic (i.e. they don’t come down as quickly as the demand slows), and while yield still remains a significant factor, there are other forces at play when it comes to making investment decisions.

For a prime location like KLCC, demand will always be there, and there will be people who will be willing to pay premium prices for prime locations. Under such circumstances, looking at average transacted prices can only provide a starting point (and making judgements with ASKING prices is almost always a mistake – use our valuation guide). When computing fair market value using comparative properties, remember that it can only be an approximation to what the specific property that you are eyeing is truly worth.

Skyline of the KLCC

What this means is that you must be prepared to pay up to 50% more than the theoretical average market price to get a good property at a good location. The extra premium is worth it if you can fulfill the following conditions:-

  • You can improve the property in order to maximize its value
  • You can attract tenants who can pay premium rental (and hence increases the yield)
  • You can attract superior buyers who can pay top price for the property

Why Overpaying Makes Sense (Sometimes)

Savvy investors know that real estate is never about the net price; making money is all about getting a healthy return. As such, don’t fall into the newbie trap of buying a cheap piece of property just because it’s, well, cheap. It’s worth overpaying if you know how to add significant value to a property. You have got to have a plan to convert any unseen potential of the property into real value that will translate into a higher price when you sell it later.

hustle

Sidenote: Go watch American Hustle – it’s pretty awesome!

Competition in the rental market can be extra brutal in the upmarket segment, but with some creativity (and willingness to plonk down the cash for renovation) one stands a better chance of getting rental yield closer to the desired level of 4-5%.

Remember that tenants shopping around for luxury properties to rent are less price sensitive than the average Joe, and sometimes it’s the tasteful decor that could nudge them over despite the higher rental tag.

In short, look for ways to improve the property, and be prepared to pay a premium over the fair market value to get superior returns. Of course, this strategy is not for everyone, but if you’re wondering why yet another unit at Troika at KLCC is sold for RM5 million, then this may be what’s happening behind the curtains. 🙂

Sidenote: If you are researching KLCC properties, check out our sister site, the KLCC Condominiums Database.

What To Look For In An Upmarket Location

1. The Prestige Factor

Anecdotally, the perceived levels of prestige in descending order: Damansara Heights + Kenny Hills > KLCC > Ampang Hilir > Bangsar > Mont Kiara + everywhere else.

I personally like the prestige of having an apartment near (next to!) the Petronas Twin Towers. For many expatriates, KLCC is the first “port of call” when it comes to looking for a place to rent because the Twin Towers is top-of-mind.

The other upscale places have their own distinctive characters which should guide your own investment decisions:-

  • Damansara Heights / Kenny Hills – Old money.
  • Mont Kiara – Japanese & Korean communities.
  • Bangsar – Watering holes.
  • Ampang Hilir – Embassies.

2. The “Good View” Factor

For upmarket properties, good views are hardly trivial. Look for units with views that fit into the requirements of the potential tenants or buyers.

I’ve got a developer friend in Scotland who had built an apartment building in Edinburgh which faced a small tract of unkept land. He acquired the land and turned it into a small park. He then sold off all the remaining units at a 20% premium.
The Mentor

North Korean dude

KLCC condos with a good view of the Petronas Twin Towers command a premium; sometimes to the tune of 20-30% more than the ones that face the neighbouring condo’s sewer tank. 😉 OK, I’m exaggerating, but you get the idea.

In the Ampang Hilir (Embassy Row) area, there are low-rise condominiums which fetch good prices (RM1,200+ PSF – comparable to KLCC levels) despite their age and often near-derelict condition because of their unblocked views of the city. And unlike many condominiums in KLCC, the is no risk of future blockage as buildings in Ampang Hilir obey the height restriction rule as stipulated in the KL Structure Plan –

The existing international character of the high quality and low density residential areas around Jalan Ampang / Jalan U-Thant shall be enhanced. Low density control and prohibition of high rise development shall be applied to Taman U-Thant, Jalan Damai, Jalan Semarak and Titiwangsa residential areas.
Kuala Lumpur Structure Plan 2020

Source: KL Structure Plan 2020 (Item 17.3.2 A)

3. The Convenience Factor

Convenience is a huge driver behind the success of most condominiums in the luxury enclaves, notably KLCC, Ampang Hilir and Mont Kiara. Ideally, important facilities like schools, transportation points, retail outlets and restaurants should be of walking distance.

As a sidenote, the availability of a suitable labour force is also important for those who are considering investing in commercial properties.

GoodPlace.my is currently experimenting with a methodology which assigns “Walkability Scores” to condominiums in the city. We have currently completed the exercise for KLCC condominiums (with plans for Mont Kiara and Bangsar next) – for more details, go here.

For a high resolution map of KLCC with Walkability Scores mapped out for condominiums in the area, click here. It’s a free download.

Good Things Come To Those Who Hustle

Occupancy rates for Malaysia’s luxury condominiums are projected to fall to the 60-65% level in 2014 from 70% last year. The oversupply situation is set to worsen; the size of the luxury segment is also set to increase by 20% given the launches that are going take place in the second half of this year.

Will the prices come down? Rather unlikely. Will there be bargains to be had? For sure… especially when fire sales become the inevitable fate for those who tried to dabble in luxury condominiums albeit with much less holding power than, say, the crown prince of Saudi Arabia.

Arabian prince making it rain on a babe

And remember what this good man says about selling when people are buying, and buying when people are selling? I rest my case.

Warren Buffett

#illuminati

Addendum: GoodPlace Digest subscriber Fred emailed the following response to this article – worth reading every word. 🙂

Hi Khai Yin

It is not just the property market in Malaysia is weakening but the region as well. Singapore, Hong Kong, and China are softening. Countries property prices have not soften are definitely toppish or bubbling. They are Thailand, Philipines, Australia, and Indonesia. Japan, thanks to Abenomics is recovering after a long stagnancy.

The situation of rapid property price hikes here are largely due to foreign funds flooding the region previously. With the curtailing of this foreign hot money or the reverse flow back to Europe and America, we should see property prices stablising or weaken slightly to be in line with economic GDP growth.

Any smart investors will identify growth potential macro-prospective first, before viewing it at micro level. In this aspect, Europe and America are just recovering. So is Japan. These are areas one should at least try to explore. So investors fearful or uncomfortable investing in such far flung regions, should at least wait for the next property cycle. A good investor will buy a property when no one talks about it. Patience is paramount in property investment.

As you have quoted Warren Buffet, buy when everyone is selling and sell when most are buying. It seems that most people follow the crowd for safety reason or when everybody talks about property investments. When property agents start persuading you  with lines such as ‘many people had bought here’ or ‘price here has appreciated 50% last two or three years’ is when one should not go in. It is too late. The strategy one should adopt is to have the patience to wait for a correction especially in a situation where property prices have outpaced economic growth too much.

After the timing assessment, a good investor would buy in the right place. A good location means rentability, follows by salebility. Are there people renting your property? What’s the yield? A safe guideline is the yield must exceed the current interest mortgage rate after deducting about two months out of a year of rent for taxes, commission, repairs etc.

Next is salebility. When you need to liquidate, are there buyers? Malaysians seems to prefer landed properties for occupation. There are no shortage for it. The prices here unlike in Singapore, between landed and condo are too close. So then, who will buy it?

Happy investing,

Frederick

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. cheonh says:

    Nice website= ) support ….

  2. Thanks for your advice and also responding to our email queries promptly. God bless. 🙂

  3. frederick made a point or 2; where are the buyers?
    some macro economics like income pyramid, minimum and average wage, concentration of purchase power, cost of living for locals,etc. will give you an impression about the real value of property.
    the foreign investors story is just to cover up the lack of fundamentals why locals can or will not buy on this price level.
    have a look at the real % of foreigners, not malaysian returning, who buy. i did not do it but i guess it is not even 5% of the total properties sold. so what can their impact be?

Speak Your Mind

*