ASIA FOCUS: Why Australian investors should consider Malaysian real estate

Petronas Twin Towers, Kuala Lumpur

Petronas Twin Towers, Kuala Lumpur

In my previous post, I highlighted some real estate opportunities in the growing economies of Asia. In this article, I zoom into one country within ASEAN where strong economic performance since the Asian financial crisis in 1997 has translated into strong growth in its job markets and real estate values and its emergence from the global financial crisis relatively unscathed.

Malaysia, with all its natural resources, relatively efficient and language-friendly workforce, stable government, healthy foreign investments and good standing within the ASEAN and international community, has somewhat lagged behind neighbouring Singapore in terms of economic growth and prosperity. However, this country has its own unique investment propositions that other developed nations may be lacking.

This article examines some key issues and why Australian property investors may consider investing in Malaysia.

What are the benefits of investing in Malaysia? – The Malaysian story

Over the last fifteen years, Malaysia’s economy grew by an average of approximately 6.4% per annum. It is the third largest economy in ASEAN behind Indonesia and Thailand and the twenty ninth largest in the world. The late 1980s saw significant foreign investments into the country where its industrial sector experienced significant growth into the mid 1990s.

Malaysia has significant natural and agricultural resources and is one of the largest oil palm producers in the world.

Harvesting oil palm (Photo courtesy: RSPO)

Harvesting oil palm (Photo courtesy: RSPO)

It also has a very strong and vibrant oil and gas industry. In recent years, Malaysia has developed significant capabilities in knowledge-based  services and manufacturing of high-value technological goods such as semi-conductors, IT and telecommunications equipment which have contributed to its growth in GDP and productivity.

During this time, Kuala Lumpur was also bestowed with the Petronas Twin Towers which has since become an iconic symbol for the Malaysian capital. History will show that it is powerful to invest in what is now a new term called “dramatic architecture”. Symbolically, it defines a destination, lends credence and puts it on the world map.

Singapore has yet again proven this to be true with the Marina Bay Sands. This S$8 billion integrated casino resort and hotel investment has been so successful, its financial commitments have been recouped in less than a couple of years. But the implications of success goes beyond financial terms.

ASEAN Country GDP $USmil GDP per capita US$
Indonesia 511,765 3,980
Thailand 273,313 8,478
Malaysia 221,606 15,384
Singapore 181,939 51,226
Philippines 166,909 3,515
Vietnam 89,829 2,793
Myanmar 26205 1,156
Brunei 14,553 50,198
Cambodia 11,250 2,082
Laos 5,374 2,127

Source: International Monetary Fund at at October 2009

So what are the pros and cons? Lets take a closer look as each pertinent element.

Investment climate and first home ownership

The dream of owing a home in Australia since the withdrawal of the First Home Owners Grant and the recent property boom is almost non-existent for first home buyers who are  choosing to live within a radius of 10km of Sydney, Melbourne, Brisbane and Perth. The entry costs of a first home in Australia is now beyond many first home buyers because our markets have moved beyond the growth in wages. With the impending carbon tax, mining tax, increase in energy, petrol and food prices, many investors are spooked about where the economy is headed. This is not helped by Australia’s current two-speed economy where BHP Billiton has just reported a $23.5 billion net profit while the retail, manufacturing, export, tourism and education are experiencing one of its toughest years on record.

Gallery at U-Thant: High-end luxury condominiums in the heart of Kuala Lumpur

Gallery at U-Thant: High-end luxury condominiums in the heart of Kuala Lumpur

Malaysia has similarly experienced a real estate boom albeit this boom has been experienced predominantly around parts of its capital city. Generally, wages growth in Malaysia has also not kept pace with its economic growth and inflation. As a result, first home buyers in Malaysia are doing it tough just like our own. An average terrace or town house in and around Kuala Lumpur now cost upwards of around RM1,000,000 (approximately A$320,000).

Luxury condominiums in the heart of Kuala Lumpur

Luxury condominiums in the heart of Kuala Lumpur

Malaysian property prices

Unlike Singapore and Hong Kong where scarcity of land and demand has driven private property prices to levels unaffordable even by a majority of their locals, Malaysian property prices are still relatively affordable.

The average Singaporean wage earner will generally be limited to purchasing Housing Development Board (HDB) flats which are essentially government housing because private property is well beyond their means. On the other hand, their Malaysian counterparts are able to afford private landed properties because prices are at affordable levels to middle class Malaysians.

Malaysians and expatriates are also enjoying the “best of both worlds” of inexpensive cost of living, idyllic lifestyle of cheap domestic help and chauffeur services whilst being able to take advantage of the close proximity of Singapore’s local attractions and amenities such as dining, shopping and quality healthcare. Singapore is approximately a 5-hour drive from Kuala Lumpur.

Real estate growth history

Selected areas in and around the capital cities of Kuala Lumpur, Penang, Johor Bahru, Kuching and Ipoh have experienced good growth in recent years. This has been due to the growth in population in recent years. Malaysia and Australia used to share similar population numbers of about 18 million. While fertility rates in Australia has been declining until recent years with the incentive of the baby bonus, Malaysia’s population has grown to approximately 28 million compared to 22 million for Australia.

Many locals in Kuala Lumpur favour inner city living although large housing estates have opened up in Kepong, Puchong, Serdang, Salak South, Taman Tun Dr Ismail, Kota Damansara and Cheras. These developments have spread the population over wider areas of the Klang Valley where Kuala Lumpur is located and has resulted in numerous highways and new ring roads being constructed to cater for this growth in transportation demand.

As a result, real estate in prime locations have significantly appreciated in value which is not dissimilar to the growth in  and around Australian capital cities.

Lifestyle, cost of living and retirement

Royal Selangor Golf Club, Kuala Lumpur

Royal Selangor Golf Club, Kuala Lumpur

The capital city of Kuala Lumpur is a melting pot of the Chinese, Malay and Indian cultures. It is highly developed in terms of infrastructure, public amenities and telecommunication facilities. Internet wi-fi is more readily available in public places such as the Kuala Lumpur International Airport, hotels, cafes and restaurants than in Sydney or Melbourne.

Bukit Bintang shopping precinct, Kuala Lumpur

Bukit Bintang shopping precinct, Kuala Lumpur

The cost of a meal consisting local Malaysian fare in Kuala Lumpur is anywhere between A$1 in hawker stalls up to approximately A$5 in cafes and restaurants. Mid-tier and fine dining restaurants are also widely available in large shopping malls and international hotels.

Middle class Malaysians and expatriates enjoy an idyllic lifestyle of strong public amenities and a range of social and entertainment options.

Many locals and expatriates have full-time domestic help to assist with all the household chores. A domestic maid or nanny for childcare costs approximately RM500 per month (approximately A$160 per month). A full-time chauffeur from 8.00am  – 6.00pm Mondays to Fridays (who is also responsible for keeping the vehicle clean and tidy) costs approximately RM1,000 per month (A$320 per month).

As a consequence of these factors, the cost of retirement in Malaysia is relatively inexpensive due to cheaper housing and cost of living. In contrast, a recent article by CNN found Sydney and Melbourne to be among the top 20 most expensive cities to live in the world.

Unspoilt and calm waters, Penang beach

Unspoilt and calm waters, Penang beach

Owing a brand new 3-bedroom apartment outright and free of mortgage with all the modern facilities for less than A$300,000 in idyllic beachside locations with public amenities and relatively low cost of living becomes a very real option for those who are unable to do so in their home country.

Political stability

Just like any government today, the Malaysian government is not free from its criticisms. Most notably, its handling, dismissal and subsequent jailing of its former Deputy Prime Minister and now Opposition proponent Anwar Ibrahim was widely critisized as being unjust and a violation of human rights by the international community.

Malaysia practices positive discrimination for its bumiputra and indigenous Malays and hence, its government machinery is widely seen by the minority locals and the international community as flawed because of the absence of a system of meritocracy.

Under its former prime minister Tun Mahathir Mohamad who held the post for 22 years from 1981 to 2003, Malaysia experienced considerable economic progress although is it widely argued that a lot more could have also been achieved should Malaysia had adopted a pure democratic society. Under Mahathir’s “guided democracy”, wealth was widely redistributed from the majority of business capitalisation held by the minority Chinese to the majority Malay population through various government-sactioned laws and regulations. It was the government and its ruling party, Barisan Nasional’s so-called “stabilizing” factor to avoid “unhealthy” undercurrents where a minority sector was holding onto the majority of the nation’s wealth. Nevertheless, Malaysia has progressed economically over the last fifteen years albeit less impressive compared to its former state of Singapore. Like Australia, it has also emerged from the global financial crisis relatively unscathed.

It is widely accepted that it will be difficult for Malaysia’s economic progress to rival that of  its neighbouring Singapore but on the other hand, Malaysia’s standard of living is also considerably higher than most of its ASEAN counterparts.

Malaysia My Second Home (MM2H) program

John Jones, a retired firefighter, and his wife Samantha who have moved to Malaysia under the Malaysia My Second Home programme. MM2H has so far attracted about 12,000 participants (Photo courtesy: The Star newspapers)

John Jones, a retired firefighter, and his wife Samantha who have moved to Malaysia under the Malaysia My Second Home programme. MM2H has so far attracted about 12,000 participants (Photo courtesy: The Star newspapers)

One of the key incentives that foreign investors can take full advantage of is the Malaysia My Second Home (MM2H) program. It is a government incentive administered through the Ministry of Tourism where the Malaysian government is actively encouraging eligible foreigners, expatriates and foreign investors to work, live and retire in Malaysia.

Some incentives include ease of opening bank accounts, repatriation of funds to and from Malaysia, tax free car repatriation, discounts for golf memberships and the eligibility to live indefinitely in Malaysia subject to certain criteria.

As the cost of living and retirement soars in Australia, I believe good Malaysian real estate presents very real opportunities for Australians who cannot afford to retire in Australia. Indeed, the paradox of Singapore having the highest number of millionaires per capita in the world is that many of its citizens are unable to retire simply because of the escalating cost of housing and the high cost of owing a private motor vehicle.

Finance, legal and tax

The ease of obtaining finance for buying real estate in Malaysia vary depending on ownership status. Foreigners with a work permit are generally allowed to borrow up to 85% while foreigners who are eligible under the Malaysia My Second Home (MM2H) program can borrow up to 80% to buy propertues with a minimum value of RM500,000 (approximately A$160,000).

There is generally no legal or government restrictions for foreign ownership of private property.

Real property gains tax of 5% is payable on disposal of private property held for less than five years as per the Malaysian budget 2010 announcement. Private property held and disposed after five years are exempt from RPGT. This imposition is favourable compared to Australia’s RPGT regime.

Stamp duties rates are as follows:

First RM100,000                                1%
RM100,001 –  RM500,000               2%
RM500,001 – RM2,000,000            3%
Above RM2,000,000                          4%

Stamp duty for home loan agreements is 0.5% for any amount of loan taken.

Conclusion – should Australian investors consider Malaysian real estate?

The question of whether to invest is obviously more easily answered if we are purchasing a first home to live in where the risks are significantly reduced. It is near impossible to spot the lowest point of entry into a property market because of so many factors. Personally, the best time is when opportunities present themselves when we are in the market to invest. Such opportunities are usually brought about by a combination of economic cycles, market inefficiencies, market knowledge and experience.

As a property investor myself, I would naturally be very cautious investing in a market which I have little knowledge about.

There are numerous factors which weigh against a foreign investor and this includes a lack of understanding and local knowledge of the Malaysian real estate market. This can significantly increase the risks which include purchasing a property in the wrong location and from poor quality developers. However, these risks can be mitigated through collaboration with parties who have knowledge of the local market and a strong network of financiers, brokers and reputable developers with quality and track record.

My own property investment experience in Malaysia

Having spent my formative years in Kuala Lumpur and having been a senior executive with one of Malaysia’s largest most successful conglomerates for many years, I have the benefit of local knowledge and networking. I believe this is the single most important factor in minimising risk and making mistakes in real estate investments. The English language is widely spoken throughout the country which makes it easy for foreigners and tourists alike to do business in Malaysia.

Most importantly, having lived and invested in real estate in both countries, I am able to draw parallels and decipher the pros and cons about real estate investment in Australia and Malaysia.

Favourable factors that give Australian investors a distinct advantage:

  • Current favourable exchange rate of A$1 to 3.2 Malaysian ringgit is at its highest in almost twenty years. The Australian dollar was buying as low as 1.75 Malaysian ringgit in May 1993.
  • Australian real estate values are at all time highs. Refinancing equity to invest in a growing market coupled with the added advantage of the strong Australian dollar makes overseas real estate extremely affordable.
  • Relatively lower entry and transaction costs into the Malaysian real estate market. Deposit rates for off-the-plan properties are usually 10% of the total sale price. For a typical Malaysian investment property worth the equivalent of A$300,000, the deposit to be paid based on current exchange rate is merely A$30,000.
  • Relatively easy process to obtain financing for foreign investors who are eligible to purchase private property. We can arrange finance through local Malaysian banks at competitive interest rates of between 5 – 6% per annum.
  • After sales and property management services. Our team of real estate agents and property managers will ensure efficient procurement of quality tenants and maintenance of your investment properties.
  • No exit restrictions and capital gains tax is minimal at 5%. Private properties held for more than five years are not subject to capital gains tax.
  • Relatively inexpensive retirement option under the MM2H whilst taking advantage of Malaysia’s idyllic lifestyle around beach locations such as Penang, Port Dickson and Kuala Lumpur.
  • Close proximity to Australia and the financial centres of Singapore and Hong Kong. Malaysia is also central to the growing economies and tourist hotspots of Thailand and Vietnam.

Who should consider investing in Malaysian real estate?

  • Investors and high net worth individuals who are looking to diversify their investment portfolios.
  • Investors who are within retirement age and are not able to retire on existing funds and are looking for a lower cost alternative without compromising living standards.
  • Investors with high levels of  savings and disposable income.
  • Investors who are planning retirement within the next five years.
  • Expatriates who are working in Malaysia.

wealthruproperty’s customised, one-stop solution and services:

  • We assist you in navigating the process of sourcing and shortlisting quality real estate by reputable developers who have a proven track record of many decades in Malaysia.
  • We assist you by arranging competitive financing and co-ordinate conveyancing and legal services to execute contracts and loan agreements.
  • We assist you by finding a tenant and establish on-going property management services for your property.

Investors and interested parties are invited contact Albert Wong on +61 413 660909 for more information and details.

Albert has an extensive network of real estate professionals, property developers, bankers, insurers, legal advisors, accountants and tax experts in Malaysia. He and his team of real estate professionals both in Australian and Malaysia provide an integrated approach to assisting property investors seek out choice investment properties with strong capital growth as an over-riding objective.

Read some of our clients’ testimonials here.

Albert Wong CPA is Head of Commercial & Research for wealthruproperty in Sydney, Australia.  All his views and opinions expressed above are personal in nature and do not constitute investment, financial or legal advice.

ASIA FOCUS – Real estate opportunities in the growing economies of Asia

Marina Bay Sands, Singapore

Marina Bay Sands, Singapore

As the economies of Europe and the US remain in the doldrums, Asia is providing the impetus for global growth where some of its economies are powering ahead.

From a recent trip to Singapore and Malaysia, and notwithstanding reports from financial institutions, analysts  and experts, my own personal observation is that consumer sentiment is confident albeit cautious, government spending is strong where the focus is on providing better infrastructure to lay foundations for sustained growth whilst retail and commercial activities are vibrant.

Construction of new public parks and amenities on reclaimed land, Singapore

Construction of new public parks and amenities on reclaimed land, Singapore

Some key Asian growth indicators:

1. Performance of Asian Real Estate Investment Trusts (REITs)

Asian REITs have outperformed global REITs by up to three times in the past five years. Mr Ng Cheze How, AmInvestment Bank’s director of retail funds says that Malaysian REITs provided an average return of 7 – 8% compared to the average of 6.3% returns from Asia-pacific property trusts. Malaysian indices give out 3.5% in dividends,” Ng said, adding that each business cycle averaged between seven and eight years and that Malaysia is in the third year of recovery.

More investors are gradually using real estate as a hedge against inflation. Rising costs of living across developing nations in Asia and Australia means that inflation is Deposit rates are generally low and and interest earned are subject to tax. Coupled with inflation rates of between 3 – 4% each year, keeping money in the bank may be prudent but inflation may eventually erode savings.

2.  Singapore’s costs of living overtake Hong Kong for first time

Singapore has overtaken Hong Kong as a more expensive city for expatriates for the first time, driven by a stronger currency and higher rents, according to Mercer’s Worldwide Cost of Living Survey.

Singapore’s GDP growth for 2010 was 14.5%, the highest in the world and now, the island nation is ranked the eighth most expensive city in the world, rising from eleventh spot last year due to a susbtantial increase in housing costs. The record GDP growth last year also helped Singapore become the world’s highest proportion of millionaire households at 15.5% of the population, according to a Boston Consulting Group report in May 2011.

Axis REIT Managers Bhd chief executive office Mr Stewart Labrooy said that real estate prices in Malaysia are relatively inexpensive compared to its regional neighbours such as Singapore. Although both countries have seen solid growth in real estate values over the last few years, Malaysia is still relatively attractive given its stable economy, abundance of natural resources and its strategic location within Asia’s financial powerhouses of Hong Kong and Singapore.

Watching Singapore's skyline from a 150-metre infinity pool on top of Marina Bay Sands

Watching Singapore's skyline from a 150-metre infinity pool on top of Marina Bay Sands

Inflation was 4.5% in May 2011 as food and transportation costs increased. The island nation uses the exchange rate as its main tool to manage inflation and has allowed its currency to appreciate to a record in an attempt to contain price increases.  The Singapore dollar has risen by 13% in the past year against the US dollar, matching the South Korean won as the two best performing currencies among the 10 most actively traded currencies in Asia excluding Japan. Singapore’s economic expansion has pushed the unemployment rate to a 3-year low and economists including Irvin Seah from DBS Group Holdings Ltd said rising labour costs were contributing to the risk of higher inflation. Singapore’s real estate prices climbed for eight straight quarters to a record high, prompting the government to introduce new measures to curb speculative buying.

Local and guests enjoying the pool at Marina Bay Sands, Singapore

Local and guests enjoying the pool at Marina Bay Sands, Singapore

3. China’s economic growth engine

China’s economy grew by 9.5% in the second quarter, slightly lower than the first quarter but still showing no signs of any slow down despite housing curbs and five successive interest rate hikes since October 2010. The efforts of the Chinese government in putting on the brakes on its economy may have a dampening effect on Hong Kong, although its dollar being pegged to the weak US dollar had little effect on the city’s ranking against Singapore above.

4. India’s emerging economy

India’s real estate prices have also been growing steadily over the last few years although there is a word about a property bubble brewing for real estate prices in Mumbai where prices could fall by up to 35%. The reason for this is a large number of developers who have bought land at higher prices  need to correct prices and the recent residential sales of 65% and 35% apartments in Mumbai and Delhi respectively being sold to speculators according to Jones Lang La Salle.

However, its economy is still powering ahead at 7.8% for the first quarter of 2011 and is expected to grow strongly into the future. Foreign direct investments stood at US$32 bilion and India is experiencing a growing middle class, strong urbanisation and government spending where US$46 billion has been allocated for infrastructure upgrades. It has a solid banking and financial system and its demographics shows a very young country where 51% of the population is below 25 years old.

So what does this all mean for the Australian investor?

It is clear that recent gains on the Australian dollar has made it extremely difficult for businesses in the tourism, education, manufacturing and retail industries where the relatively expensive dollar has been curbing international visits, foreign investments and real estate growth. As I write this article, major retailers David Jones and Myers have reported sharp decline in profits.

Real estate agents have reported a marked slow-down in foreign investors. The official 2-speed Australian economy is well and truly underway and as long as China continues to demand raw materials, our resources sector and associated industries such as transport and logistics will continue to be strong.

No doubt our real estate prices have seen very solid growth in the last 24 months and are now taking a breather. It is generally a buyer’s market in Australia and a good time to review portfolios. Manufacturing your own equity through upgrades, improvement and construction are a strategic moves in the current flat markets.

Australia needs to improve its competitiveness

To remain competitive and attractive for foreign investments due to the strong dollar, Australia needs to focus on its key drivers of growth. No longer can we rely on real estate predicated on the natural beauty of harbour and river settings because prices are now beyond the reach of international investors and growth will slow. Local investors have squirrel away A$80 billion in the last financial year due to uncertainty around the world.

From a tourism point of view, there are so many attractions around South East Asia that can rival the Sydney Opera House and its band of attractions around Australia that are far more cost competitive due to the location of these attractions in cities with a high density population and spending-power. The international airports in Shanghai, Beijing, Hong Kong, Kuala Lumpur and Singapore are miles ahead of Sydney and Melbourne airports in terms of efficiency, customer-focused conveniences such as high-technology wifi, telecommunications, banking and forex, shopping and hospitality.

Space and abundance: Kuala Lumpur International Airport (KLIA)

Space and abundance: Kuala Lumpur International Airport (KLIA)

Overseas opportunities

In addition to strong infrastructure growth,  real estate investment opportunities are looking ever so attractive in these new Asian markets due to the strong Australian dollar. These investment opportunities include:

  • Investment in strategic locations in Malaysia for the dual purpose of investment and retirement where the standard of living is relatively high whilst the cost of living is low. Modern and highly developed infrastructure such as international schools and hotels, hospitals, transportation systems and English being widely used throughout the country make it easy for English-speaking foreigners to relocate to Malaysia.  An idyllic lifestyle such as beaches set around tropical real estate with access to high-quality broadband, health care, relatively cheap international and local cuisine, domestic assistance such as maids and chauffeurs make this a very real and attractive proposition.
Gallery at U-Thant: High-end luxury condominiums in the heart of Kuala Lumpur

Gallery at U-Thant: High-end luxury condominiums in the heart of Kuala Lumpur

  • Malaysia My Second Home program where strong incentives are given by the Malaysian government to foreigners who choose to make Malaysia their home. This program is now attracting a significant number of foreigners from the UK, China, Japan and South Korea who are relocating their families to Malaysia (Stay tuned for more about the incentives, tax concessions, real estate opportunities on this program in my next post).
Kuala Lumpur International Airport (KLIA)

Kuala Lumpur International Airport (KLIA)

  • Indian real estate in top cities such as New Delhi, Mumbai, Chenai, Kolkata, Hyderabad, Pune, Gurgaon and others.
  • Private apartments in Singapore where scarcity of land is pushing up property prices.

Look out for my next few posts to give you more information about these overseas investment opportunities which are set to rival Australian investment and retirement options due to the changes around the Asia Pacific region.

Panoramic view of beaches along Batu Ferringhi, Penang

Panoramic view of beaches along Batu Ferringhi, Penang

Australia needs to be very serious to remain competitive and relevant to rival the business and investment opportunities that is being presented to the world by cities such as Shanghai, Beijing,  Hong Kong and Singapore.

Readers, property investors and interested parties are invited to call Albert Wong on +61 413 660909 to discuss real estate investment opportunities to take advantage of our strong Australian dollar.

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Disclaimer: Views, opinions and comments expressed in this article are general in nature and do not constitute investment, legal or financial advice. Readers are advised to seek their own professional advice as and when required.

Sydney inner west – strongest property market or parking nightmare?

Auction clearance rates

Sydney’s inner west was recently dubbed by Dr Andrew Wilson from Australian Property Monitors as the hottest property market around metropolitan Sydney, a distinction based purely on auction clearance rates (see article below).

Although auction clearance rates is one of so many indicators of the strength of a property market, it should be remembered that auctions only account for a mere 12% of property sales in Australia. Therefore, to claim the inner west being the strongest market based purely on auction rates is somewhat misleading. Granted, its location of being so close to the CBD and attractions around Sydney makes certain suburbs in the inner west as popular as ever, especially among some of the young professionals and those seeking the hip and eclectic Sydney lifestyle.

The downside to inner west living is the level of human and car traffic where this locale is one of the most densely populated areas in the whole of Australia. You don’t even need to wait for peak hours to drive through King street along Newtown to understand that traffic congestion can drive people to avoid certain inner west areas like a plague. In addition, many properties around the inner west in suburbs such as Newtown, Erskineville, Surry Hills and Chippendale don’t have private car space or off street parking. Great lifestyle when you come home from a hard day’s work and having to circle your neighbourhood for half an hour only to find the nearest parking spot 100 metres away from your property. Better still, try carrying your six bags of groceries through 100 metres in the rain.

Some two-way streets in the inner west are so narrow that only one vehicle can drive through when cars are parked to the brim on either side of the road. Find an open driveway failing which you may have to reverse all the way back to where you came from depending on how you decide who has the right of way. Better still, try locating inconsiderate parkers who decided to dump their vehicle across your driveway (despite clear “no parking – day or night” signage on your gate as well as clear demarcation on your driveway) when you are late for an appointment.

To me, investing in the inner west in Sydney cannot be compromised with the absence of a car space as so many developers are increasingly building apartments that come without private parking. There may be an element of councils eager to keep millions of dollars raised from parking metres and fines each year and hence restricting the allotment of car spaces for new developments.

Private car spaces in the inner west are becoming so valuable that on-site parking for houses in Newtown, Erskineville and Marrickville can add between $70,000 to $120,000 to the value of a property. The inner west may offer a certain lifestyle to some but it certainly comes with a cost. As Sydney becomes even more congested in the near future, properties in the inner west which offer private and off street parking will become even more scarce and investors would be wise to tick this item on the investment checklist.

Related articles:

Australian housing bubble and ceteris paribus – who to believe?

Housing bubble Australia

Housing bubble in Australia - should we be concerned?

At any one time, there are so many conflicting articles and messages in the media about whether there is an impending housing bubble in the Australian property markets that many investors and home owners just scratch their heads and wonder who’s advice to follow.

Whether it’s property developers, bankers, real estate agents, so-called “property experts” and the whole gamut of financial and market analysts, each of these parties have their own perspectives and vested interests in how the property markets perform and their advice can sometimes be skewed accordingly. The housing bubble in Australia is predicated upon strong upward trend in home prices despite so many rate rises over the last 20 months. On the other hand, there are some who steadfastly hold that house prices are in no way overvalued. Either way, there are conflicting sets of data to prove both scenarios.

For the bullish investors, the current shortage of housing stock in the Australian markets have always been seen as a guarantee for ever-increasing property prices. However, this can be a very dangerous assumption. In my undergraduate economics class, we were told that if supply decreased then, theoretically, prices will increase. The key assumption here is ceteris paribus, that is ‘all other things being equal’. Moving from lecture hall into the real world, we soon find out that in reality, there is a multitude of factors which are constantly changing.

Housing bubble Australia 2

Factors such as demand, personal tastes, housing trends, government policy, significant world events and natural disasters cannot be easily factored into an economic equation to provide an accurate account of property markets. Sadly, and in most cases, it is this ceteris paribus assumption that is conveniently ignored by punters, property spruikers and those who more often than not take an aggressive stance about our markets although their view may be accurate at certain points in the property cycle. This simplistic view that a shortage in supply will spur on price increases can, in some cases, brew the so-called housing bubble as already evidenced in some countries.

As I write this article, we are in the midst of a two-speed economy where the resources and mining sectors are powering ahead whilst the retail, manufacturing, tourism and education sectors are sputtering. The recent announcement that Top Ryde City Shopping Centre in Ryde has been placed in receivership due to debts of $700 million should serve as sober reminder that not all is well in Australia’s so-called “solid economy”. Consumer sentiment and retail results last Christmas show that people are still wary and uncertain about what 2011 will hold for the property markets.

Ill-informed anaylsis is nothing new, but at its worst, it is not only wrong but is also misleading, and can even lead to wars being fought among countries which would surely burst any bubble, property market or otherwise. Next time you hear or read any forecast, analysis or commentary about our property markets, it might help to put into perspective who is the presenter to ascertain any vested interest and if the ceteris paribus assumption has been considered if at all.

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Aussie $ power – Where to invest with the rise of the Australian dollar

Balinese villa, Canggu, Bali

Balinese villa, Canggu, Bali

In one of my previous articles entitled 2011 – Investment strategies for a year of consolidation, I suggested that property investors should also consider investing beyond our shores to capitalise due to the recent strength of the Australian dollar (currently trading at US1.0113).

Through my research, I have found that Thailand, Malaysia, Singapore and Indonesia offer some good bargains where yields are considerably higher than in Australia because real estate prices are “relatively cheaper” in these countries.  The immediate concerns for most investors would be:

  • How do I decide on the location?
  • How do I find a good property manager?
  • What are the tax and ownership implications / restrictions if any for these countries?
  • How do I get financing?
  • How do I find a good real estate agent and solicitor?
  • What if I can’t find good tenants and what if the tenants trash my property?

The key is to do solid due diligence and research on locations which have good growth history, good infrastructure, public amenities, stable political environment, strong growth prospects as evidenced by its surrounding areas. Building a network of strong local contacts such as real estate agents, solicitors and conveyancers, business people and local residents will assist in the event local assistance is required.

Bali, Indonesia

Popular tourist locations such as Kuta, Nusa Dua, Seminyak, Ubud and Jimbaran have taken off in recent years. Bali has recently reported its strongest growth and highest tourist arrivals since the Bali bombings nearly a decade ago.

Bali Governor Made Mangku Pastika last month took the unprecedented step of banning new hotel development in the island’s three busiest areas, including the beach strips of Kuta and Sanur, the exclusive beachfront resort district of Nusa Dua and the rice-terraced hills around Ubud.

Areas which have yet to experience a strong take off but are popular among tourists include Tanah Lot, Canggu (10 km north of Seminyak in the south west coast and Candi Dasa in the east coast.

Alila Manggis resort, Candi Dasa, Bali

Alila Manggis resort, Candi Dasa, Bali

Prices range from A$200,000 for smaller villas up to A$1 million and above for larger and more luxurious homes in popular areas. Real estate prices in Bali are quoted in US dollars by local real estate agents.

Penang & Kuala Lumpur, Malaysia

Penang is a approximately three and a half hour’s leisurely drive north of Kuala Lumpur. The island state is known for its holiday resorts along its north eastern coastline of Batu Ferringhi and tasty local fare and bargain shopping. In recent years, there has been a proliferation of new condominiums and apartments dotted all along the Batu Ferringhi drive which overlooks the sea with uninterrupted views of the Straits of Malacca. New apartments and condominiums along this popular stretch range from A$200,000 to A$1 million and above for luxury penthouses with ocean views.

Western view from Mutiara  Upper East

Western view from Mutiara Upper East

Kuala Lumpur is the capital of Malaysia and real estate prices in the city has experienced a sharp upturn over the last 2 years and some popular areas in the city such as Kota Damansara, Mount Kiara, Damansara Heights, Ampang Hilir and selected areas around the CBD have appreciated by as much as 30%.

Mutiara Upper East, Ampang Hilir

Mutiara Upper East apartments, Kuala Lumpur

Mutiara Upper East is a development located in the heart of Kuala Lumpur which enjoys a sought-after address in Ampang Hilir. The development consists of two high-rise towers with a total of about 200 luxury apartments. Each apartment in the development enjoys private lift entry directly into the apartments some of which have two separate kitchens (dry and wet kitchen), servants’ quarters and views over the Selangor Polo and Riding Club. A new freeway links this area directly into the heart of the city which is merely 4 km away. Prices for apartments in this development start from A$300,000 up to A$900,000 for penthouses with views of the city.

High-end apartments within a radius of 3km of the CBD cost A$1 million upwards with spectacular views of the Kuala Lumpur skyline.


Marina Bay Sands, Singapore

Marina Bay Sands, Singapore

Singapore experienced the highest GDP growth in the world in 2010 where its economy grew by a whopping 14.7%. It has an efficient government machinery that encourages foreign investment whilst the government itself is also a strong investor overseas whereby it owns high growth real estate, financial assets as well as IT & telecommunication investments.

The recently completed Marina Bay Sands is a symbol of its success in attracting foreign investment, perpetuating its status as one of the busiest and most efficient seaports in the world.

Far East Organisation is by far one of the leading property developers in Singapore having developed more than 700 projects over the last 50 years. New apartments and condominiums currently on the market in Singapore include the following:

1. Adria at Novena

2. The Cascadia at Bukit Timah

3. The Tennery, Bukit Panjang

4. The Orange Grove, Stevens Road

5. Twin Peaks, Leonie Hill Road

Central and Latin America

Costa Rica beaches

Beach in Costa Rica

International Living is a publishing group which advocates the idyllic notion that one can live a healthy, low-cost and stress-free lifestyle and retire to unspoiled seaside locations, emerging cities  around the world where fewer people know about. Some interesting articles written by its writers based all over the world include the following:

Related links:

International Living – how to retire and live comfortably on $800 per month

Retire in Costa Rica

Idyllic setting: Retire in Costa Rica

International Living started with a newsletter thirty years ago which sparked a big idea. With an international team of editors and writers based around the world, International Living is a publishing group which advocates the idyllic notion that one can live a healthy, low-cost and stress-free lifestyle and retire to unspoiled seaside locations, emerging cities  around the world where fewer people know about.

The monthly newsletter of International Living covers topics such as retiring overseas, international real estate, investment and travel where one can subscribe to free of charge. A daily “IL Postcard” with articles written by its team of writers is emailed to 400,000 readers.

Retire to the Phillipines

Dreaming of paradise: Retire to the Phillipines

Some interesting articles which I came across include:

You look out your window, past your gardener, who is busily pruning the lemon, cherry, and fig trees … amid the splendour of gardenias, hibiscus, and hollyhocks.

The sky is clear blue. The sea is a deeper blue, sparkling with sunlight.

A gentle breeze comes drifting in from the ocean, clean and refreshing, as your maid brings you breakfast in bed.

For a moment, you think you have died and gone to heaven. But this paradise is real. And affordable. In fact, it costs only half as much to live this dream lifestyle … as it would to stay in your own home!

— Kathleen Peddicord, publisher of International Living

It’s official – Australia in a 2-speed economy

Glenn Stevens - Governor of the Reserve Bank of Australia

The economic imbalance of Australia’s economy is official. Governor of the Reserve Bank of Australia, Mr Glenn Stevens had previously warned of the massive demand pull generated by Australia’s booming mining industry whilst the rest of the economy is stuck in the slow lane. Official employment figures from Access Economics for the year to the end of August 2010 showed that employment in the mining industry rose by 16% and construction by 3% as more workers are drawn to the resources boom. At the same time, more than 22,000 jobs were lost in manufacturing, down 2% in the past year and the arts and recreation sector, which takes in the embattled tourism sector, fell by 4.5%.

Whilst workers are flocking to the mining industry in droves, the high Australian dollar is pushing some of the nation’s most iconic industries to the brink.

It is not new the mining boom in the early to mid 2000’s has created more wealth in mining states like Western Australia. However, coupled with the high dollar as a result of the boom, firms which are exposed to the export market are severely affected as their products become less competitive in the international market.

John Haines, chief executive of Haines Group, one of the nation’s largest boatbuilders, says his manufacturing operation will soon switch to a four-day week.

“We are down 60 per cent and we are pulling back to a four-day week,” he said. “We are taking extended holidays over Christmas hoping that we might see some more work come in. I speak to a lot of our competitors, and they are all the same.” . The issue is complicated by cheap imports from the US. Mr Haines said a 6m Australian boat that would normally sell for up to $60,000, was facing competition from second-hand US boats selling for as little as $15,000. He said this would affect the market for years to come.

Brad Teys, the chief executive of Teys Brothers Holdings, which kills about one million cattle a year in Queensland and South Australia, said the high dollar was squeezing beef producers because contracts were written in US dollars. “I’d say it would be very marginal for them – their costs are increasing diesel power, fertiliser, water, rates and I’d say most people would be finding it very difficult in the cattle industry,” he said.

Graham Packer, whose Packer Leather makes the covers for Kookaburra cricket balls, said the company was being squeezed by a high dollar on the one hand and high interest rates on the other. It was looking at taking some production overseas and finding cost savings.  “We’re getting pressured to reduce prices as a result of our currency and our internal costs,” Mr Packer said.

“They don’t want to pay the increased prices and what the currency is doing to us, we are feeling a horrible squeeze. Between the banks and their wretched interest rates and their risk margins . . . and the high dollar, we are getting squeezed from both sides.” He said the company could survive with a dollar at US85c but at near-parity “you just keep believing that things will change”.

“Success comes from doing things differently”– Steve McKnight

Steve McKnight

Steve McKnight

Steve McKnight is a full time property investor, award-winning author and ex-Chartered Accountant who bought his first property for $44,000 in Ballarat back in 1999. Since then, Steve McKnight has founded, a successful website and forum which has taught thousands of ordinary Australians about property investment. His book, From 0 – 130 properties in 3.5 years is Australia’s most successful real estate book ever. Steve McKnight - 0_130_properties_3.5_years

One of the key tenets which Steve McKnight advocates in property investing is to do things differently, that is, to try not to follow what the general investing public is doing or adopting a “herd mentality”. Many investors think that buying real estate is about getting in at the right price, find a good tenant and wait for capital growth to propel the investment forward.

However, savvy property investments are much more than find a good property to buy. It involves a detailed understanding what drives our property markets, its players, effective tax and ownership structures, financing options, how to “manufacture” equity and getting the investment dollar to work at its optimum rate. Steve McKnight’s techniques are about risk and return, using cashflow positive properties to continually drive towards a self-sustainable portfolio, minimising negative gearing and to sell when the time is right.

Many investors are against cashflow positive investments due to its location and perceived poor capital growth rates and even more are in favour of negative gearing as a form of tax minimisation. Still, some investors hold the adage that you should always buy and never ever sell due to its transaction costs, capital gains tax and so forth. Steve McKnight’s answer is there is no one single solution for every investors because investing depends on individual needs, risk profile and desired outcomes and he has proven that by doing things differently, we open ourselves to greater opportunities, albeit sometimes at a higher but calculated risk and have a detailed plan in ensuring that contingencies and other unforeseen have been taken into account.

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Risky business–buying off the plan in a flat market

Construction site - buying off the plan

Construction site in Thailand

Buying a property off the plan means that you are buying it before it has been built. In our most populous capital cities of Sydney and Melbourne, this form of purchase will only get more prevalent as the population grows. As it is, there are a multitude of medium density housing, that is units and apartments, land and house packages that are available on the market in many suburbs which are further away from the CBDs.

One of the most attractive propositions of buying off the plan is that you are buying a property in the future at today’s prices. In a strong and bullish property market, this may result in a large capital gain on paper by the time you move in and indeed, many speculators have made huge sums of money this way. The key assumption here is that prices will rise in the future. But what happens if we are in a flat market or there is an imminent downturn in the property cycle? It becomes extremely risky for the following reasons:

1. Reputation of the developer – This is a key factor as experienced developers are more likely to complete the project on time, within budget and in accordance to the terms and conditions of the contract of sale. Some of Australia’s most prominent developers are listed on the Australian Stock Exchange and although this is no guarantee of quality, it provides some level of credibility over smaller ones, especially during flat markets. There have been developers who “flee the scene” during financial hardship where deposits from buyers have already been collected.

2. Rising costs of construction – Today’s developers are faced with ever rising cost of land, construction materials, labour and finance charges. Buying an apartment off the plan is no longer a straight formula of calculating the price per square metre because developers also need to make a fair profit for the risk they undertake. As a result, apartments sold off the plan are becoming increasingly expensive in absolute dollar terms. The task of the skilled developer is to be able to balance “perceived value” against the asking price and as a buyer, you need to be able to carefully determine and quantify what this value is. Many newer apartments are smaller in size and there is an increasing number of new one bedroom apartments within close proximity to CBDs that do not come with a car space. This, in part, is also due to changing demographics such as smaller / single households, rising value or real estate around CBDs and significant marketing and holding costs.

3. Stagnant prices – In a flat market, the off the plan buyer is essential bearing a significant amount of risk because prices today are likely to be prices in a couple of years time with little or no upside. Unless off the plan buyers are also intending owner occupiers, it makes little sense as an investment proposition in a flat or downturn cycle.

4. Occupant profile – Many new apartment blocks are now being marketed to foreign and overseas investors and in some cases, a very significant majority of eventual occupants will consist of tenants as opposed to owner-occupiers and unless management and body corporate maintenance is effective, these apartment blocks will depreciate more quickly and worse still, develop a stigma of having very transient occupants and affect future capital growth.

5. Finance approval – Due to tighter lending guidelines, major banks now have restrictions of 15% for lending to any one off-the-plan project to limit their exposure to inherent risks. In many cases, pre-approval cannot be given as bank valuations will only be done at the “lock-up” or completion  stage of the project. Even after obtaining finance approval for these project, one may encounter issues with getting the desired  Loan to Value ratio as this is dictated by the bank’s valuation.

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2011 – Investment strategies for a year of consolidation

Investment strategies for 2011

Melbourne - stellar market performer of 2010

2010 – The Year of Robust Growth

This time last year, I was finalising my research and due diligence which eventually lead to the purchase of two properties in Melbourne in December 2009. I vividly remember market sentiments were mixed – there were bargains in good suburbs and at the same time interest rates have began to move from its 49-year low of 3% in September 2009. Investors were cautious because the outlook in employment was still uncertain and the media was sending out conflicting messages of both recovery and gloom. Fast forward a year and in hindsight, the performance of most property markets across Australia, especially Sydney and Melbourne from the beginning of 2010 to May 2010 was the strongest in many years. Auction clearance rates were in the 80% in major markets although it should be remembered auctions account for a mere 10% of all property sales in Australia.

Prices continued to firm in the second half of the year although the seven interest rate rises since October 2009 have obviously taken effect in slowing down the market and if the auction clearance rates are any indication, it is pointing towards a slower 2011.

As I write this review a year later, I don’t feel the same “pulse” as I did during the Christmas season a year ago because prices and interest rates have both surged. In short, the investment climate has changed significantly during the year and 2011 calls for increased caution.

Key Observations

Some key observations through 2010 include the following:

  • Strong performance of some city fringes suburbs over inner city locations

KPMG demographer Bernard Salt has found the fringe suburbs of Wyndham Vale, Werribee and Melton precincts in western Melbourne to be the fastest growing area in Australia with 18,000 new residents over the year. At the same time, inner city hotspots such as Middle Park and South Yarra experienced modest growth at best. The traditional preference of staying close to CBDs and inner city areas are proving increasingly more difficult and many first home buyers are coming to more realistic terms about starting out in suburbs a little further away just to get a foot into the property market. I foresee this to be an increasing trend as fringe city suburbs and so-called second-tier areas with good transport links and public amenities herald and perpetuate “sub-markets” – that is, cluster of suburbs or areas within major capital cities which may have its own “pulse” and demand drivers which may move contrary to general market trends.

  • Apartment growth rates outperforming landed property

Traditionally, many property investors have the mindset that landed property with freehold titles have much higher growth rates than apartments and strata-titled properties. The CEO of Residex John Edwards had correctly predicted the growth rate of apartments will increase more substantially and 2010 had seen many suburbs with predominantly median density housing recording very strong growth rates over those with landed properties. In general, apartment growth rates are on par with landed property in many major capital cities with changes in demographics such as smaller households, single occupants and affordability being the key factors influencing this change.

  • Melbourne now most expensive city in Australia

By far, Melbourne has been the stellar property market in Australia over the 2009 and 2010 period where strong surge in property values have seen some areas such as Sunshine grow by as much as 50% over the year. Couple with slightly lower wages in general, analysts believe that Melbourne has now overtaken Sydney to be the most expensive capital city in Australia to buy a home. Melbourne has also seen very strong net immigration where some 1,700 new residents call her home each week. Melbourne has a relatively strong State government which is continuing to boost its status as an international city with a relatively high standard of living.

What will 2011 hold for property investors?

2011 will be a year of consolidation where previous strong capital gains will be countered by slower growth rates due to a rising interest rate regime. Most industry analysts are anticipating at least 2 more interest rate rises. For this reason, I foresee 2011 to be generally a buyer’s year where there will be an increased level of stock in most markets across Australia. Conservatively, I believe investors should budget for a full 100 basis points increase in the current cash rate of 4.75% to 5.75%.

In recent times, the media in the form of newspapers, property reports from industry analysts, experts and finance commentators among others have played an increasingly influential role in investor sentiment and confidence. There are many mixed messages and this seem to add more confusion than to actually clarify issues and give clear indication of where our property markets are heading. There are approximately 2,650 suburbs which investors can buy real estate in Australia. Each state within Australia has its own property cycle and within each state, cluster of suburbs and different locations are experiencing increasingly different trends and growth rates as our property markets become more sophisticated due to increasingly sophisticated demographics and factors which influence its dynamics. Therefore, although 2011 is generally tipped to be a buyer’s year, it should be acknowledged that our property markets are becoming increasingly fragmented as a result of the above. There will be areas where property prices will be flat or falling and at the same time, there will also be suburbs and / or types of properties that will be bucking the trend. In this regard, investors should do their homework and conduct due diligence in a very systematic and consistent manner in order to fully understand the areas or suburbs they wish to invest in. Generally, I would advise investors to take media commentary with “a pinch of salt” and do their own research.

Investment strategies 2011

Personally, I would advocate the following simple strategies for 2011:

1. Reduce debt and value add

As interest rates rise, it will be prudent, if possible, to try and reduce borrowings so as to reduce exposure in the event there is a down turn in the property markets. Although capital growth is expected to slow, rental rates for well-located properties are expected to further increase due to interest rate pressures. Sprucing up your investment properties will allow you to command better rental returns and coupled with reduced debt levels, this strategy will negate or minimise the effects of the anticipated higher interest bills for 2011. Renovating your properties, subdividing and developing are great ways to “manufacture” equity and grow your portfolio during flat markets.

2. Do your research and devise a game plan

What is becoming increasingly important is due diligence of an area or suburb over a period of what I believe to be at least 3 – 4 months. The research should necessarily include property inspections, attendance at auctions, observing demographics of residents, buyers, investors, tenants, type of housing which are in demand or over supply, best and worst streets, prices trends, proposed infrastructure, public and private investments in order to gain a good appreciation and understanding of the suburb in detail. Developing strong local networks with real estate agents are also imperative to gain a good source of information before taking the plunge in 2011. Lastly, do have a detailed game plan which include desired outcomes, strategies and action plans, time frame and contingencies.

3. Watch out for emerging suburbs

As interest rates are anticipated to further rise in 2011, housing unaffordability will become an issue again with both investors and first home owners alike. This will fuel demand for “newer” or emerging suburbs which have previously been overlooked and now seem more attractive. In particular, I would target areas where public transport are being planned or upgraded, suburbs or cities with new infrastructure investments and public amenities such as shopping malls, hospitals, schools and mining activity although the last item requires a lot more caution and good due diligence.  Suburbs which are close to areas which have previously experienced strong capital growth may reap spill-over effects in times where growth is slowing down. Second, third and even forth cities within each state in Australia should also be considered seriously especially those which are within close proximity to capital cities.

4. Look beyond our shores

One of the key dynamics of 2010 is the rise and rise of the Australian dollar. The little Aussie battler is widely tipped to trade above parity with the US dollar as the largest global economy continues to struggle and ease monetary policy to stimulate its faltering economy. However, the obvious caution from forex experts is that the dollar is currently trading well above its long term average. Foreign investors which have previously found Australia to be a good investment destination will find Australian real estate to be increasingly more expensive whilst local investors will do well to look beyond our shores to find bargains as a result of the strength of the Aussie dollar. These markets may include those closer to home such as Thailand, Singapore, Malaysia and Indonesia. For the more adventurous in markets further away from home, the US, UK and certain parts of Europe present great opportunities with strong yields due to their struggling economies. Although strong gains are not expected anytime soon, this may be an alternative strategy to hedge your currency in exchange for good yields in the event the Aussie dollar retreats.

Albert Wong is economics editor for
Disclaimer: Views, opinions and comments expressed in this article are general in nature and do not constitute investment, legal or financial advice. Readers are advised to seek their own professional advice as and when required.

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