2019 In the Eyes of an REA
By: Jotham Lim
A soft property market is not a far-off event looming on the horizon. We are, in fact, experiencing a soft property market right now. Many industries have been affected by this market change, and the real estate agent (REA) industry is no exception.
It is now the survival of the fittest, and only those who can adapt to these market changes can truly outlast the competition and endure this period of struggle. Property Insight managed to get in touch with Mr Alex J Gomez to get his thoughts on this changing market - and this is what we have learned.
WHY REAL ESTATE IS STILL A WORTHY INVESTMENT
Despite the soft market, real estate is still a profitable business simply because of how important it is to our everyday lives. Real estate fulfils some of our most basic physiological needs, providing security, warmth, and shelter, placing it at the base of Maslow’s Hierarchy of Needs. Just like gold, there will always be a limited amount of space available on Earth, making real estate more and more lucrative as time goes on.
Real estate is different from other investment options because, as the name suggests, it is real and tangible. Owning a physical space and having a roof above your head is different from other intangible and abstract investment options like stocks and bonds. Real estate has always been a relatively safe investment, and it is common for middle-income earners to have an investment portfolio consisting of multiple properties.
There are many ways to directly profit from property investment, with two main sources being rental income and capital appreciation. Rentals yield a steady flow of monthly passive income, which can offset the monthly mortgage payments. House prices appreciate as time goes on, hedging it against inflation while providing a hefty profit margin, provided that the property is situated in a strategic location.
CURRENT MARKET SITUATION
Malaysia is, and has always been, a vibrant market when it comes to real estate. However, there is a glut of properties currently on the market, with around 30,000 unsold units at the end of 2018. This translates to about RM17 billion worth of properties just lying around gathering dust.
In spite of the oversupply of houses, the amount of property transactions in Malaysia remains relatively unchanged. In the Klang Valley, it is slowly becoming harder to profit from capital appreciation, especially with changes to the Real Property Gains Tax (RPGT) introduced in Budget 2019. However, property investment in the Klang Valley still provides a healthy flow of rental income, making properties an attractive option for investors.
Real estate agents were primarily involved in the sub-sale market. But with developers being stuck with an oversupply of units, real estate agents have been brought in to sell these unsold properties as well. This is unsurprising, seeing that agents are able to sell properties at a higher rate than developers themselves by using their expertise and the wealth of information and databases they have on hand.
CHANGING TIMES
Buying newly developed projects is a different proposition in the current market compared to even the recent past. There were rental guarantees and rebates, with the closest thing resembling a benefit being the Developer Interest Bearing Scheme (DIBS). The market started to change in August 2015 when the IMDB scandal was unearthed, precipitating a sudden drop in demand for Malaysian properties.
It revealed that the country was knee-deep in debt, and investor confidence in it was reduced drastically. People were afraid to buy new properties; in fact, many investors were desperate to sell theirs. With more properties coming onto the market, developers needed to find new ways to attract customers to buy their unfinished projects. Thus began the race to offer the best benefits and rebates.
From the buyer’s point of view, buyers are more incentivised to buy newly developed properties as opposed to sub-sale units. Buyers only need to fork out a down payment as low as RM45,000 for a studio unit in the Klang Valley. The difference is stark when compared to sub-sale units with their higher down payments, making sub-sale harder to procure than newly developed ones.
The drive towards buying newly developed projects is further amplified when you consider that buildings deteriorate over decades. When given the option to buy either an old, formerly tenanted house or a brand new one at the same price point, it makes sense to pick the latter.
This is not to say that newly developed projects are universally better than sub-sale units. There are factors such as immediate rental income, completion risks, room for negotiation, and location maturity that still give sub-sale an edge over new developments. However, shifting consumer purchasing habits mean real estate agents have to adapt to selling new projects. It is said that sales commissions go up for new projects compared to the industry-capped sub-sale commissions.
We referred to Mr Julian Ooi, head of project sales at Remax, to discuss the advantages of selling new projects from an agent’s point of view.
ADVANTAGES OF SELLING NEW PROJECTS
Same Presentation
Each sub-sale property is different, and agents must craft different presentations for each and every unit. Researching and crafting sales material for individual units is time-consuming, with time better spent prospecting and making sales. New projects, however, are the same across the board, and sales materials are generally already prepared and provided by developers.
Easier To Sell
New projects are just plain easier to sell on paper due to the sheer amount of benefits they provide. Developers offer to bear the costs of SPA legal fees while providing special rebates and rental guarantees. All these marketing buzzwords attract a lot of attention, which in turn attracts a lot of customers.
Prices Are Fixed
The prices are generally fixed by the developer, with little room for negotiation. While this may not be good news for buyers, it saves a great deal of trouble and time, rather than making many possible concessions and haggling back and forth with buyers.
Fewer Listings
Ask any agent, and they will say they spend a lot of time and money making listings and boosting advertisements on websites and social media. Making premium listings on portals is not cheap and entails a substantial amount of upfront costs, which may turn away novice negotiators. New projects require fewer marketing platforms, which, while not necessarily cheaper, certainly make management much easier.
Safer Environment For Females
Not many people have spoken about the issue of safety for female agents bringing potential clients to viewings alone. There are cases where females have been sexually harassed or felt physically threatened when bringing prospects to isolated locations. The issue is rampant to the point where female agents team up with other agents to conduct viewings out of fear for their safety. This issue is mitigated when selling new projects, as viewings are conducted in an open and public environment.
DISADVANTAGES OF SELLING SUB-SALE UNITS
Properties Are Sparse
Travelling to different properties across the state is an agent’s worst nightmare considering traffic and petrol costs involved. This is why agents specialise in specific areas or districts, but it does not change the fact that they are required to travel frequently in order to entertain clients and prospects in order to make a sale.
Lack Of Access To Units
There are times when agents have procured a listing but are not given keys to access the property itself. Home sellers are uncomfortable giving duplicate keys to unfamiliar people, especially when multiple agents are employed for the same property. This makes it common to bring prospects to view and inspect the property from outside, forcing agents to make appointments with homeowners as well.
Competitiveness
There are cases of poaching clients and undercutting deals in order to make a sale. Home sellers and buyers generally do not care about the inner workings and politics between agents; they are concerned with finding the best deal for themselves. This has created an unhealthy and unethical competitive environment where agents compete for buyers and sellers.
Closing
Speaking with Alex and Julian provided insight into the daily life and struggles of real estate agents. Despite the industry shift towards selling new projects, there will always be a secondary market that plays a major role in turning the gears and ensuring the system works as intended. In the end, it is important to pay attention to trends, as sometimes they are necessary for survival.