Dato’ KK Chua’s 2019 Market Outlook
By: Jotham Lim
With the new year rolling in, Dato’ KK Chua, Property Insight’s Editor-in-Chief, takes a look into the recent past to try and preview the future, as well as answer some of your most pressing questions about the property industry and investing in property. Here’s a sneak peek into the mind of the man behind Malaysia’s largest property magazine.
Tell Us a Little about how You Got Started in the Property Business
15 years ago, I was a real estate negotiator. Being new to the property scene, I sold my first few properties and my jaw dropped when I read through the S&P agreement. I have seen house prices increase by 50% in just two years, and 100% in just three years. I saw a huge opportunity in this market, thus I started learning from my mentors and past clients. One thing led to another, and here I am now today.
Education and understanding market news is what brought me here today. That is why I transitioned to starting my own publishing company, to teach and educate new investors on the ropes of property investment. Even today, I still receive questions via email and social media from new investors looking for advice. Depending on my availability, I do my best to answer their questions every time.
In Your Opinion, how is the Market Performing Right Now? (Residential, Industrial, commercial)
From my perspective, the largest market movement has come from the residential sector. As you know, Malaysia is experiencing an issue with overhang properties. There is a glut in the supply of residential homes, and the key question we should ask ourselves is, how can we speed up the property digestion process and reduce the supply in the market?
For the industrial sector, there has not been much movement from what I have observed. The industrial sector has never been very vibrant relative to some other industries, but transaction rates have been consistent. I did notice a slow increase in demand for industrial space due to the influx of online trading platforms. The logistics and warehousing industry is currently experiencing a good and healthy spurt of growth and they need factory spaces to conduct their businesses.
It is difficult for me to comment on the commercial sector as a whole because it is split up into many subsectors. I will try to address three major ones - office spaces, shop lot houses, and retail stores.
The issue of overhang office spaces has been going on for years with typical pessimistic sentiment repeated over and over like a broken record player. Nothing much can be said for this segment, but I would like to comment on new commercial projects rolling into the market.
From my experience, these new Grade A offices with their new facilities are going strong in this industry. It is old offices that lack refurbishments and repairs that are experiencing issues and data statistics reflect that. Old offices that are more than 20 years old will suffer in terms of occupancy and rent while Grade A offices that are well located show great growth potential.
Shoplots in general are doing okay in the current market but only those on the ground floor. The challenge lies in the upper levels of 2 or 3-storey buildings. These units are much more difficult to rent out, especially with the emergence of co-working spaces. My advice would be to change the entire concept layout and rent room by room.
There is a trend of people converting upper floors into accommodation for workers and employees. Some buy out the entire building and convert it into a budget hotel. These ideas work really well but don’t get your hopes up if you were planning to rent the space out as traditional office units.
The market which sees the most movement is retail stores and shopping malls. Online shopping has largely disrupted this segment, causing a shift in tenant mix and occupancy. You see shopping malls now focusing heavily on food and beverages, large fashion retailers, and jewellery corporations and franchises. However, the retail market as a whole has been showing signs of growth and potential.
Developers Have Recently Made a Push towards the sub-RM500,000 Market and Affordable Housing. Do You See This as a Necessary Adjustment for the industry’s Survival? And is it Sustainable?
I see this shift towards affordable housing as a government initiative to help the B40 and M40 groups to own their very own house. There are plenty of houses priced below RM300k, but even if the property prices are at RM150k, many of the B40 group are unable to secure a loan to afford these houses.
On the contrary, if the affordable housing policies are not controlled well enough, it might invite investors from the M40 group to come in and purchase these affordable houses instead. This will somewhat defeat the purpose of having an affordable housing policy. In my opinion, the shift to focus on affordable housing is but a temporary trend because the entire market is heading in that direction.
The RM400k to RM600k price range is where property transactions and prices remain sustainable. The M40 group is a red ocean market. The majority of developers are building houses priced between RM500k to RM600k to cater to the mass market. When most developers are targeting the same demographic, heavy competition is bound to happen and some developers will fail. Hence, good positioning and differentiation are needed to stand out from the competition even at the RM500k range. It can be a better layout, better amenities, better location or even an award or two as long as developers are able to justify their pricing.
What Are the Influences that Have Resulted in the Current Market Move towards This?
I feel that the biggest influence on the current market would be the mismatch between supply and demand.
People say property is all about location. Behind that statement, what they truly mean is property is all about population. This universal truth cannot be changed. If an area has a lot of footfall and people, it means it is a vibrant area and units will definitely be sold. In a new township, if they do not have the population to back it up, it is very difficult to justify selling at a high price. What you see is what you get. Places like Bukit Bintang are so highly dense that it is actually hard to fail if things are done correctly.
In the past, developers would say “build and people will come.” But this chicken and egg statement I prefer not to be optimistic about because very few people work and live in certain areas. No matter how many projects are being built, it is difficult for the area to grow. That is how we end up with the current property overhang issue.
On the contrary, build the right property in the right location at the right time and people will definitely come. I urge newer developers to take a look and reflect on their current plans. Study demographics, psychographics, and population due diligence to observe if an area has strong demand and under-supply issues and if the population has the financial strength to afford these houses.
“Don’t build homes for the future in the hope that people will eventually move in. Build it for people now who desperately need it.” - Dato’ KK Chua
Another major market influence that many people do not know about is market sentiments. From historical data, the property market lags behind the stock market by six months. If the stock market does not perform well, you can expect property transaction rates to slow down after six months. Property purchases are heavily reflected by buyer’s confidence. When people are confident in the Malaysian economy, more cash flows into the market which then flows into the property sector as well.
Plenty of foreign and local investors were also seen shying away from Malaysian properties due to the lower Return on Investment they generate. Unless investors produce manufactured returns like renting out on AirBnB or incorporating different concepts, returns are only 6-7%. But if rented out as usual, just like every other investor, you are looking at about 3% at most.
Many home buyers are angry at banks for not providing them finances for home purchases. To them, I say don’t blame the banks. They are in the business of lending money and many factors are taken into consideration when issuing a loan. If you are eligible, there is nothing to be afraid of. There is also a debt service ratio standard that banks need to uphold. This way, banks are trying to help by ensuring you are able to survive the monthly payment. It does not make sense for banks to issue loans that people are unable to afford to pay off.
But one aspect that I wish banks could improve on is that they need to open up the doors for the B40 group and first-time home buyers. The government should take the initiative first by offering sensible policies through government-linked banks like Bank Rakyat and BSN. Set an example, only then will the private banks follow.
What Are Your Thoughts on the Property Overhang Issue here in Malaysia?
I have a theory as to why this has become an issue. In a newly developed district, the first initial project can manage to sell out its entire 500 units. The fact that the projects have fully sold out means that there is a market in that area - on paper that is. The true demand in that area may not be so enthusiastic, but many developers do not realise that. So half a year later, three more projects start rolling in and get sold out. Half a year later, another three more projects get erected, and they manage to sell well too.
Thus, more and more developers start pouring into that district because historical performance suggests that this area has been selling well. But an area can only have so much population and Malaysia can only have so many investors in the market. Those projects which are first to launch in that particular district - of course, their take-up rate will be good, but not much can be said for the rest that followed along. Developers should take effort and find out the real demand among the local people and cater to the population and their needs and wants.
What is Your Market Outlook on the Real Estate Market in 2019?
I would like to state upfront that I do not know for sure what is going to happen in the property market. But from my understanding, we should see more vibrancy in the market in the second half of 2019. Up until February this year, despite many initiatives from the government and new concepts like P2P lending, there has not been much market movement as of yet. People say that we are in recovery mode right now, but we have been stuck in this mode for the longest time.
I see the current property market like a sick human body. Our body temperature is increasing but we have not actually fallen sick yet for the longest time. We need to fall sick in order to get rid of the toxins and pollutants in our body in order to recover.
We need to see prices dropping before they can go back up, and we have not seen the dive yet. Yes, the market is slowing down, not because buyers lack the money, but because most of them are waiting… waiting for the dive to happen, so that they can capitalise during the changing market.
What Advice Would You Give to Seasoned Investors such as Yourself?
In reference to what I have said earlier, do not try to time the market, but put more time into the market. Nobody knows if and when the market will crash, but if you chart the graph of the last 20 years, you will see that the arrows have always been pointing upwards.
The property market is not that much different from the share market. You could try to buy at the lowest point on that particular day, but it would not matter much in the long run. Buy properties as if you would buy stocks, for the long term and think beyond daily market movements.
The longer you hold your properties, the higher your profits when you let go of them, but how much is enough is entirely up to you. My rule of thumb is just for the profits to be higher than any bank’s fixed deposit rates.
Is now a Good time to Invest in Properties?
For such a cliché question, I can only give a clichéd answer.
The best time to buy a property was 10 years ago. The second best time to buy a property is today.
As long as it fits your objective, and you have the funds to do so, you can buy a property anytime you want. Regardless if the market is bullish or bearish, you can always find a good deal at any time. In fact, with the current market situation, good deals are easier to find.
Overhang units usually spell good news for buyers and investors because there will be better rebates and better discounts that you can capitalise on. But the most important step is to ask yourself questions and find out your individual goals.
Some of us don’t want to go through the hassle to rent out our units. Some just want to hedge their money above the fixed deposit rates. Some are looking for double-digit returns, and some may be comfortable with just 3% returns. It all boils down to your individual wants and needs.
What Actions Do You Recommend the Government Take in order to Curb the Issues in the Market?
As mentioned earlier, the government’s focus is directed at the B40 group of people, with the first-time homebuyer policy, RUMAHWIP program, etc. However, affordability is the main issue for B40 groups, and the government should focus on increasing the nation’s productivity as a whole. Only then are people able to afford properties.
Our income is the biggest obstacle right now. There are so many RM500K homes in the market, but it would require a family with a monthly income of RM8000 to comfortably afford it. Who is able to fork out such a sum? That does not include maintenance fees, utility bills, existing car loans, etc. The reality is, the rakyat needs to be more productive in order to afford good housing, and the government should direct their attention towards that instead.
What Were the Main Elements You Looked for in Your First Property Investment?
The same elements I looked for in all my properties - supply and demand.
In order to pick a good property to purchase, you need to know if the area is vibrant and alive. The easiest way to do so is to take a drive around the area in the morning, and another drive at night, and take in the surrounding atmosphere. If you are eyeing a home in that particular area, always benchmark it against other current projects. How much are they selling for? How much are you able to sell it for? Understand the type of people who will buy and rent your property. Be as clear as possible, and only then will you know if this property has potential or not.
What Advice Would You Give to Novice investors/first-time Investors?
I recommend new investors to start with properties near the area they are currently staying in. If you have lived in an area for a long time, you will know the ins and outs of that particular area. I know pretty much everything about Kota Damansara because I have been living here for the past 10 years. If I were to buy a property, it would be a safer bet for me if I were to buy it here. It would be a riskier bet for me to purchase a property in Cheras because there are plenty of uncertainties to account for which can be compensated for through research of course.
Sacrifice your weekend and go visit the sales gallery of the project you are interested in. Understand everything you need about the project and developers themselves. Never buy a property because of your friend’s recommendation, and never follow the hype.
Know how much you can actually afford. If you can afford a Myvi, don’t go ahead and buy a BMW. There is no shame in owning a Myvi, and there is no shame in owning a RM200K property as your first property. There are a lot of people wanting to buy a property way above their means and end up eating stale bread in a corner of a big house. Never stretch yourself too thin.
With Chinese New Year just a Few Days Away, is there Anything you’d like to Say to the Audience?
During this festive season, put all business and investment talks aside and spend time with family and loved ones. Whatever happens in the outside world, family still remains the most important thing in life. Savour the moments you spend with loved ones. After all, how many Chinese New Years can we celebrate in a lifetime?