When making investment decisions, property investors need to know what is the expected rental yields from a property investment and how its yield would fare in comparison with similar class of properties as well as other alternative investments available in the market such as REIT, stocks, unit trusts etc.

A rental yield provides indication about the performance of a investment and its relative attractiveness against other types of investment. For example, if a residential property can produce a rental yield of 5% pa, it is considered a better investment than the fixed deposits offered by the local banks at prevailing rates of 2.0- 2.5% pa. On the contrary, the 5% yield is considered less attractive if compared to other higher yields but riskier investment options like stocks, equity-based unit trusts etc.

Besides, the yield can be used as a yardstick to measure and evaluate similar class of competing investments for decision making. For example, condominium investors would be keen to know which class of condominium in Penang can offer higher rental yields ?

a) beach / holiday resort condominium within the tourist belt of Batu Ferringgi or
b) city condominium in the inner city of Georgetown or
c) Suburb condominium at new growth areas along the reclaimed coastal area of Jelutong- Gelugor- Bayan Baru

Ways to determine property investment yields

The rental yield for a property investment can be determined by using the following calculation, commonly known as investment method:-

Estimated Rental per annum
______________________ X 100 = Gross Yield (%)
Property Acquisition Cost

Property Acquisition costs = Purchase Price + incidental costs ie legal fees, stamp duties, agent fees etc

Example :

Monthly rental RM1,000.00. Estimated annual rental income = RM12,000.00
Property acquisition cost= RM185,000.00

RM12,000.00
——————- X 100 = 6.5% gross yield
RM185,000.00

For computation of net yield, which is more reflective of the actual return, the following expenses ought to be deducted :- maintenance charges, sinking fund, management fees, insurance, quit rent, assessment, and other expenses.

Indicative gross yields of several property class in Penang

Landed houses- terraced, semi-detached and bungalow: 2 – 3%
Townhouse/Apartment/Condominium : 4-7%
Commercial shops/light industrial : 6- 9%

Generally, landed homes in land-scarce Penang offer lower rental yields as compared to high rise stratified and commercial units. Lower yield signifies that it is a safer or lower risk investment and hence  investor is willing to accept longer payback period for his investment. Property investors would expect higher yields for commercial/industrial property investments due to higher holding costs and risks.

Property investor need to set out his/ her investment objectives whether to invest for rental returns or long term capital growth or combination of both as each investor has his own investment requirements and rental yield expectations and hence difference strategies and choices of properties as their investments.

• Landed houses vs condominiums/apartments
• High price single property vs low price multiple properties
• Off-the-plan housing unit vs secondary market unit

A retiree might seek higher rental as passive income from his property investment whilst a young working professional would be more interested in wealth creation and achieve long term capital growth.For more related information on investment strategies, go to 6 strategies to succeed in Penang Property Investment.

In addition to the above investment method, other sophisticated approaches that can be used to aid property investors in decision making are:-

The Discounted Cash flow (DCF) model can be applied to determine the Internal Rate of Return (IRR) or Net Present Value(NPV) of an investment property. The DCF method is one of the valuation methods being used by property valuers particularly in evaluating income-producing properties and potential   development lands.

The Monte Carlo Analysis is another decision-making tool using multivariate modelling technique that allows investors to forecast various investment outcomes. The risk/return profile of any investment can be calculated and compared to investor’s risk tolerances.

View of the coastal area along Tanjung Bungah- Batu Feringghi

Unlike the previous 1997/98 Asian Financial crisis, the Penang property sector at that time was badly hit due to the credit crunch of the Malaysia banking system and the sudden surge in lending rates to as high as 13%.  As a result, many housing projects were stalled and abandoned, with many developers were either facing cash flow and debt servicing problems and eventually collapsed and wiped off from the marketplace such as Adorna, Penas and Cayman etc. The aftermath of the crisis has crippled the Malaysia housing and construction sector with major property sectors suffered sharp price declines as much as 30-40% from their peak levels whilst the banking system saddled with huge bad loans and high NPLs.

Some notable projects in Penang/Kedah region which have been badly affected since the times of 1997/98 Asian Financial Crisis are mostly retail/commercial and several mega projects, some of which are still in abandoned stage and awaiting revival or resuscitation:-

Penang Island

Bayan Central – An uncompleted commercial complex located at Bayan Bayu which commenced construction in 1997 and subsequently stalled.

Bayan Bay Marina and Leisure Resort by Eternal Resources (joint venture between Anson Perdana and PDC) which was originally scheduled for completed by year 2000 but stalled for several years. This multi-million Bayan Mall (now Queensbay Mall) was successfully revived by CP Group and commenced business in 2005.

Mainland Penang (Seberang Perai)

Plaza utama- A commercial complex comprising 6 storey shopping mall, 213 room-hotel and one office block at Bukit Mertajam town. Plaza Utama development commenced in Nov 1995 and completed in 1997. The commercial complex was opened for business after completion but ceased business after a short stint.

View of Plaza Utama in Bukit Mertajam

City Parade at Jalan Megat Harun, Bukit Mertajam – Another completed commercial building which is similarly affected like Plaza Utama and ceased operation after opened for business for a short period.

Both buildings have long been put up for sale by former Danaharta now Prokhas and still looking for potential “white knight” to revive it.

Fasda Heights (Taman Bidara)- a mixed housing project in Macang Bubok, Bukit Mertajam with about 1,000 units which was not fully completed and handover to the purchasers.

Taman Perindustrian Macang Indah- an abandoned SMI industrial park at Sungai Lembu, Bukit Mertajam.

Leisure Tower- A 11-storey integrated commercial complex at Jalan Kampung Gajah, Butterworth by HCC Group originally schedule for completion end of 1999 but only partially completed and abandoned.

Kristal Golf Resort (Suasa Kristal) - a golf resort located at Sungai Bakap, Southern Seberang Perai, ceased operation several years ago and taken over by Danaharta. The site was reportly sold to a private housing developer.

Others approved commercial complexes which have been launched but failed to take off and subsequently shelved are “Plaza Everise” – a planned 2.3 acre commercial complex at Sungai Rambai Commercial Centre and  “Aseania Mall” at Bandar Perda. Both are located within bukit mertajam area. “Plaza Cayman”, another planned commercial project located adjacent to old MPSP building at the heart of Butterworth town.

Kedah

Padang Meha Parklands by MBF Country Homes and Resort (Alamanda) near Kulim– a proposed RM3 billion housing/resort development near Kulim covering 5,200 hectares launched prior to 1997/98 Asian Financial Crisis which has since abandoned. Latest report disclosed that the developer has been liquidated in year 2005. More related info here: Developer liquidated, 300 land buyers in the lurch. Others include the 160 hectare  residential resort scheme (Diamond Santuary) in Mukim Padang Meha near Kulim Hi Tech Park and the proposed RM1 billion Diamond Creeks Retreats with 800 hectares of land in Ulu Behrang, Perak near the proposed Proton City.

In a nutshell, the magnitude and severity brought about by the impact of the 2008/09 Global Financial Crisis on the Penang property sector is comparatively shorter and much lesser compared to 1997/98 Asian Financial Crisis. A healthier and resilient Malaysian banking system, on-going implementation of Malaysia economic stimulus package, Malaysia’s central bank prudent interest rate policy, relaxation of EPF housing withdrawals and other economic liberalization measures, have helped to cushion the impact of the recent economic downturn on the property sector. Malaysia economy is on track for a full recovery next year.

Wawasan Open University along Jalan Sultan Ahmah Shah
(Northam Road), Penang

Here is Mr Andrew Sheng’s An Asian View Of The Global Financial Crisis. Though economists are of the views that the worst is over and confident level on the global economy outlook is improving, the lingering concerns remain whether the world economy recovery is V-shaped or W-shaped recovery? Nobel prize-winning economist Paul Krugman’s view ; World may witness W-shaped recovery whilst a local Fund Manager has a bullish view; V-shaped recovery has begun.

Malaysian Economy - at which stage of economic clock; 7 or 8 or 9 O’clock ?

1. Relaxation of FIC guidelines- The Prime Minister of Malaysia has announced that, effective 30/6/2009, all property transactions, including those between foreigners and non-bumiputeras, will no longer require Foreign Investment Committee (FIC) approval. The NEW FIC guidelines on acquisition of properties can be downloaded from the website of Economic Planning Unit of the Prime Minister’s Department.

However, foreign investors cannot acquire properties below specified threshold limits, with the threshold amount for commercial properties at RM500,000. For the purchase of residential properties, the present threshold of RM250,000 is maintained until the end of 2009, with the threshold increased to RM500,000 effective of Jan 1, 2010. More latest related information on deregulation of FIC guidelines at here and here.

2. Pemudah– A special taskforce set up by the government of Malaysia in 2007 to facilitate easier business dealings and improving public services delivery system. Pemudah has come out with a guidebook on land registration in Malaysia. The guidebook provides a brief information on land ownership registration in Malaysia. It also provides the stages and processes involved in land administration and complete with relevant forms required when transferring ownership for both local and foreign investors as well as list of registration fees for ownership transfer of each states.

The guidebook can be downloaded free from Pemudah’s website-here;

3.JPPH–Valuation and property services department, ministry of finance Malaysia. The JPPH’s website has shown much improvements over the years. The website not only posted the department’s up-to-date information but incorporates various NAPIC (National Property Information Centre)’s publications as well which was previously available on printed copy at a fee.

It is commendable that JPPH has posted NAPIC’s publication online on regular basis providing free quarterly property information such as Property Stock Report, Property Market Status Report, Property Sales Data etc. In addition, the portal now comes with new added online services such as stamp duties calculator for ownership transfer of real estate and MySMS services for property purchasers on stamp duty valuation cases. Though JPPH has uploaded the property information online, layman and property beginners somehow find that these quarterly reports are not easily comprehensible as there is little explanation or commentary and comparative findings on these tabulated statistics and data. The information is catered more for macro analysis on the suppy and demand of the various sub-sectors of the property market.

4. Department of Director General of Land and mines – this website posted general information (in Malaysian Language only) and a list of Malaysia Laws and application guidelines of various land dealings such as application for state alienated lands, subdivision and amalgamation, land conversion and guidelines on the approval process of land ownership (residential units) by foreign interests. Under Malaysia’s Federal Constitution, Land is under the jurisdiction of the respective state administration and each state has its own set of land enactments. Related link : Penang’s new policy on land conversion.

The website has also posted a paper written by Mohd Shukri Bin Ismail providing some insights into the latest amendments of the National Land Code 1965. The National Land Code is the primary land law of the states of Malaysia.

5.MM2H – Malaysia, My Second Home Programme, an international residency scheme being promoted by the Ministry of Tourism Malaysia to allow foreigners to live in the country on a long-stay visa of up to 10 years. The portal, MM2H, has been enhanced several times and is now accessible in various languages and provided with all the one-stop information including guidelines on purchase of residential homes by foreigners/expatriates.

6. Guidelines for house buyers issued by Ministry of Housing and Local Government Malaysia- The guidelines has been posted on the ministry’s website for many years which are still relevant and provides  helpful tips to FIRST-TIME house buyers who wish to purchase new housing units (off-the-plan or under construction units) from primary market ie from housing developers.

The website also provides information of housing legal clinic and tribunal for homebuyer claims set up by the ministry to provide advice and help solve the problems faced by home buyers against housing developers.

For advisory on property investments in Penang and Kuala Lumpur, email to us at Izrin & Tan Properties Sdn. Bhd or call us at +604 6588333 (Penang Office) or +603 92839782 (Kuala Lumpur Office) and we would be pleased to assist.

Evening Scene of Butterworth-Penang Skyline

KLCC skyline

We have seen house owners carried out major renovations to their houses to the extent that the renovation costs exceeding the purchase price of the house.

Renovations do not always translate to an increase in the value of your home. However, if you’re planning to sell sometime in the future and want to ensure you get the most ROI (Rate of Return), it is important to assess the value renovation. Below are several ways to optimise the cost-value ratio and achieve maximum ROI for your renovations;

a) Avoid renovations with too much customization of personal liking and taste.

If the major renovations and home improvements are customized design to suit to personal liking and lifestyle which is not commonly acceptable in the marketplace sometime in the future, you may not get much of a return when you sell as potential buyers may find these renovations are not value-added renovations but rather owner’s own personal indulgence and lifestyle. Potential buyers may also view it as a liability because he may have to spend more money to change or renovate again.

When choosing tiles, countertops, paint, cabinet doors, kitchen appliances and awnings, go with colors that will stand the test of time even as fashions come and go. Conventional or classic home designs are still the ideal for home renovations because such designs never go out of style and will always attract buyers when you are ready to sell your home.

b) Retain the essence of the original design ambience

Avoid excessive renovations such as changing the structure of house from the original two storey house to become a three storey house or demolition of a front porch and facade and replaced with a totally new design super large car porch with a balcony. Such major renovations could have materially changed the external facade of the house and may render the house no longer blend in with the design ambience of the neighbourhood and this may affect the saleability of the house.

c) Summit proper building plan for new extensions

Check with the building department of the local council MPPP or MPSP and obtain a copy of building  approval guidelines. Engage a licensed draftsman or architect to ensure that the extensions are in compliance with the building guidelines by the local authorities.

A property valuer, when assessing the market value of a house, will give due consideration and only accord full value computation for properly constructed extensions with valid approvals.

d) Value-neutral or value-added renovations

Ascertain whether the renovations to be carried are value-neutral or value-added renovations. Upgrading cement floor with homogenous floor tiles, modernizing a kitchen or upgrading the kitchen into wet and dry cooking area, improving home security system are regarded as value-added renovations whilst demolition of front terrace and house facade and rebuilt it with a large balcony, adding a swimming pool or building a sauna or long bath,  reducing the number of bedrooms to less than three are considered value-neutral renovations.

List down your options before embarking on home renovations. For house buyer who prefers house design with large car porch and balcony, it is wise to compare and weight the option which is more worthwhile and cost effective ? to buy a landed house without a balcony and later renovate it or to look for house design that comes with large car porch and balcony ?.

House Design : 2-storey terraced houses without balcony

Another House Design : 2-storey terraced houses with large car porch and balcony

For more tips on home renovations, go to Renovation quotation.

Very often when house owner decides to sell off his house, they tend to overprice their properties as they calculate their asking price by factor in all the costs incurred during and after acquisition of the house ie. purchase price plus all incidental costs such as payment of legal fees and stamping charges plus  renovations costs, bank interest charges incurred plus exit fees or penalty charges for termination of loan agreement within the lock-in period (if any).

The true fact is that total cost spent on the particular house is NOT necessarily equate to the market price of the house. In an active and uptrend market, house prices tend to go up higher than the total acquisition costs. Conversely, in a weak or depressed market, house prices may go down and fall below the total acquisition costs of the house. The market price of the house is very much influenced by the prevailing economy conditions and market sentiments and more specifically relates to the demand and supply of similar houses in the local area.

For advisory on property investments in Penang and Kuala Lumpur, email to us at Izrin & Tan Properties Sdn. Bhd or call us at +604 6588333 (Penang Office) or +603 92839782 (Kuala Lumpur Office) and we would be pleased to assist.