Property expert Dr Daniele Gambero, Co-Founder and CEO of REI Group of Companies recently presented 6 golden rules to help property investors to make profitable purchasing decisions even in challenging times. He recently spoke at the Havoc Hartanah property convention.
Dr Gambero introduced the term, propenomy as a lead into his presentation. He explained that propenomy is a portmanteau of property and economy and is based on the understanding that property is not an economic driver but the consequence of properly planned economic growth. Propenomy is derived in a market by which the rules for sustainability has been clearly outlined as in Malaysia. He then defined sustainability as the healthy growth of a regulated and profitable property market using the diagram of a house. He said sustainability is achieved through reinforcement of 4 key pillars which are namely, the definition and development of economic clusters, definition and development of proper infrastructure, socio-economic equity or fair wealth distribution and lastly by having a strong legal framework and regulatory authority. The 2 fundamentals that underpin these 4 pillars are economic growth planning and execution as well as a stable and democratic political environment.
Dr Gambero elaborated on the Malaysian context. He said that a property investment will generate capital appreciation if the selection of the property’s location and type is based on the sustainability model. He then shared his personal experience, stating that he, an Italian chose to make Malaysia his home for the last 17 years because Malaysia’s economy is very much based on the sustainability model as it is helmed on several drivers such as industrialisation, production, tourism, logistics, healthcare and it did not just rely only on its natural resources. Additional factors that has contributed to the strength of Malaysia’s economic route were its well planned and comprehensive infrastructure, educational facilities and high level of English language proficiency when compared to its neighbours.
Other key pillars of sustainabilty such as strict regulatory policies and well excecuted economic programmes are strongly reflected by Malaysia’s economic outlook with the exception of fair wealth distribution. In the case of wealth distribution, he said 80% of Malaysia’s wealth was controlled by 20% of its population. He pointed out that this disparity did not augur well for those yet to purchase a property. He also took time to name some of Malaysia’s key economic programmes such as the Economic Transformation Programme (ETP), New Key Economic Areas (NKEA), Greater Kuala Lumpur, Iskandar Malaysia, Sabah Development Corridor, Sarawak Corridor of Renewable Energy, Malacca Gateway, all of which he stated should boost investor confidence.
Dr Gambero next continued into the main part of his presentation on the 6 golden rules of making a profitable property investment. He elaborated on each of the golden rules by providing clear examples and illustrations as detailed below.
RULE 1 : Differentiate perception from reality
He emphasised on the importance of being able to filter away the perception created by advertising and other market dynamics and to rely on researched facts.
RULE 2 : Acquire a clear understanding of the basic facts and figures
He advised on the importance of conducting the necessary research to acquire all the statistics needed to support a decision. He continued by stressing the need to identify independent and credible sources. He then shared the statistics he had gathered on Malaysia from the International Monetary Fund (IMF) Country Report 2014. He highlighted the key findings of the report which were as follows:
- Near term outlook – Malaysia has a well diversified economy.
- Impact of lower oil prices – Modest negative impact as Malaysia is more of a producer of natural gas.
- Appropriate macroeconomic policy mix and fiscal consolidation well timed
- Financial stability: Risks pro-actively managed by Bank Negara Malaysia
He also addressed concerns about the lower oil prices, clarifying that Malaysia produces high quality crude oil, which is used by airplanes and hence has been able to maintain prices. He also spoke about the need for the implementation of GST as it will help provide for the infrastructure in Malaysia. He concluded his explanation of Rule 2 by reading IMF’s final comment; “Malaysia is on track to become a high-income country, fully developed and advanced economy by 2020.” He said that as the IMF is the monitor of world economies, its comments should give the audience further assurance on the strength of Malaysia’s economy.
He then added that Standard & Poor’s latest rating published in July 2015 reaffirmed Malaysia’s A- rating with a stable outlook. This reflects the country’s strong external position and high monetary flexibility. At this point he also highlighted the relevance of reports such as these to MNCs when making decisions about regional bases and the set up of manufacturing plants. He quoted the example of Nike, which was setting up a manufacturing plant in Lawas, Sarawak. DHL, UBS, Hewlett Packard, IBM, KWFH, HSBC were part of a long list of MNCs that had chosen to set up various types of operations in Malaysia based on figures provided by the IMF and World Economic Report.
Dr Gambero then spent some time dispelling the perception that property was highly unaffordable in Malaysia. He said that Malaysian property prices were amongst the lowest in the region and he substantiated this by presenting the average price of property in 9 Asian countries as well as each country’s average per capita income to property price ratio. An extract of the information he presented, sourced from the website of the Ministry of Housing & Local Government is shown below:
He highlighted Malaysia’s position as the country with the lowest property value to income ratio at only 5.93 and as such it enjoyed the highest prospect for capital appreciation. Dr Gambero went on to explain that from his discussions with developer associations such as REHDA, SHEDA and SHAREDA, he foresees that the average property price per square foot is expected to increase to RM3,000 in the next 5 years. Given that Malaysia is moving towards becoming a fully developed high-income nation by 2020, he was certain these prices could be achieved. Dr. Gambero shared the Italian experience where Italy after suffering massive destruction in World War II rebuilt itself to become one the 5 top industrial superpowers of the world in the 1970s and 1980s and saw property prices increase substantially.
He further clarified his point by saying although the number of property transactions has fallen, it should be noted that prices have not fallen which signals that demand is still strong. He explained the importance of investors having a good understanding of the purchasers of their properties in the future i.e. in the next to 5-10 years. He presented the demographic profile of the Malaysian population as shown below:
Dr Gambero drew the audience attention to the fact that 67% of the population is under 39 years and below. They formed the main segment of future property purchasers. He said as such, today’s investors are advised to purchase properties that are going to appeal to the Generation Y.
He elaborated by explaining that the Generation Y segment are drawn to designer homes, which offer a complete lifestyle. He identified features such as design, exclusivity, security (gated & guarded), connectivity and recreational facilities as the priorities of this segment. He said that they are not too particular about the type of property as they are open to purchasing landed, medium rise or high-rise, as long as it offers a complete lifestyle.
Malaysia’s Wealth Distribution
Next, he discussed the purchasing power of Malaysians. He began by presenting facts about Malaysia’s Wealth Distribution. The average per capita income was RM5,032 per month and quoted IM/WB as his sources. He then highlighted Malaysia’s Wealth Distribution Statistics as detailed below.
- 20% of the homes should be in the low cost bracket
- 60% of houses should have values from minimum RM200 up to max RM700 per sq ft
- 20% of houses free and open value RM/per sq ft.
He said that the said the median segment of 60% who shared 53.5% of the country’s wealth consisted of 18,000,000 people.
Affordable Housing Dilemma
Dr Gambero proceeded to explain what he termed as the Malaysian Affordable Housing Dilemma by defining the average affordable value per state by analyzing 2013 statistics of the following indicators:
- Population as at 2013.
- Average income per capita.
- Assumed average household monthly income by making the assumption that is a two-income earner with the 2nd income being 60% of the 1st income.
- 35% of income is payable towards mortgage with the assumption that tenure of the mortgage is 30 years at an interest 4.5%.
Based on which Dr Gambero was able to determine the affordable value for each state as per below:
Dr Gambero then stressed on the importance of being aware of these values when purchasing property. He said that an investor would analyze these statistics further by reviewing the type of property and the segment that it would be addressing.
He then zeroed in on Selangor to give his audience a better understanding. He began by sharing the average monthly income band for various professions in the state. The highest income earners in the state were legislators and senior managers who enjoyed a salary range of between RM12,000 and 25,000 or higher monthly. The lowest bracket for monthly income was from RM900 to RM1,300.
He also helped the audience to identify where their biggest segment of potential purchasers was in Selangor by analyzing statistics covering the following fields:
- Total population
- Household Income, average expenditure and average income available for purchase of a property.
- Affordable home value as first time homebuyer, 30 years tenure @ 4.6% base rate
- Ideal supply of residential units by income distribution.
His analysis showed that the estimate selling value RM/per sq ft for an average 1,000 sq ft home in Selangor should be priced between RM260,000 and RM600,000 to target 63% of the population who would form an investor’s potential purchaser base should he wish to sell his property.
Before moving to his third golden rule, Dr Gambero shared an extract from the NAPIC Property Market Report 2014 that provided statistics for the supply of 3 categories of houses; landed, low cost and high-rise between 2014 and 2020 for each of the states in Malaysia. The total number of houses was mapped against the population in 2020 to determine the gap in supply as shown below:
Based on the statistics above, Dr Gambero highlighted that total shortage in the number of houses will exceed 3,000,000 by 2020. As such he concluded his explanation of Rule 2 by saying that given the high demand for homes, prices could only continue to increase.
Rule 3 : Buy demand driven investments
Rule 3 exphasizes on the need to stop buying concept driven development and instead buy demand driven investment. He advised against buying a property for emotional reasons. He said a property should be purchased to make money. He next elaborated on demand driven factors that should be considered. He presented aerial views of Klang Valley in 1990 and in 2012 to show the expansion of developments that have taken place in the span of 22 to 25 years.
He then raised the topic of Klang Valley’s direction of growth in the future. He said that it would not be possible for Klang Valley to develop further to the East as there was a geographical obstruction, the Titiwangsa Mountain Range. He said the development towards the North of Klang Valley was not moving as rapidly due to the lack of infrastructure and demand drivers.
Development is growing rapidly towards the West and the South resulting from a strong demand being created by the growing population in the 3 key areas listed below:
- Greater KL to reach a population of 10 million people (Mega City) by 2020.
- Singapore aspires to reach a population of 6.9 million by 2030.
- Iskandar Malaysia aims to have a population of 3 million by 2025.
Dr Gambero also shared statistics on Kuala Lumpur/Klang Valley’s growing population and the corresponding demand it is creating. Figures of which are presented below:
To elaborate further on demand driven investments, Dr Gambero presented several game changers of the Malaysian property landscape. He began with the 11th Malaysia Plan, a major game changer that will be executed between 2016 and 2020. The plan, which is themed, “Anchoring Growth on People,” has 6 strategic thrusts as follows:
- Enhancing inclusiveness towards an equitable society.
- Improving wellbeing for all.
- Accelerating human capital development for an advanced nation.
- Pursuing green growth for sustainability and resilience.
- Strengthening infrastructure to support economic expansion.
- Re-engineering economic growth for greater prosperity.
Although all 6 thrusts would impact the property sector, the greatest impact would come from the 5th thrust, which focuses on improving infrastructure and entails optimizing transport planning. It involves what is termed as the Transit Oriented Development (TOD) and is a concept to be promoted to optimize land use and public transport infrastructure planning. The TOD concepts will be expanded in urban areas to maximize access.
Planned improvements, which are underway include:
- MRT Line 1 to be completed and operational by 2016 & 2017
- MRT Line 2 to be completed by 2022
- LRT Line 3 stretching from Bandar Utama to Shah Alam to Klang. Construction to begin in 2016 and be completed by 2020
- KTM to be enhanced in terms of frequency and services
He also highlighted the additional enhancements to the transportation system, which included:
- The construction of new highways, expressways such as Damansara Shah Alam Highway (DASH).
- The rationalization of bus networks and implementation of the Commuter Bus Improvement Plan (CBIP) covering 19 pilot project areas in Greater Kuala Lumpur/Klang Valley.
- The introduction of the Bus Express Transit (BET) lines to maximize utilization of existing infrastructure.
- The introduction of the Bus Rapid Transit (BRT) to 12 new corridors as per list below.
- Kuala Lumpur – Klang
- Taman Melawati – Puchong
- Puchong – Kuala Lumpur
- Ampang – Kuala Lumpur
- Kinrara – Damansara
- Bandar Sunway – USJ6
- Ampang – Kepong
- Kota Damansara – Shah Alam
- Shah Alam – Putra Heights
- Putra Heights – Putrajaya
- Putrajaya – Kajang
- Kerinchi – Alam Damai
Before ending his explanation on Rule 3, Dr Gambero said the complete network consisting of the MRT, LRT, BRT and BET would ensure that the Greater Kuala Lumpur/Klang Valley area is well connected. He directed the audience attention to the fact that the infrastructure was concentrated towards the south and the two focal points within Klang Valley’s comprehensive network were Bandar Malaysia and Putrajaya. He described these stations as super hotspots as they were respectively the second last and the last stations of Singapore-KL High Speed Rail (HSR) Link.
At this point he also expressed his certainty that the HSR Link will be fully constructed by 2020 or 2021. He said that the Singapore government has financially committed to the project and are in the midst of acquiring the land for its terminal in Singapore.
RULE 4: Identifying the right location
He began his explanation by reminding the audience on the importance of focusing on affordability of the biggest segment of the population and emphasized that Malaysia’s wealth distribution pattern clearly indicates that 60% of the population could afford homes priced between RM200,000 to RM700,000.
He then led the audience to review popular property investment areas beginning with the Kuala Lumpur city centre area. He said prices at the KLCC area was about RM2000 per sq ft making it only affordable to the 20% in the highest income segment. Next, he directed the audience attention to the areas just outside KLCC vicinity, which are priced at RM900 per sq ft and remain unaffordable to 80% of the Malaysian population. Next he highlights Puchong, which is at an affordable RM600 per sq ft.
However Dr Gambero continues by asking the audience to focus their attention to areas in the Southern Corridor of Klang Valley. He said leading developers are moving south and creating many opportunities for investments. The corridor enjoys high accessibility and connectivity provided by the LIKAS and PLUS highways as well as MRT, HSR, KTM and ERL making it ideal for purchase of properties that are priced between RM150 per sq ft to RM250 per sq ft.
RULE 5: Buying where there is scarcity
Dr Gambero introduced Rule 5 by identifying condominiums and landed properties with small built ups as good investments because of their scarcity. He said currently most developments in the southern corridor are serviced apartments. He continued by explaining that homes with small built ups are affordable and illustrated his point by highlighting the unaffordability of a 2,500 sq ft home at RM300 per sq ft which works out to RM750, 000 against the affordability of 1,500 sq ft home at RM250 per sq ft which works out to only RM320, 000 and has a wider base of potential buyers.
RULE 6: Earn heavy RM and live with light RM
Dr Gambero concluded his presentation by sharing a tip on how to save money. He encouraged his audience to work in large cities like Kuala Lumpur and Singapore where income levels are higher but to live in Southern Corridor where living standards are more affordable.
This article first appeared in the October 2015 iProperty.com Magazine Issue 128. Get it now from selected newstands and bookstores, or read it online at www.iproperty.com.my/magazine/