This article was updated on 11 April 2019.
Land investment today = Property development tomorrow. It is not a chicken and egg situation; you need land to build property. Land expert, Tan Hwa Chuan explains why investors should up the ante and look beyond physical real estate to obtain sustainable returns.
Why land investment?
• Raw land is a limited resource; even in Malaysia where land is abundant; not all are suitable for development due to geographical constraints. The only way to ‘create’ land is to embark on reclamation, which is complicated and costly to undertake.
• The country’s population is only going to go up – According to the Department of Statistics, Malaysia’s population stood at 31.2 million in 2016 and by 2040, this figure is expected to grow by 33% to 41.5 million. As population increases so does the demand for housing.
• Property developers are constantly on the hunt for the next best area to build a township or strata development. Depending on your land’s location and its proximity to the development site, its value has the potential to increase exponentially. Take the Jalan Tun Razak area in KLCC – land there was going for roughly RM50 per sq ft in 1996. In 2015, Affin Bank Bhd purchased 1.25 acres of land in the Tun Razak Exchange (TRX) for RM4,700 per sq ft in 2015; that is a 9300% jump in less than 20 years.
• Because land is a tangible asset, it circumvents fraudulent behaviour. Investors can carry out the necessary background checks and asset evaluation themselves.
• Individual investors can latch onto the potential of low entry costs as well as the leveraging power that land investment presents. While some amount of money is required, contrary to what most people believe, investors need not fund for 100% of the purchase price. For instance, I bought a plot of bungalow land (residential use) in Country Heights, Damansara for RM200 per sq ft in 2011. I obtained a 90% loan financing from the bank – the land value (as of Aug 2017) is now easily worth RM500 per sq ft.
• Land requires much less if not negligible maintenance as compared to other property classes such as condominiums or office lots. There are no tenants to look after, maintenance to worry about, etc – It just sits there and well, behave!
With the local property marketing bottoming out, is now a good time to invest in land?
There is no good or bad time – you buy land and wait, you do not wait to buy land.
The best upside to land is how resilient it is; even in economic downturns, its value will not experience any significant drop or stagnation.
Prices might see a temporary dip between 10-20%. But when it comes to appreciation, it’s a different story – ‘it’s a case of when it rain, it pours”.
What can landowners do to obtain the best returns from their investment?
The best exit strategy for land investors is to purchase land to sell it off for commercial or residential development. Nevertheless, considering the current economic climate, it is much more strategic to have a joint venture deal with developers.
Developers enter into an agreement with landowners where the owners retain ownership of the plot while the former erect a building (homes, offices, etc) and offer a few property units as compensation to the owner.
This profit-sharing agreement could see owners receiving real estate of their own or cash considerations in staggered payments or maybe even both. Developers, on the other hand get to save on term loan costs, i.e. bank’s interest payments; making it a win-win for both parties.
This JV arrangement is gaining popularity in Malaysia – On the back of an economic slowdown, both parties are more willing to explore such creative endeavours. Owners are able to utilise and reap the rewards from their asset whereas developers are able to cut down on development costs while capturing current consumers’ demand.
How can investors analyse the feasibility of a plot of land and what are some of the mandatory due diligence one should carry out?
I have actually developed a 10-step feasibility framework which has proven to work for all my land ventures in prime areas within the KV. This due diligence guide covers all bases from research to purchase and works to provide land investors with maximum value while mitigating risk:
The Rule of Thumb is especially helpful to carry out a quick preliminary test or when you have to make a judgment call. It calls for the land cost to not be more than 20% of its potential Gross Development Value (GDV); i.e: the estimated value that the total development would fetch in the open market. Currently though, investors are able to purchase land which cost is roughly 10% of its potential GDV.
Say, for instance, you have your eye on a plot of land which is able to generate a GDV of RM100 million – if the seller will not budge from a minimum asking price of RM25 million, you know it is time to walk away from the deal.
Level 5 is one of the most important steps – investors must appraise the rules and policies stipulated by the government pertaining to land. The Local Municipality’s planning department is in charge of the area’s Town Planning or future development blueprint. You will want to determine that you are purchasing the right type of product.
Should investors purchase a land gazetted for agricultural use, they will not be able to sell it off to developers as the land is not zoned for development use. Instead, it can only be utilised for plantation purposes. So unless investors are planning to plant durian or mangosteen trees, their investment will backfire.
Case in point, there are numerous plots of land in the Melawati area that have been gazetted as forest reserve; but land purchasers who did not check beforehand had to kiss their home development dream goodbye.
Owners can apply for a re-gazetting of land use, say from industrial to commercial but this process is a tedious one as considerable cost and time are involved. In Selangor, the re-gazetting process takes 2 years and land purchasers will have to bear the financing’ instalments in the meantime, which translates to unnecessary losses.
Other points that investors should cross off their list include zoning, density and height restrictions for property development – you would not want to get a plot of land that is not going to generate maximum yields for you or your future buyer.
The next step, Land Office Checking is equally vital – here investors will get to determine if a plot of land is being owned by your seller or if it’s actually a ‘charge’ under a bank. Investors can also find out if their investment target is under any provision which allows the government to acquire it at any time for public use, transportation infrastructure, social housing purposes, etc.
How do I finance my land investment?
Most banks provide for a loan amount of 50-70%. Again it depends on the type of land and what is its intended purpose as well as the buyer’s profile. Banks award financing based on the potential profitability the land would generate. Say your (residential use) land is located nearby a condominium project which recently saw a good take-up rate; then you can expect to get a 70% financing.
Investors should look towards commercial banks such as Maybank, CIMB and UOB for the financing of development land whereas loan application for agricultural land meant for plantation endeavours and such would only fly with an Agro Bank.
Is land subject to taxes such as the Goods & Services Tax (GST)?
As per the Royal Malaysian Customs GST Guide, the sale, lease or rent of land other than land for residential, agricultural or general use (public amenities, parks, etc) is subjected to 6% GST.
However, there are a few other instances where GST comes into play. In cases of JV between developers and landowners to build commercial/ industrial properties, the landowners will have to pay GST for any consideration (money or real estate units) they receive in kind even though there was no land transaction. It will be best to always consult your accountant or tax planner to avoid any ‘shocks’ down the road.