Tuesday, April 14, 2009
Should KLCC Investors Yield Or Maintain?
Recently, in the KLCC region, there have been a flurry of viewings and some transactions for the newly completed projects. Most projects completed in 2009 range from RM700-1200 persf in the secondary market, but do note that these are deflated prices as compared to their initial high back in 2007. From my own personal observation, transactions and even potential viewings were greatly diminished towards the end of 2008, and it was only after the Chinese New Year that things have started moving again. Buyers are slowly coming out in hopes of securing themselves some great bargains.
The question is this, most properties in the KLCC area are worth much more than they are being transacted at now. Do note that value of a property might not be similar to what is being asked for and transacted at ultimately. In dire times like this, vendors are lowering their expectations and hence the lower asking prices. Vendors who can hold on to their investments will prefer to lease their units out while waiting for prices to stabilise once again towards the end of this year. They know that their units can easily be transacted at 20% higher than what it is going for now in just a matter of a year from now. With this, there have been reportedly more landlords in the market now than there are vendors, and this in turn has seen a slight drop in rental rates.
So, in a stagnant economy like this one, what should investors do? When I say investors, I am referring to vendors and landlords, not so much buyers as in my previous post, I have made it clear that there is no better time for buyers to purchase than now. Bank interest rates are at an all time low, as low as 3.2% for the thereafter rates, and prices of prime property are realistically affordable now. But back to vendors and landlords, should they accept current prices of indication of the value of their properties? Should vendors accept lower transaction prices and landlords taking in the first tenants to offer?
I am with the opinion that if you are not able to hold on to your properties to see them surge to their rightful values in the coming years, then yes, you can accept offers that are on average 20% lower than what would have been when times were good. You see, contrary to assumption that most KLCC property owners are bleeding from their investments, the one thing that most folks forget is that these owners are also the ones who were enjoying capital gains on paper as much as 50-60% back in 2007. With the recent tumble in prices, it will take a genuinely lousy investment with a hopeless location to garner its owner losses.
Let's just say that the worst performing development in the KLCC region is still seeing an average of 10% capital appreciation. Don't forget that that this seemingly small capital gains may translate to lump sums of RM150K on average, which is by far higher than any other mediocre investment in the less prime areas. So, with KLCC investments, despite the fact that we are seeing price drops now, few owners out there are actually incurring losses as you would have thought. There is a difference in lower profit margins and total losses.
Rental rates have dropped too in recent times, due to a glut of landlords in the market as opposed to vendors. However, there have been tenants enquiring for rentals as well as they know that now is the time to lock in affordable rental rates. I would suggest to landlords to still screen through their prospective tenants instead of taking the first one to offer because problematic tenants are just as bad as having your unit untenanted, if not worse. However, be realistic with asking rentals. You may not enjoy the surplus that you would have hoped for, and possibly may have to accept rental offers that can barely cover your total monthly expenses. I would say that anything around a break-even is good enough for now. It will help you scrape through and prolong your investment to see values returning to their previous high in a couple of years or so from now.
In other words, do investors settle for lower transaction prices now or do they lease their units out while waiting for the economy to stablise? It all depends on your situation. If you are not so keen on facing possible rental issues and problems, then perhaps you would like to release your units for their lower accepted prices now. A gain is still a gain, and most KLCC properties are still seeing a gross capital appreciation of 30% on average. If you are fine with taking time to furnish your properties and lease them out in the hope of selling them when prices soar once more, then by all means.
I wish to point out that there are advantages to both scenarios. Some may have further ventures to move on to, and will see the exit route a better option rather than staying put with their current portfolio. Some may realise that prices today are not reflective of their actual values and would prefer to delay sales. It all depends on your obligations and directions, and not one decision is deemed better than the other. I have seen folks who heave sighs of relief for not getting into the KLCC bandwagon thinking that recent times have shown that it is clearly a bad idea. They cannot be further from the truth, because KLCC investments are KLCC investments, and there can never be better performing properties out there irregardless of good or bad times. Even at its worst, KLCC properties are still performing at levels equivalent to others at their best.
The question is this, most properties in the KLCC area are worth much more than they are being transacted at now. Do note that value of a property might not be similar to what is being asked for and transacted at ultimately. In dire times like this, vendors are lowering their expectations and hence the lower asking prices. Vendors who can hold on to their investments will prefer to lease their units out while waiting for prices to stabilise once again towards the end of this year. They know that their units can easily be transacted at 20% higher than what it is going for now in just a matter of a year from now. With this, there have been reportedly more landlords in the market now than there are vendors, and this in turn has seen a slight drop in rental rates.
So, in a stagnant economy like this one, what should investors do? When I say investors, I am referring to vendors and landlords, not so much buyers as in my previous post, I have made it clear that there is no better time for buyers to purchase than now. Bank interest rates are at an all time low, as low as 3.2% for the thereafter rates, and prices of prime property are realistically affordable now. But back to vendors and landlords, should they accept current prices of indication of the value of their properties? Should vendors accept lower transaction prices and landlords taking in the first tenants to offer?
I am with the opinion that if you are not able to hold on to your properties to see them surge to their rightful values in the coming years, then yes, you can accept offers that are on average 20% lower than what would have been when times were good. You see, contrary to assumption that most KLCC property owners are bleeding from their investments, the one thing that most folks forget is that these owners are also the ones who were enjoying capital gains on paper as much as 50-60% back in 2007. With the recent tumble in prices, it will take a genuinely lousy investment with a hopeless location to garner its owner losses.
Let's just say that the worst performing development in the KLCC region is still seeing an average of 10% capital appreciation. Don't forget that that this seemingly small capital gains may translate to lump sums of RM150K on average, which is by far higher than any other mediocre investment in the less prime areas. So, with KLCC investments, despite the fact that we are seeing price drops now, few owners out there are actually incurring losses as you would have thought. There is a difference in lower profit margins and total losses.
Rental rates have dropped too in recent times, due to a glut of landlords in the market as opposed to vendors. However, there have been tenants enquiring for rentals as well as they know that now is the time to lock in affordable rental rates. I would suggest to landlords to still screen through their prospective tenants instead of taking the first one to offer because problematic tenants are just as bad as having your unit untenanted, if not worse. However, be realistic with asking rentals. You may not enjoy the surplus that you would have hoped for, and possibly may have to accept rental offers that can barely cover your total monthly expenses. I would say that anything around a break-even is good enough for now. It will help you scrape through and prolong your investment to see values returning to their previous high in a couple of years or so from now.
In other words, do investors settle for lower transaction prices now or do they lease their units out while waiting for the economy to stablise? It all depends on your situation. If you are not so keen on facing possible rental issues and problems, then perhaps you would like to release your units for their lower accepted prices now. A gain is still a gain, and most KLCC properties are still seeing a gross capital appreciation of 30% on average. If you are fine with taking time to furnish your properties and lease them out in the hope of selling them when prices soar once more, then by all means.
I wish to point out that there are advantages to both scenarios. Some may have further ventures to move on to, and will see the exit route a better option rather than staying put with their current portfolio. Some may realise that prices today are not reflective of their actual values and would prefer to delay sales. It all depends on your obligations and directions, and not one decision is deemed better than the other. I have seen folks who heave sighs of relief for not getting into the KLCC bandwagon thinking that recent times have shown that it is clearly a bad idea. They cannot be further from the truth, because KLCC investments are KLCC investments, and there can never be better performing properties out there irregardless of good or bad times. Even at its worst, KLCC properties are still performing at levels equivalent to others at their best.
