“Property investing: The moment of truth is now”, featured in StarBiz, The Star, on 10th Dec 2016
YOU are taking a leisurely drive around town on a Sunday morning and you can’t help but notice the numerous up-and-coming developments in almost any area of the city. At first glance, it would seem that property investing is thriving and demand must be at an all-time high, given the non-stop construction going on. But the reality is quite the opposite; residential and commercial units everywhere are experiencing less than satisfactory occupancy rates. Gone are the days when investors flock to new property launches, and stories of buyers queuing up overnight at the property developer’s office seem to be a thing of the past.
As property owners and investors, we have to face the fact that there is a dampening in the property sector, brought about by oversupply and a mismatch of what is being built and what is in demand. Consumers yearn for affordable housing whereas developers are building more lucrative high-end properties which are mostly out of reach of the average middle-income Malaysian.
Property owners who are renting out their units are also facing bleak times with weakening economic conditions in the country, e.g. slowdown of the oil and gas (O&G) sector and its direct impact on properties in expat-favoured locations such as Mont Kiara and Kuala Lumpur City Centre. Just recently, a client was lamenting about how he was forced to accept a drastic rental reduction for his office unit which was being rented to an O&G support services company (evidently falling on hard times) from RM10,000 to RM3,000, as it would have been worse to end up with no rental at all.
You can’t help but wonder what would be the likelihood of your own investment property suffering a similar fate in the near future. Having properties in your investment portfolio is advantageous, but you should not assume it will continue to work in your favour. With the current market sentiment in play, it is high time to review and take stock of how these investments will perform on your balance sheet. The last thing any property investor wants is to be faced with a unit that is idle, vacant and bleeding losses.
First of all, you need to look at the big picture and know why you purchased your property in the first place. You had certain goals in mind. Have you achieved those goals? What has changed since then? Will selling the property prevent you from achieving that goal or will it free up cash to allow you to pursue bigger, overall ambitions?
Think back to the time when you first purchased your investment property and consider the factors that made you choose that property in the first place. Was it the location, the rental it commanded or the prospects of promising growth? Is the location just as thriving as before, even better or has it dampened somewhat? Is the rental you are getting sufficient to cover your mortgage repayments and even if it is, are you getting a fair market rate or are you being short-changed?
Many investors are enticed into buying properties based on the developer’s “guaranteed rental”, without looking at the prospects beyond that period. One client was in for a rude shock at the end of the guaranteed rental period when he could not find any tenants at the same artificially-inflated rate he had been enjoying all the while. Had he been more attuned to actual rental market conditions then instead of resting on his laurels, he could have considered selling the property during the guaranteed rental period and might have been able to fetch a better price.
Equally important to think about is the mental and emotional stress attached to the property. Granted, dealing with property as an investment is never without its fair share of road bumps; but if it is giving you constant problems and headaches, you need to ask yourself whether it is better to sell to alleviate the stress. For instance, you may be worrying about it being in a flood-prone area, or having to deal with tenants who are a perpetual pain. Property management and maintenance issues for strata properties are all too common. If yours is a commercial property, do you see bright prospects for the entire complex or could it be doomed to struggle as many do currently especially in the Klang Valley? This unfortunate turn of events was experienced by another client who had purchased two commercial units in the same shopping mall which after completion, failed to attract sufficient foot traffic. He ended up with retail lots he could not rent out but still had to continue servicing the mortgage totalling RM29,000 per month out of his own income, resulting in his retirement plans being shelved indefinitely.
So, do you consider your investment property a gem worth keeping or it is a potential source of grief? But bear in mind, whichever way you go, you should always evaluate the cost of selling vs the cost of holding.
Should it stay …
If you have a long-term outlook for your property, then you can possibly hang on. Perhaps your intention is for the property to be your retirement home in future or to set it aside for your children when they are grown.Young investors in Malaysia more so than older investors could be encouraged to hang on to property investing since the young have more time on their side, especially if cash flow is not an issue.
If you own property that is cash flow neutral or cash flow positive, then holding costs are less of a concern. If the positive cash flow is significant, then it may be worth your while to maintain it. Furthermore, if the location of the property has a high propensity for appreciation in value, then consider the value of future capital growth.
Finally ask yourself – if you were shopping for an investment property right now, would you buy this same property again for your portfolio? If you would, it’s definitely a keeper. If not, perhaps selling is the better option.
… or should it go?
When you have to keep dipping into your pocket to top up a shortfall on your investment property, thereby affecting your own cash flow, then it is timely for you to look for alternatives.
If you have the opportunity to invest your money into a different investment option which may better suit your personal investing strategy, then cashing out could be a good idea. Or perhaps you are nearing retirement age and you can sell one property to pay off all your debts and live off the rental income on your other properties.
Sometimes, property owners are reluctant to sell even though there is no real advantage in keeping the property because they feel they might reap better returns if they just held on for another year or two. But sometimes, they do see the light of day like a client, who after holding on to a property in Mont Kiara that he bought five to six years ago for RM1.8mil, finally decided to let it go at RM2mil. Despite the very low capital appreciation, he realised it was a necessary move after coming to terms with weak prospects for its future, mainly due to oversupply and lack of tenants. Selling it at a lower profit or even a small loss turned out to be an unexpected shot in the arm as he could now use the funds raised to reduce his pressure to pay instalments for other loans.
Another common barrier to letting go of a property is the potential void that follows, especially if you have had the property for some time. Many investors are unsure what to do with the proceeds from the sale. They are at a loss as to which would be the most beneficial way for them to reinvest, when in fact, all that is needed is for the investor to have a few liquid investment options available to determine the best course of action. However, this is easier said than done, and perhaps being able to consult with a licensed independent financial adviser could offer investors with some guidance.
Don’t let the tail wag the dog
Property investing in Petaling Jaya are ideal in one’s investment asset allocation. However, one mistake can impact your financial roadmap drastically, which is why you should periodically review your property portfolio as an integral part of your overall financial plan.
There is little point accumulating property merely for the sake of it without looking at the big picture and end up spending the next decade or so being a slave to your investment. At the end of the day, your property should be working for you, not the other way around.
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