Is Iskandar Property Still A Bargain – Part 2

In Asia, generally investors have always had a positive bias against property. As many have said “It is something I can see and touch.” However, that does not mean it will not fall in value. Iskandar properties have been the star attractive of the property market in Malaysia for some time now, we look in detail at where in the property cycle are we now at and whether investors should be buying at this time.

Property Cycle

Property generally increases in value over a very long period of time, say 20 years. But so does everything else, it is call inflation. In the shorter time frame, the property market will move in a cycle. As we illustrate from the diagram above, it will move from a Slump to a Recovery, to a Boom and then ending with a Slowdown, and the cycle repeats itself. Let us look at where Iskandar is currently. We start from the global financial crisis in 2008. At that time, we are roughly in the position “6” where there is no confidence in the market and transaction is low. After the global financial crisis, buyers regain confidence and started buying, buying a lot! Iskandar has been able to attract foreign investors, particularly the Singaporean investors. As Singapore is facing a huge run-up in its own properties prices, many turn to its hinterland in search of properties offering better value. This cause prices and rental to accelerate as more investors and businesses moved to Iskandar. During that time, as most projects are just launching, there is a shortage of stock, causing even higher prices.

Rental Yield

Construction costs follow the uptrend and most of the cost continues to be passed on to consumers.  Properties agents were popular then and many could see it and joined the trade. True to the investment cycle, the media catches on, we hear and read about the Iskandar project among daily, bringing in even more investors and speculators. During 2008, it is possible to find properties with a rental yield of 8% to 10%, a wonderful scenario. However, if you are to look around, rental yield should be in the region of 3% to 5% while the average lending rate is around 4.3%.

Affordability issues starts to arise. Over the last year, banks have been experiencing a higher rate of defaults, prompting them to tighten their lending practices. To get a loan approved for a purchase might require a bit more patience and luck compared to 5 years ago. If we based on an assumption that an average buyer of a residential unit uses about 30% of his/her income to pay off the mortgage, the average price range for a median income household is around RM200,000.00. A survey around the markets show that many of the new launches are not aimed at this market.

Credit Availability

As the property markets depends a lot on the credit availability from the banks, if the banks decide to slow things down, things tend to slow down. If the banks do not relax its lending practices, it might be hard for us to see huge growth coming from the Iskandar property market.

Supply and Demand

My personal opinion is that we are somewhere in the position “1” and “2”. We are already seeing the affordability issue coming up but have yet to face a full blown oversupply issue. However, in particular to the high-end high-rise buildings that are expected to flood the market in a few years, we might not be too far away from an oversupply situation.

I am not saying the whole of Iskandar will be a bad buy now. I still feel some areas have great potential. But I do caution those who are interested in buying, that the time for easy money is over, being more selective should be the way going forward.

 

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READ ABOUT “Is Iskandar Property Still A Bargain – Part 1” HERE

 

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We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguardedThe information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim do not own shares in any of the companies mentioned above.

 

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