This segment of the market offers long-term rewards to patient investors

When Subang Jaya resident S Ravi was advised by his friend to buy a shop office as an investment in the newly-launched Taipan area in USJ 10 some 15 years ago, he laughed at the idea. He didn’t think there would be tenants rushing in to take up space there any time in the near future as the emerging USJ area was hardly a retail hot spot at the time.

Today, Ravi is kicking himself and suffering deep pangs of regret because in September last year, he heard that one of the units had been sold for RM3.18 million - almost four times the launch price of RM890,000 or so!

Having seen the rapid take-up rates and the acceleration in rental and capital values since the units were launched, Ravi is now a much wiser man, and more inclined to listen to the advice of seasoned property investors. Shop offices have often been overlooked as a choice by new investors in the property market. Many investors feel safer parking their money in residential properties, particularly condominiums, which have traditionally yielded respectable returns.

Yet the figures show that time and again, shop offices have generated healthy returns for those bold enough to take the plunge. And it’s not just units in fastgrowing metropolises that yield healthy profits – even those in smaller, outlying towns have proven to give good returns in a relatively short period of time.

In Rawang, a town 35km from Kuala Lumpur, for example, shop offices that were launched some 10 years ago at just under RM300,000 were transacted for RM1 million in 2010, leaving those smart enough to purchase them laughing all the way to the bank. In Bandar Kajang, a three-storey shop office was recently transacted at RM1.3 million, while another four-storey unit at Reko Sentral, also in Kajang, was transacted at RM3.45 million, almost five times the launch price six years ago.

One of the reasons for the quick appreciation of shop offices and the healthy rental yields is the increasing demand for this property type, particularly in satellite towns and secondary growth areas. Astute developers are capitalising on this by launching new commercial developments where the predominant offering is shop offices ranging from two to six storeys high.

The demand for shop offices appears to be coming from various sources. One of these is from the influx of new retailers attracted by the strong economy and increasing buying power of a growing middle class population that is settling down in housing estates in the fringes of greater Kuala Lumpur.

The modus operandi is to rent or purchase several units and combine them to provide larger premises that are perfect for showrooms and retail outlets. The upper floors are often utilised as offices or for storage.

An example of a development offering this concept is Sunway Giza in the almost-mature Kota Damansara township, which is located about 18km from Kuala Lumpur City Centre and 10km from Petaling Jaya. The unusual concept of two-and-a-half and threestorey stratified shop offices grouped around a central courtyard appears to be quite popular with tenants, judging from the demand for ground and first floor space.

The ground and first floors of most of the units are fully taken up, with ground floor rental rates going from RM12,000 onwards for 1,650 sq ft of space, or an average of about RM7 per square foot (psf), and the first floor going for RM4,500 or more. Higher floors are being rented at an average of RM2 psf. Thus a three-storey unit can yield a total rent of RM20,000 for an investor.

This translates to a yield of 6% for an investor willing to pay up to RM4 million, the latest transacted price of a three-storey unit here.

Another development that is set to create waves in a secondary growth area is CITTA, which comprises three-storey retail spaces with a nett lettable area of 424,000 square feet. Developed by Puncak Dana Sdn Bhd and German fund manager SEB Asset Management, the development aims to capitalize on the “underserved population” of the Ara Damansara, Glenmarie, Subang Bestari and Kelana Jaya areas.The units are expected to be put up for rent in the second half of this year, with rentals pegged between RM4 and RM10 psf.

Another ready market looking for shop offices in secondary growth areas comes from second-tier corporations looking to set up business in suburban areas. Their preferred locales are of course, developments that have the makings of a successful suburban centre, with the right mix of components and a ready catchment population.

The excellent network of highways servicing up-and-coming developments makes it convenient and practical for these corporations to set up offices in townships away from the city centre.

For retailers, these highways have extended the catchment area by making it easier to attract clientele from further away. The anticipated completion of the MRT has also boosted the prices of not just commercial properties, but also residential units located in the vicinity.

Even government administrative and service agencies are seeing the wisdom of relocating to less congested areas. Clinics, local councils and the rest are decentralising their services to better meet the needs of the people by moving to shop lots and secondary areas.

The demand for shop offices in good locations has already been felt by the developer of Petaling Jaya Commercial City, an integrated commercial development comprising shop offices, serviced suites, a hotel, office tower and shopping mall just beside the New Pantai Expressway in the booming Bandar Sunway-Subang Jaya corridor.

The developer’s strategy of pricing its three-storey shop offices at a more competitive rate than other similar developments has ensured good takeup of the units. The three-storey shop office units launched in 2008 were priced slightly less than RM870,000, the five-storey units were pegged at RM2.5 million and the eight-storey ones complete with lift went for RM3.9 million.

Price aside, the selling point for these units could well be the excellent location and concept. The developer has consulted extensively with landscape specialists and consultants to design an interactive lake featuring musical fountains, wading pools, floating decks and retail kiosks, offering an attractive environment for corporations and retailers looking to set up shop.

But it’s not just in emerging areas that shop offices are attracting interest. There are takers even for the high priced units in mature commercial precincts such as Bangsar’s Telawi area, despite the congestion in the area and the competition from new developments in the vicinity such as Bangsar South and Solaris Dutamas.

A two-storey intermediate unit in Telawi is going for an asking price of RM5 million, while its three-storey counterpart is going for between RM6.5 million and RM8 million. Buyers of these units are definitely not in for speculative purposes, neither are they too focused on the rental yield, which works out to around 4% based on a monthly rent of RM14,000 for the ground floor, RM5,500 for the first floor and RM3,000 for the top floor.

Another nearby area that is still attracting investor interest is the thriving Desa Sri Hartamas commercial precinct, first launched in the mid- 1990s. A four-storey shop office here was transacted at RM3.8 million in December 2010, and is expected to generate a return of 5% based on a monthly rent rate of just over RM16,000.

Overall, the figures show that shop offices are definitely a worthwhile investment, but there is a condition to consider: An investor looking at this segment of the property market must be have holding power and be prepared to be in for the long haul for the investment to truly yield generous returns. This is not a segment for speculators or those looking for gains within a period of less than five years. That’s not to say that investors can’t realise returns in five years – they can. But to enjoy sizeable capital gains on their investment, they need to be prepared to park their money there for at least 10 years.

CYBERJAYA: AN EMERGING SUBURB

More multinationals setting up office here

SP Setia Bhd is the latest developer to establish a footprint in the ICT hub of Cyberjaya with the launch of its RM3 billion residential development, Setia Eco Glades.

The development will feature 2,437 units of superlink houses, semi-detached homes, bungalows, condominiums and shop lots. The first phase of the development will comprise condominiums and semi-detached homes, and is scheduled to be launched by the first quarter of 2012.

The launch price for the semi-detached and bungalow houses is expected to be in the RM2 million to RM 3million range. The developer is targeting expatriates and locals who work in the area and are looking for a place to invest. There are currently an estimated 4,000 expatriates working in various multinational companies in Cyberjaya.

Cyberjaya was launched in 1997 by the then Prime Minister of Malaysia, Tun Dr Mahathir Mohamad, to attract ICT companies into setting up their regional headquarters here. The township was designed to incorporate state-of-theart IT infrastructure and attractive incentives were offered to companies that came in. In 2010, Cyberjaya was designated a model green sustainable township by the government, hence increasing its pull factor.

The move has paid off, and Cyberjaya is now on the radar of many multinationals; more and more are setting up offices here, converting it from a sleepy town to a liveable, exciting suburb.

There are currently over 500 companies located here, including globally recognised names such as DHL, HSBC, DELL, Shell, BMW, AMD and Ericsson. In 2010 alone, Cyberjaya attracted a total investment value of RM3.19 billion.

Cyberview Sdn Bhd, the landowner of Cyberjaya, has RM2.52 billion worth of developments in the pipeline for this year. This will be achieved through land sales of enterprise, commercial, institutional and residential spaces.

EVOLVING WITH MALAYSIA

British-born Christopher Martin Boyd is not a new face on the Malaysian real estate scene. Before assuming the position of executive chairman of CB Richard Ellis Malaysia (CBRE), he held senior positions at two international property consultancy firms and a listed development company.

During his 41 years as a real estate professional in Malaysia, he has been involved in many mega-development projects, as well as mergers and acquisitions. He has seen Kuala Lumpur evolve from a small capital city to where  it is now. Property Quotient caught up with him recently to find out his views on the Malaysian property market. Here are excerpts of the interview:

MPI: What are the major developments in the property sector in Malaysia that you would like to highlight?
Boyd: In 1974, the population of the Klang Valley was 900,000 and now it is 6.5 million. I have been privileged to observe the scale of development that has taken place throughout the years. On the commercial front, there are two significant changes I wish to highlight. Now, you have large retail malls that did not exist in the mid-70s. It was almost impossible to populate shopping centres with tenants because all potential tenants then were small mom and pop operators. Currently, malls are tenanted by big chained retailers, such as Mango, Guardian Pharmacy, England Optical and others.

MPI: What are the emerging geographical areas to look out for?
Boyd: The buzz word is the Mass Rail Transit, planned to run from Sungai Buloh to Kajang. Everybody is on the lookout for new land openings along the routes of the new MRT lines. Although Sentul had a bad reputation in the past, it now has an immense potential to grow. Another location that has potential to grow is Kota Damansara, which is developing into a preferred suburb as it has good public amenities that complement the population in that area. In other states like Sabah, Kota Kinabalu has got a lot to offer and is largely unexploited and under-developed. It has good infrastructure, is a good tourist attraction and has a vibrant economy,
all of which could offer attractive returns on investment. Down South, Johor is seeing investments taking shape. Iskandar Malaysia is developing rapidly, with a slew of infrastructure projects sprouting up.

MPI: What is the outlook for the residential, retail and commercial segment in 2011?
Boyd: The residential segment in the Greater Kuala Lumpur area experienced a slowdown in incoming supply in 2008. As a result, there was a supply squeeze in 2009 and 2010 that pushed prices upwards. In 2011, new supply will be coming in and this will tend to moderate prices. The residential segment is very good at self-regulation; it will not decline and is most likely to plateau, with prices stabilising as new supply comes onstream. The retail segment will see additions of approximately 4 million sq ft for the next three to four years. This amounts to 10% of total supply. Rental rates have grown at 10% per annum for the past five years and are expected to grow at a similar rate this year. Average rental rates in KL city centre work out to around RM 12 to RM 16 per square foot (psf).

MPI: What segment will offer the best returns in 2011?
Boyd: The segment that is most promising is the retail segment. This segment currently enjoys an average yield of 6% to 7% and good capital appreciation. The factors that are driving the segment are evenly matched supply and demand, a young population and rising inflation.

MPI: What are the factors that will drive the property sector for years to come?
Boyd: Factors that will drive the property market are dynamic economic growth, a young population and a well-developed banking system offering ample liquidity into the market. The recent government initiative of unleashing the Economic Transformation Program will also fuel the sector with fresh inflow of investments and infrastructure projects that will definitely spur the sector further.

MPI: What is the competitive advantage Malaysia has compared to other countries in the Asia Pacific region?
Boyd: Currently, foreigners are not well aware that they can purchase just about any type of property in Malaysia. The need to create and embed awareness on the Malaysian property market is vital as the yields are attractive compared with other countries in the Asia Pacific region. The Malaysian market is also attractive as it offers opportunity for diversification, has a strong and stable currency, sound demographics, low geopolitical risk, transparent title system, low entry cost, no estate duty and ample financing options. Another attractive attribute is that for tax purposes, interest costs can be set off against rental income -- not all tax regimes in the Asia Pacific region offer this relief.

INDIANS KEEN ON APAC

MPI survey shows more are considering Malaysia because of its position as a regional hub

The Asia Pacific region is the top destination sought after by investors from India looking to park their money in real estate.

A recent survey carried out by the Malaysia Property Incorporated team in India showed that investors from the subcontinent ranked Asia Pacific as the most desirable region to purchase properties, followed closely by Europe and the Middle East.

The top reason fuelling their decision to purchase property in the Asia Pacific region is for business expansion purposes and for exploring potential partnerships within a moderate-risk environment.

Zooming in on investors’ opinion of Malaysia as a place to invest, the MPI team discovered that more than 80% of the respondents showed keen interest in buying property in the country.

On the business side, they see the country as a regional hub that offers potential for growing businesses. Its impressive transportation system and infrastructure compared with other developing countries in the region are also plus points for them.

 On the personal side, Indian investors are attracted to Malaysia’s culture, lifestyle, heritage and history, some of which overlap because of the  commonalities in the colonial past of both countries. Both Malaysia and India were ruled by the British before they received independence.
 
Malaysia’s natural scenery, sunshine and beaches are also a draw for Indian investors, some of whom have said they feel extremely comfortable living here. Almost one third of the respondents said they favour high investment returns when purchasing property in a foreign country.

In terms of type of property and location, many Indian investors are zooming in on residential and commercial property in Kuala Lumpur’s suburban areas like Bangsar, Mont’Kiara and Petaling Jaya. Many indicated a preference for landed residential property if they were purchasing for their own use.

 An interesting fact that emerged from the survey is that Vastu Shastra compliance is important to Indian investors and they consider it part of the value-added package when buying property. Vastu Shastra is the Hindu system of design based on directional alignments. Its Chinese counterpart, feng shui, already has a big following in the East.

Indian interest in the Malaysian property market is not a new phenomenon. Prior to 2008, before the Foreign Investment Committee Guidelines on property ownership were abolished, Indian nationals emerged as the fourth largest group of residential property investors in Malaysia, with Kuala Lumpur, Penang and Johor being their preferred locations.

Indian investors tended to mirror the investment patterns of their family members and friends, preferring to purchase where their countrymen had bought. Prices of properties purchased predominantly fell in the USD150,000 to USD300,000 category.

Indian celebrities that are rumoured to own real estate in Malaysia include music director Deva as well as actors Madhavan and Vadiveloo.

As at November 2010, Indians make up  the eighth largest number of  applicants from amongst the applications under the Malaysia My Second Home (MM2H) programme.

If the United Nations Development Programme’s 2010 report is anything to go by, more Indian nationals may be looking to own property in Malaysia.

Malaysia has one of the largest communities of Indian diaspora in the world, making it a familiar place for Indian nationals looking to live or work overseas. The UNDP report states that India is one of the largest “sending” nations in India, with an emigration rate of 0.8%. The report indicated that 72% of those leaving the country have opted to work in other Asian countries.

AFFORDABLE EDUCATION IN A TROPICAL PARADISE

Since the birth of the Malaysian Federation in 1963, higher education institutions (HEIs) have expanded phenomenally in number, student enrolment, and the range of specialties they offer.

In 2000, there were 11 universities in the public sector, besides six private universities and 283 private colleges. The demand for higher education was so high that all six private universities were established in just two years in 1996 and 1997 in response to public demand for admission to the HEIs and the inability of the government-funded HEIs to meet the need.

In 1996, enrolment in the HEIs was 17,589; in 1997, it jumped to 28,344 students. Even so, in 1997, only onethird of the total of 86,384 applicants could be admitted. Consequently, in 1996, more than 15,000 students went overseas for higher education.

Realising that there was a ready captive market for higher education within Malaysia and a shortage of institutions to meet the need, many of the existing colleges and universities banded together to form the Malaysian Association of Private Colleges and Universities (MAPCU). Working closely with the Malaysian government, MAPCU’s mission was to make higher education affordable while helping the government reduce the outflow of funds for education overseas.

MAPCU’s objectives include promoting and co-ordinating the development of Malaysia’s private higher education industry; enhancing the quality and delivery of courses and programmes conducted by its members and affiliating itself with international associations and bodies involved in both public and private higher education.

Amongst its strategies for fulfilling these objectives were the establishment of branch campuses of reputable foreign universities in Malaysia, with uniformity maintained in terms of course content, academic standards and degrees awarded.

Supported by the government, MAPCU also initiated the innovative concept of twinning degree programmes in which studies are conducted partly in Malaysia and completed abroad at the foreign partner university. In certain cases, programmes may now be conducted entirely in Malaysia although the degrees continue to be conferred by the foreign universities. Hence a student at the Malaysian branch of a foreign university does not have to leave these shores to be awarded the degree, saving him considerably in terms of costs.

So successful were MAPCU’s endeavours that ever since 1998, Malaysian private institutions of higher learning have been increasingly spotted by foreign universities from countries such as the United Kingdom, Australia, United States and France to form a collaboration, given the country’s potential capacity to become a popular education centre in the region.

Prominent international universities such as Monash University, Curtin University of Technology, University of Nottingham and Swinburne University of Technology have already established a strong presence in Malaysia and offer the same courses that are available at their main campus.

In Johor’s Iskandar Region, the southern economic corridor of Malaysia linking business activities to neighbouring Singapore, a number of big names such as University of Southampton, Marlborough College, Raffles University, University of Newcastle, Netherland Maritime Institute of Technology (NMIT) and Management Development Institute of Singapore (MDIS) have also ventured-in to take their place in this emerging sector.

In an effort to make Malaysia the education hub for Asia, the Ministry of Higher Education (MoHE) has targeted 150,000 foreign students for local colleges and universities by 2015. There were already 75,000 international students in  Malaysia at the beginning ranging from International schools to private and public tertiary education institutions offering diploma, degree and PhD courses. This signifies the acceptance of Malaysia as an international centre for education.

Today, Malaysia is acknowledged as one of the pioneers in this region in the development of affordable transnational educational programmes and attracts students from the Middle East, Asia and Africa to its numerous highquality colleges and universities.

One of the key attractions for these students is the cost of living, which can be as low as RM11,000 per year, which works out to just under US$3,000 per annum. This, and the affordable tuition fees, are the reason why many of them are opting for Malaysia as the first choice when it comes to tertiary education.

The Malaysian lifestyle is another factor. Malaysia offers great lifestyle options at a much more affordable rate than many other metropolitan cities in Asia. Accommodation and food are still relatively cheap, and its multi-racial, multi-cultural society ensures new arrivals feel quite at home in their new environment.

Parents are also more comfortable sending their children to study here as Malaysia is a socially secure country with safety measures incorporated in the laws of the country.

The tropical climate is warm and humid throughout the year without any drastic weather changes. Malaysia is also geographically-safe from major natural disasters as it is located in a natural catastrophe free zone. As such, from the political, geographical, social and economical point, Malaysia is a very suitable place for students, especially international students to study and live in.

The holders of student passes are allowed to work in some specific sectors while studying, to help supplement their living allowances. Subject to other immigration requirements, students are allowed to work part-time for a maximum of 20 hours per week during semester breaks or holidays of more than seven days.

Over and above these advantages, students can enrol in one-degree programme at a Malaysian university and earn two qualifications upon graduation – one from the Malaysian university and the other from the reputable foreign partner university.

For investors aiming to set up educational institutions to capitalize on a growing market, there are number of requirements they will have to adhere to.

These include legislative quality assurance requirements and governing legislation such as the Education Act 1996, as well as the Private Higher Educational Institutions Act 1996.

CAN MY CHILDREN BUY A HOME NEAR ME?

Mr Leong, who is retired and lives in Petaling Jaya, met me at a seminar where I was speaking on Malaysian real estate. He asked two questions.

• Why have houses become so unaffordable to people like me?
• How will my children be able to buy a property similar to mine with current values being so high?

I told him that both are very important questions and to answer I had to go into some background.

First, the affordability factor and the rights of the next generation to own property in proximity to their parents are not tenable in the changing world that we live in.The Klang Valley, or Greater KL, as it is now known, is the capital city of Malaysia and has grown exponentially over the last 30 years.

Just to give an example, out of the 4.43 million homes that have access to services such as electricity, water, telephony and sewage, nearly 40% are in the Klang Valley, representing 1.681 million homes. The remaining 2.732 million homes are spread over the rest of the country.

The Greater KL Local Councils’ combined budget is larger than any single state budget in the country. This is not a local phenomenon, as the same situation applies to London, New York, Sydney, Moscow and Istanbul.

Our National Economic Transformation Action Plan will see an influx of new financial services, oil and gas companies and logistics companies setting up offices in the Klang Valley. They will bring with them opportunities for work for Malaysians, together with higher salaries. They are also expected to invest in Malaysia’s growing importance as the logistics gateway to India, China and Indonesia.

Mr Leong is lucky that what he bought 30 years ago, and which he still owns, has appreciated in value and now is worth nearly 90 times his original purchase. Recently, a two-storey semidetached house in Petaling Garden that was purchased by the owner in 1975 for RM21,000 was sold for RM1.8 million. Of course, many people do not own real estate for that long but if they did, this should be the value proposition in popular locations with easy access to schools, hospitals and services.

The pressure on new housing and the prices they command also have to do with Kuala Lumpur being the financial capital of Malaysia and the home of the Stock Exchange of the country. As such, most companies that wish to list their companies into the Stock Exchange need an office in the city and that means that their directors move to Kuala Lumpur from wherever they are and bring with them the proceeds of the listed vehicle. Hence, prime landed property has never lost its value in Kuala Lumpur.

A further impetus to the growing might of the Klang Valley is the number of young people who migrate to the capital city every year to look for employment as soon as they graduate.This pool of young people, many of whom have graduated from international universities, require a lifestyle that has nothing to do with what their parents were used to. As a result, the city has been blessed with international brands for entertainment, shopping and dining such as Starbucks, Tesco and the new restaurants that have come and will come with the introduction of new hotels such as the Grand Hyatt and St Regis.

These young graduates are also unable to buy property in the city centre and if one of them happen to be Mr Leong’s offspring, it is likely that they will stay with their father until they get married.

Not surprisingly, young people do not require the space their parents had when they purchased their own premises. This is because most of them have become accustomed to living in smaller properties when they were studying overseas. Also, young couples do not wish to spend their time cooking and cleaning or managing a large home as their lifestyles demand outside entertainment and instant enjoyment on a regular basis.

As a result, we have noticed the rising popularity of homes of below 1,000 sq ft in size purchased mainly by the younger generation as their first home, which could also be near their parents’ home as they are apartments or condominiums and not landed real estate.

The Government is now seeking to put houses within a RM100,000 to RM250,000 range to meet the rising demand from young people who claim to be priced out of the current property market. That price range is only possible if the major component of the house price, which is land value, is absorbed by the Government, and a new industrial building platform is used for standardisation of construction.

So my answer to Mr Leong, the retired pensioner, was this: The only viable way for his children to own a property like his at this point in time is for him to sell his current house and use the proceeds to purchase a number of smaller units in a location further away (and more affordable) than his current address. His children could share in the financing, since the equity portion would come from the original investment.

The only other way, as I see it, is if they struck a lottery.

TRANSACTION DATA ON MALAYSIAN PROPERTY ABOVE RM1 MILLION