Leaderboard2

Under Construction Properties

0










 

 

 

n the last three to four years, anyone who has been buying under-construction properties in the market would have made decent profits. Upon completion of their properties, 100% price increases are not uncommon. As an example:

• I bought a unit in The Zest Kinrara for RM232,000 back in 2009
• Today similar units to mine are being transacted at RM460,000
• On paper, this particular unit has gain in values by approximately RM228,000.
• I placed RM23,200 as down-payment in 2009 and on paper today it seems that I will be making gross 900% paper gain on capital in just four years.

The example above is not uncommon and it’s not even my best purchase to date. Property prices have really soared since 2008, in both primary (under-construction) and secondary (sub-sale) market.

The question that many investors are asking today is whether is it still safe to invest in under-construction properties?

I’m not a magician, so I can’t predict the future and tell you if everything will be ok or will fall apart. However, as an investor who has made decent returns from buying under-construction properties, I could share three basic pointers that have worked well for me, and hopefully they’ll work for you as well.

DEVELOPER

The first and most important entity is the developer. I normally certify a developer based on the following criterion:

Abandoned record – I will NEVER, NEVER, NEVER buy anything from a developer that has an abandoned project, for obvious reasons. I like giving people second chances, but not when it involves a few hundred thousand Ringgit of losses. www.kpkt.gov.my is a website that black-lists errant developers, I recommend everyone visit the site first before buying anything. The key here is to identify the real developer behind the blacklisted companies, as normally developer will use different shell companies for different projects.

Their current financials – Even if the developer never had an abandoned project before, we can’t rest on our laurels just yet. If you are going to be buying a unit from a particular developer, it is paramount that we know that the developer has the muscles to complete this particular project. It is great if you can obtain access to their financial standings, but these types of information are normally not made available (unless it is a public listed company). Normally, I will look at the banks that are providing the end-financing for a particular project. The more banks providing EF to a particular project, the better. It’s basically a “vote of confidence” towards that project.

Average returns of their past projects – This is often over-looked, even by the most experienced investors. But this is of primary importance to me. There are developers who have consistently delivers above average returns to its investors in many, many projects. This means that they often priced their product sensibly to leave some room for its investors to make money, and chances are they will continue helping their investors to make money. Let me use a real past performance for developer A as an example :

• 63% increase for the Ayu Kasih double-story terrace house in Shah Alam (launched in 2009) to RM530,000 from RM325,000;
• 80% increase for a corner shop lot in Section 19 Shah Alam (launched in 2010) to RM4.5 million from RM2.5 million;
• 135% increase for shops by Selaman in Section 7 Shah Alam that were sold for RM850,000 in 2008/2009 are now valued at RM2 million
• 74% increase in semi-detached houses in Puncak Bangi (launched in 2009) to RM1.5 million from RM860,000.

Chances are this particular developer will continue delivering values to its investors to generate decent returns in its future projects, and a developer that I’ll be keeping a close eye on future buying opportunities.


PRICE

The second factor is obviously the price. Typically new properties today are being sold at an unhealthy premium versus:

• Existing supply of a similar category.

• New upcoming supply of similar category

It goes without saying, the lower premium a particular project commands; the better it is for its investors. As an example, there’s a project launched in an expat enclave in Klang Valley at RM900psf. Project X, looks decent and flashy. But once I compare that to other similar launches that are priced at less than RM800psf, and existing units which were going for less than RM600psf, I know that project X has priced the future premium into its pricing today and unlikely to leave me with much profits left.

SUPPLY AND DEMAND

The last but just as important, is to assess the supply and demand equation of a particular development. The idea here is to be different, and play the contrarian role. To illustrate my point:

In areas like KLCC or Mont’ Kiara, where there are many supplies of units with built up of 1500sqf and above, buying smaller units like studios and 1 bedroom would be a safer move. In fact, the smaller units in this area are thriving at the moment, commanding very decent rentals and have recorded decent price increase.


 If we look at landed properties, one of the best performing properties are the gated and guarded properties in Desa Park City, where some of their landed offerings have tripled in values since 2005. Excellent security feature, lovely landscaping, full facilities and self sustaining community was its unique proposition and it was very different to conventional, plain vanilla landed properties.

CONCLUSION

So as you can see from the above, buying primary market properties requires a lot of homework and research. This is crucial especially if you can’t afford to make any mistakes. Thanks to the internet and property related forums like propertyWTF.com.my, a lot of your research can be done at the comfort of your home. In my book, I’ve also shared an investing framework I used to analyze properties, called the APE framework that helps an investor to ask tough questions before investing in any property. Thanks to APE, I bought Zest and have enjoyed over 900% returns on capital today so perhaps it would do you some good to apply APE before your next property purchase.

All the best and feel free to reach me via either Facebook (Faizul Ridzuan) or write to faizul@gmail.com  Please invest sensibly ya.