photo credit: macieklew

The economy is in a worse state than the World Bank thought
In March, the World Bank reckoned the global economy would shrink by 1.7% this year. Now, despite a three-month stock market rally, it reckons it’ll shrink by 2.9%!

The bank also reckons that poor countries will suffer more than developed ones. “Unemployment is on the rise, and poverty is set to increase in developing economies, bringing with it a substantial deterioration in conditions for the world’s poor,” the bank reported. Falling remittances from migrant workers, reduced exports, falling foreign direct investment and reduced aid will hit developing nations hard, it reckons.

But it also warned that stimulus packages and the like carried their own risks unless they are agreed on internationally. “Any country that acts alone – even the United States – may reasonably fear that increases in government debt will cause investors to lose confidence in its fiscal sustainability and so withdraw financing.”

Business insiders
It wasn’t just the World Bank’s glum prognosis that concerned the markets, however. Insiders in the US are selling out of stocks at the fastest pace since the credit crunch kicked off two years ago, reports Bloomberg. These insiders are company executives – people who should know their firms’ prospects better than anyone else basically. So the fact that they’re all taking profits doesn’t look too healthy for the bull case.

“If insiders are selling into the rally, that shows they don’t expect their business to be able to support current stock price levels,” Joseph Keating of RBC Bank told Bloomberg. Insiders also sold heavily in the first quarter of 2000, just as the air was starting to leak out of the tech bubble.

Post from: Real Estate Investment in Johor Bahru

Is the bear market returning?

photo credit: laureskew

Recently we have been hearing media and papers talking about the recovery of economy. Is economy really on her way of recovery? Well, we have seen stock markets rally for more than a month. But we are still not sure yet if the bull market returns.

In fact, we are rather concerned when seeing people rushing back to buy stocks indiscriminately recently without looking at the global situation. Even the property market has becoming crowded for the past one month. Is Malaysian market really reaching the bottom? Are we totally isolated or immuned from what’s happening worldwide in the midst of the latest IMF’s forecast about year 2009 to be the worst global economy slowdown after world war two?

Restarting bull market?
To restart the bull market, banks need to be adequately recapitalised and willing to lend; even if they achieve that, it would also require consumers and business to return to borrowing. This morning we have just attended a seminar for small medium enterprises (SME) conducted by EON bank at Mutiara Hotel. The objective of the seminar was to encourage these small enterprises to borrow money again from banks so that banks can have a chance to tap on the funding channelled by government through its RM 67 billions stimulus packages.

While financial institutions and private businesses are yet to really utilise or benefit from the two stimulus packages, do you believe economy is going to turn direction now? Well, some people may say that stock markets are always 6 months ahead of the real economy. But wait…

Over the last two weeks we have seen a number of interesting items which would appear to give hope for a new global bull market and a number that do not.

For economic recovery and a new bull market
• Barack Obama said “Impressive efforts to boost the economy are starting to bear fruit even though recovery would cause more pain this year.”

• Ben Bernanke, Chairman of the Federal Reserve, said “The economy is no longer ‘falling off a cliff’.”

• CBI – “Worst of recession over.” Ian McCafferty, Chief CBI Economist said “The rate of contraction will moderate quite noticeably in the second quarter of this year.”

• “Germany could be nearing the bottom of its sharp economic downturn,” said Angela Merkel.

• Tim Geithner said “The large majority of banks had sufficient capital.”

Against economic recovery and a continuing bear market
• US industrial production, year to March, fell 12.8% – the fastest rate since the end of World War II.

• Eurozone industrial production in February fell 2.3% versus January and 18% compared to a year ago. The biggest decline since records began in 1990.

• Globally economic activity and employment continues to contract.

Although some of the recent data has been a little less bad and some even a little better, there are other developing problems which represent a significant threat to the economy and to asset values.

• According to Standard & Poor’s, this year, worldwide, there have been 68 defaults by global debt issuing companies, of which 35 occurred in March. Quite clearly it is serious that the rate of default is accelerating.

• The rating agencies are downgrading at a near record pace. More companies had their rating cut to junk in March than in any month since the Asian financial crisis of 1997. In March, 17 companies were downgraded compared to an average of six per month for the previous 12 months – acceleration.

Another burgeoning problem is the commercial property market and commercial property mortgages.

• In the US, first quarter 2009, vacancy rates at shopping malls rose 9.8%.

• In March, US banks seized 464 commercial properties, valued $7 billion – three times the number in December – more acceleration.

• Last year, US commercial property sales fell 73%.

• At the end of 2008, US office space, vacancies rose to 14.5% and is expected to worsen.
What’s coming towards us is truly daunting. The forces at work until 2007 that drove asset prices to ridiculous highs have ended and won’t come back for years to come.

• The pre-2007 period of share buy-backs and private equity funded by limitless and mindless lending has been followed by a period of equity issuance and a collapse of lending.

• The period of borrowing and spending has been followed by a period of saving and debt repayment.

• The willingness of banks to lend to anybody as much as they wanted, has been followed by a period of very tight lending – whilst their balance sheets remain weak, banks don’t want to lend, other than to the very best propositions. There is a growing lack of willingness to borrow by both businesses and consumers.

Martin Wolf, this week in a Financial Times column headlined “Why the ‘green shoots’ of recovery could yet wither”, asked: “Is the worst behind us?”

He answered: “In a word, No” – explaining – “The rate of economic decline is decelerating. But it is too soon even to be sure of a turn-around, let alone a return to rapid growth … Complacency is perilous. These are early days.”

He ends what is an enlightening article by saying “The brutal truth is that the financial system is still far from healthy, the deleveraging of the private sectors of highly indebted countries has not begun, the needed rebalancing of global demand has barely even started and, for all these reasons, a return to sustained private-sector-led growth probably remains a long way in the future.”

So what do you think?

Post from: Real Estate Investment in Johor Bahru

Is economy on her way of recovery?

How many are there (places i can know abt auction houses) and usually how fast do they update their list. Also for good bargain do they “keep” the info to regular gangs of property agents instead of releasing it out to the public?

Answer #15:
You can contact auctioneers to get a latest auctioned properties list from them. Their contacts are available at auction advertisements on papers, notice board at the ground floor of JB High Court and Internet.

Besides City Plaza, some LACA auctions are held by auctioneers in their auction houses in TJB tower.

Most auctioneers are appointed by banks. Banks also appoint certain property agencies to find bidders for their auction properties. These agents collaborate with auctioneers to provide services in facilitating their clients to successfully bid the property they wanted in auction.

We have discussed some of our experience and details in acquiring auctioned properties in “What must you know before buying an auctioned property?” with recommended links and agents.

Question #16 – Inspection of auctioned properties
I admit that I never really consider to buy an auctioned property just because of the tedious due diligence works.

One particular thing is that the potential bidder can’t inspect the property. How do you go around this?

Answer #16:
It is necessary to conduct on site inspection of an auctioned property and its surrounding neighborhood to ascertain the physical conditions of the property. You may not be able to inspect the interior condition of a house. But you can ask around the neighborhood who may have visited the house. From the exterior condition also you can have a rough idea how much cost is needed to refurbish the house.

The stage of maintenance has a significant effect on property’s value. Don’t go for the deal unless you are confident that you understand the value of the property and the possible costs required.

Question #17 – Property agent’s conflict of interest
How would u know if the agent you’re hiring won’t be trying to sell for his clients? Wouldn’t there still be conflict of interest as agents would likely already have a pool of clients they’re already serving and earning commission from?

Answer #17
In today’s market where sellers are more than buyers, agents start to know they have to serve buyers better in order to close any deal. However, we always encourage home buyers and investors to do their ground work like learning how to estimate the property value, how to identify a property worth investing and borrowing before negotiating any price with the seller through agent. (You can learn these from our previous articles “How to estimate the value of a property?”, “How to know if a property investment is worth investing?“, “Why you want to take up a loan for your real estate investment?“)

No doubt most of the agents today still tend to sell for their clients and the conflict of interest is there. It’s our own responsibility to protect our own interest. And the best way to do so is to equip ourselves with the right investing and market knowledge.

Question #18 – Questions for prospective property agent
Maybe you can come out with a set of questions we should ask our prospective real estate agents, before engaging any.
In Penang, I’ve met many agents who don’t really know about the market. Only a handful of them are professional and knowledgeable.

Answer #18:
Some questions that we normally ask our real estate agents:

How old is the property? Fully-furnished or unfurnished? Lease hold or free hold? How big is the built-up area? How much is the monthly maintenance cost, if any?

Any other expenses for the property? Has the individual title issued? Why does the owner want to sell?

What is the lowest offering price? Is the price reasonable in the market? Any room for negotiation?

How much is the highest and lowest rent I can get from the property? How long will you need to find a tenant for the property?

Once you have asked the same questions to several agents, you will be able to identify who can serve you better.

Question #19 – Commission rate of property agent
May I know what’s the standard fee like for hiring/paying an agent in KL or PJ area? Is it 1% of the property purchase price like in JB?

Answer #19:
Yes, you are right. But for certain higher value transactions you may negotiate with the agent to have some discount on the commission. For example, for a transaction above RM250k we normally expect to get 20%-30% discount from property agent, i.e. 0.7%-0.8% of the purchase price instead of 1% for agent’s commission.

Post from: Real Estate Investment in Johor Bahru

Real estate investment Q&A #3

Like other corporations, REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges like shares of common stock in other firms. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.

Like buying stock, you have no control in the operation or selection of the investment property although some REITs make a public offering of a specific investment property. You, at least, have the opportunity of examining the property in which your investment funds will be placed. But, you still have no control over the management or operation of the property. (Read “Why real estate is a good investment?” to understand the advantages to have control over your investment property.)

The key statistics to look at in a REIT are its NAV (Net asset value), AFFO (Adjusted Funds From Operations) and CAD (Cash Available for Distribution). REITs face challenges from both a slowing economy and the global financial crisis, depressing share values by 40 to 70 per cent in some cases since 2007.

Is the worst over?

The market has discounted REIT shares to levels that anticipate a drawn-out period of deteriorating fundamentals. They are trading at steep discounts to asset values. The single most important factor affecting a recovery will be the course of the economy.

We expect the record fiscal and monetary stimulation being put in place worldwide to at least stem the economy’s decline. We should start seeing evidence of this by the end of 2009, when economic statistics begin to suggest a bottom. REITs tend to be early-cycle stocks, so they could start to perform well sometime between now and then. Meantime, it is hard to imagine valuations getting much worse.

It is likely things will get a bit worse before they get better. When you are going through a recession, sentiment is always bad, and things always seem worst near the bottom. The “it’s never coming back” chorus is getting louder.

On the other hand, there has never been more fiscal and monetary stimulus thrown at the world’s economies. Mortgage rates are down. Mortgage refinancing is up. Spreads are starting to narrow between different grades of securities. But it is going to take time because the economic and financial crisis is just too big.

Post from: Real Estate Investment in Johor Bahru

Is the worst over for real estate investment trust (REIT)?

photo credit: Moe_

reijb.com is going to enter into her 5th month. Thank you for all your support.

We have received many feedbacks and comments from readers which help us to improve the contents of this blog and make reijb.com a place of discussion about real estate investment.

We hereby summarised some of the questions and answers which you may have missed but yet interested:

Question #1 – Fixed and floating rate mortgage, which one is better?
Last time, there are fixed interest rate home loan package available. But nowadays, this kind of offer is getting less.
Some investors pointed out that it is safer to use a fixed rate mortgage because we don’t have to worry about interest rate hike in the future, which might affect the monthly installment amount. What do you think about this?

Answer #1:
Yes, there is virtually no more fixed interest rate mortgage in the market now. But no worry, it can be a good thing for real estate investors and home buyers to choose floating interest rate in this period of time of economy crisis.
Please read “Why floating rate mortgage can be a better choice now?” for detailed discussion.

Question #2 – Is now a good time to buy house?
Is now a good timing for buying a house in JB since BLR dropped? We are looking for a house near Tampoi area. Please advise.

Answer #2:
Generally speaking, compared to months or years ago, yes, we would say now we can find more good bargains in JB. From what we have seen in the past few months since Aug 2008, the attitude of most sellers (home owners/developers/agents) have changed to become “softened”. And we discovered that more developers are throwing in those units they previously held (to jack up selling price) into the market.

Also, now we can get better offers from banks in terms of interest rate and other terms. For example, Maybank now offers shorter lock-in period (3 years) for non-zero entry cost mortgage. But according to bankers, however, loan approving rate has dropped nearly 50% since Sep 2008 due to more stringent policy adopted by banks. They are trying to secure more ‘quality’ borrowers by promoting more attractive packages.

Specifically for housing estates near Tampoi, we have yet to look into this market. However, the area is classified as one of the prime suburban areas by JB town councils. Most of the residential lands for apartments/condominiums there are lease hold mainly because of its location as the nearest industrial area to town and better traffic system. The other area that deserves such status is Larkin, but you may find less choice of houses there.

Question #3– Is there really a high-return property?
There is one big problem with the 1st scenario in “How to know if a property investment is worth investing?“. How many people have actually bought a condo for RM168,000, or even RM200,000 and manage to rent it out for RM1,400 within even the 1st 6 months? Agent fee alone is 1 month.

AFAIK a condo that is worth RM168,000 in JB or KL can only be rented for around RM1,000.

I would stand corrected if someone is able to have proven to own a property worth RM168,000 that fetches RM1,400 monthly rental. This does not include a property bought several years ago for RM168,000 but renting at RM1,400 now (in which case in the first few years there would probably be negative cash flow).

Answer #3:
Yes, not many people are able to spot such good deal from the market.
If we spend some time searching for wholesale bargains like fire sales by developers, desperate owners or bank auctions, we will be surprised by their offering prices and quality of properties.

Some apartments/condominiums in Larkin area worth RM160,000-RM190,000 now are rented for around RM1200-RM1500 (fully furnished). The unit in the 1st case was found in the same area with existing tenant from a local company. 2 weeks after we found the unit, our agent was able to rent another unit out in the same building (2 floors higher) for RM1500 within a week!

However, we cannot deny that there are many units of these apartments/condominiums currently rented below market price (RM800-RM900). They may be rented to owner’s friends or relatives or rented out several years ago.

“Seeing is believing” – that’s what we always say in the market….
Question #4 – Are rental markets of JB, KL & Penang the same?
I think your explanation about the rental market in “Will property price and rental fall further?” (that rental rate are expected to increase as more people will prefer to rent instead of buying house in this uncertain period) applies to the market in KL and Penang too. Isnt’ it?

Answer #4:
Theoretically, yes, rental markets in KL and Penang are expected to see the same things happen.

But there is one factor in JB rental market that KL and Penang markets do not have – Singapore. Within the next 6 months, Malaysian workers retrenched by Singapore firms will flow back to rent houses in JB while they look for new jobs. This may temporary create another influx of tenants to JB. The strong Singapore currency will also attract more people from the north to come and find job here in long term, just like what has happened in the last 1997 Asian currency crisis.

p/s: we further discussed our recent observation about the increased occupancy rate of certain rental apartments and condominiums in Johor Bahru in “Why apartment can be the best real estate investment?”.

Question #5 – Is inflation your friend or enemy?
I don’t really “catch” the meaning of “inflation is an enemy to all home buyers because they don’t earn income from their houses…” (in “Inflation may come back soon”)
Would you explain more details about it?

Answer #5:
Home buyers buy houses for their own stay. Whenever inflation strikes, cost of living becomes higher and higher, including the price of a new house, monthly installment of new housing loan, maintenance of house, utilities and other household expenses.

Unlike property investors who benefit from higher rental income and property prices due to inflation, home buyers have to rely on their existing sources of income to cover the increased home-related expenses.

Question #6 – Does Iskandar Malaysia project benefit property investors?
How do you think about Iskandar Malaysia project? Does it really benefit the property investor?

Answer #6:
In his latest comment on remarks made by Singapore PM Lee Hsien Leong that the republic was not competing with Johor especially with Iskandar Malaysia, Johor Mentri Besar Abdul Ghani claimed that the special economic corridor had attracted RM40bil in investments since its launch in November 2006.

If everything portrayed by the government about Iskandar Malaysia is true, it definitely benefits almost everyone in JB including property investors there. However, in the market we found more speculations rather than concrete confidence from investors. For example, price of land plots along the second link has increased tremendeously (>80%) as a result of speculators’ operation. This has also invited criticism from former Malaysia PM Maharthir because without the support from true economic activities, everything looking good now will not sustain, and eventually someone will have to pay the bill – most likely the locals will lose their ownerships of agricultural land and tax payers will have to repay additional natioanal debts incurred by unnecessary infrastructure projects.

Investors are realistic players while speculators are gamblers.

Question #7 – Why prices of some properties never go down?
I see that supply > demand in JB property market due to many housing development projects, but price of properties never go down.

What is the reason behind this?

Answer #7:
Property price of new developments may not easily go down as developers have to meet their break even points. Unless they are really in deep trouble. So we see a lag effect compared to resale/sub-sale market.

Certain resale properties in JB like high-end semi-D, condominium, bungalow and land are mostly bought by cash-rich buyers such as wealthy Malaysians and foreigners (Indonesians and Singaporeans). They have the holding power and normally do not like to let people take advantage from their properties when the market is bad. Sometime we can even face difficulty to find such properties in bad time.

Properties that reflect instantly the effect of supply and demand are those bought by middle and low classes in the resale market.

Question #8 – Why strata title is not issued yet for a completed project?
Regarding Wadihana, I was told that though it was completed more than 15 years ago, strata title for individual unit has yet to be issued and that the owners are now in dispute with the developer over it for the developer is dragging its feet. Is this true?

Answer #8 (contributed by goBetong):
If strata title is still outstanding after 15 years, the property is not worth any consideration. Either (i) the developer is intentionally irresponsible and to his advantage, keeps dragging the title application it to enable them to control/manage/continue to make monies from the properties or (ii) that the developer is still owing $ to the bank and is unable yet to redeem the master title or (iii) the property is not constructed to specification, CF is temporary. Whatever the scenarios, it stinks to seven heaven. Why anyone of sound mind would want to invest in a property w/o title and which, is not outrightly his is beyond my comprehension.

Question #9 – Does a property with average rental yield or capital rate guarantee a cashflow investment?
For example, i buy an apartment at $200k with 10% down-payment of $20k, 90% with mortgage loan (interest rate 6.5%) of $180k with $1100 monthly installment.

if my capital rate is 6%, i manage to get monthly rental income $1000.
in fact, i invest $20k then getting -$100 cash flow.
please advice.

Answer #9:
Yes, you get a preliminary monthly cash flow of -$100 before other expenses like tax, repair, insurance, etc. (with 30 years of tenure for your loan)

Here we can see how high interest rate (6.5%) can turn a so-called high rental yield (6%) investment into a negative-cashflow deal.

In fact, even though now we can get lower interest rate at around 4%, which reduces the monthly installment to $860, a $200k apartment rented at $1000 is still not considered as a positive-cashflow deal if its monthly maintenance fee is above $140.

Post from: Real Estate Investment in Johor Bahru

Real estate investment Q&A #1

photo credit: C.P.Storm

Of all possible investments that are within the reach of the average investor, none ofter the combination of outstanding benefits that are available to real estate investors. And, do you want to know something, banks and life insurance companies recognise this fact!

So they invest your money in real estate. While they pay you 1 to 3 percent for the use of your money, they are making 10 to 20 percent on it.

Why is real estate such a good investment? It offers the investor at least five different returns or ways of making money, on his investment.

Gross spendable income – cash flow
Investors also refer to this as “cash flow” or how much money that you can spend at the end of the month or year after all the operating expenses and mortgage payments have been made. We also call this as “gross” spendable because we have not taken income tax consequences into consideration at this point.

We always purchase properties that cash-flow. It takes time to find them, but it is well worth the effort. The simplest definition of positive cash flow is that you collect more revenue, usually in the form of rent, than it takes to pay for and operate the property.

A big advantage of real estate over other investments is that it can produce cash flow on a monthly basis. The cash generated by a real estate investment will always be a much larger percentage cash-on-cash return than any other investment.

The beauty of a cash-flowing real estate property is that it can help you become financially free. We discussed two real life examples of such real estate property in How to know if a property investment is worth investing?

photo credit: Tracy O

Equity income
This is also referred to as equity buildup or principal reduction. Anyone who has had a mortgage on a home or car recognises that each time a payment is made, a certain portion of that payment is for the interest charged by the lender and the balance goes toward reducing the balance on the loan.

In a real estate investment, this equity income can be a sizeable amount. Although you cannot spend it each month, when the time comes to sell your property, you owe less on the mortgage, so you will receive more money at closing. It’s like putting money in the bank each month.

Making inflation work for you instead of against you – appreciation
Like inflation, you do not see it but it’s there. Only now, it’s working for you instead of against you. How does it work? Each year, because of inflation, your real estate is appreciating in value. Those of you who own a home, for example, would you sell it today at the same price you paid for it five or ten years ago?

We keep on having babies but God quit making land a long time ago. The supply is limited.

What does this mean in terms of existing land values? It means that existing land is becoming more and more valuable each year. It explains why investment real estate, whether in single family homes, apartment buildings, office buildings, shopping centres, ware houses and even vacant land, has become the most secure and profitable way to beat inflation. Existing land in most parts of the country, is appreciating at a rate greater than that of inflation.

How real estate stacks up against other investments – leverage
Leverage is an interesting thing about investing in real estate. It’s more than likely you have heard the term Other People’s Money, or OPM. The concept is simple and powerful.

The OPM concept is using money generated from someone or something other you in order to start a business or acquire an asset. While it is true that you can do this to an extent with stocks through buying on margin, the fact is that there is no investment where the application of this tool is more powerful than in real estate.

In real estate the leverage is based on the asset itself and you can get a bank to loan you the money up to 90 percent, and sometimes even 95 to 100 percent, of the total asset value. Why do banks do this?

Because they can repossess the physical asset itself should you default. Buying stocks on margin, however, allows you to borrow no more than 50 percent of the stock portfolio value. Just try to get bank to loan you the money for buying stocks – let alone your margin! Instead, you have to buy through a brokerage – at a high interest rate. In other words, when you buy stocks on margin, you are taking the risk. But when you take out a loan to buy real estate, the bank is assuming the risk. – Ken McElroy in “The Advance Guide to Real Estate Investing”

You can see the power of leveraging demonstrated by real life cases in our previous article Why you want to take up a loan for your real estate investment? No other form of investing allows an investor the opportunity to control so much with a small amount of his own cash.

We further discussed in How to finance your real estate investment for maximum return? the ways to structure a mortgage loan in order to get the maximum return from your cash investment in real estate.

photo credit: lumaxart

An investment that allows you to control
A unique advantage to real estate is that you can control it. In other types of investments, you give your money to a financial advisor and they place it for you in a company’s stock, a bond, or a mutual fund. What happens after that is completely out of your control. You have no ability to make operating decision for the company you have invested in; you are at the mercy of its managers.

Similarly, you have no control over financial markets when you purchase bonds or futures. You make a calculated guess, and then you sit back and watch. With these types of investments, the only control you have is choosing whether to buy or to sell.

Real estate is different. You purchase a tangible asset and you manage it. While there are still external market conditions that affect your investment, the difference is that you have the ability to manipulate the operations of your investment to respond to those conditions. Instead of being reactive (buying or selling), you are being proactive.

For example, if you are a landlord, you have the ability to manipulate rents based on changing market conditions in order to maximise income. This doesn’t always mean raising rents. The goal is to maximise income. Since it is a dynamic process, that might mean lowering rent or offering an incentive. A property’s occupancy comes into place here.

If you have the highest rents in a market, chances are potential tenants will rent from a direct competitor. Then all your high rents become lost potential income. The dynamic of real estate require you to keep occupancy, as well as rents, high.

You have the power in real estate to control the operational performance of your asset more than any other investment.

Post from: Real Estate Investment in Johor Bahru

Why real estate is a good investment?

Cash flow
In our previous article How to know if a property investment is worth investing? we highlighted that a real estate investment that generates cash flow effectively put money into your pocket every month, while your equity in the real estate investment increases over time. And this is the real estate worth investing that we are talking about.

Cash flow is such a vital element of the power of real estate investments.

In commercial real estate, leases can be for many years. While the security of a long term lease is nice, it doesn’t allow you to take advantage of fluctuations in the market.

In apartment investments leases tend to last normally six to twelve months. This allows for constant adjustment of rents to maximize market value and cash flow. Additionally, apartment buildings tend to have more density than commercial buildings. That means you have a lot more individual residents on shorter term lease.

Demand
People always need a place to live. Shelter is one of the basic requirements of existence. That alone gives apartment an advantage over other types of real estate investments. You can rest assured knowing that there will always be a demand for residential housing whether the market is going up or down.

Apartments have become the housing answer to the retired age citizens. These people are frequently referred to as “empty nester” because heir “nest” is now empty. Their children are all grown and gone. Suddenly, they find themselves living in a large, virtually empty home, requiring a lot of upkeep.

Staying in apartment, they are free to come and go as they please. If they want to go traveling, all they have to do is lock their doors and leave. There is another, possibly unexpected benefit. They have undoubtedly moved into a building with other owners who are in the same boat they are, retired, no children around, leisure time, etc. New friendships are readily found and they may feel less alone and more secured then they did in their homes.

On the other hand, young working class in cities also find apartment to be an ideal temporary home which is easy to maintain. Their only maintenance requirements are within the four walls of their apartment. All major exterior maintenance is paid for out of the monthly maintenance fee paid by each apartment owner.

They also find themselves living in a secured environment with 24-hour security system, which is one of the most crucial criteria to live in a not-so-safe city like Johor Bahru. Amenities such as swimming pool, tennis courts and recreation buildings provide them a convenient yet affordable quality life style.

All of this brings us to one conclusion. Apartments have become a much needed form of housing.

Affordability
Rental housing is cheap – cheap to rent and cheap to buy. We have discussed the primacy of leverage when it comes to real estate investments in our previous article Why you want to take up a loan for your real estate investment? The good news is leverage makes investing in real estate, especially apartment, extremely affordable.

In any given purchase you only have to come up with 10 to 20 percent of the total asset value in order to experience the benefits of an apartment investment. Take our recent acquisition in Permas Jaya for example. That was a RM125,000 apartment. We only had to invest a bit over RM16,000 to secure it.

Real estate is one of the only investments you can buy that is often immediately worth many times more than what you have invested. If we had invested our RM16,000 into a mutual fund ot a stock we would have had… RM16,000 worth of stock. By placing our money in an apartment investment we immediately had an investment worth RM125,000 – 85 percent more than our initial investment.

The appreciation we receive from our RM125,000 investment is not based on our actual cash, or our RM16,000 investment, but on the value of the total asset. At the appreciation rate of, say, 6 percent, that means the total appreciation for just one year on our total asset value of RM125,000 works out to be RM7,500 versus the same total appreciation on our down payment of RM16,000, which is RM960. That’s a difference of RM6,540.

The bank doesn’t get a cent of that. We are effectively using bank’s money to compound our returns almost eight times over our actual investment. We can’t think of cheaper money than that, can you?

Business cycles
Apartment investments are one of the only sector of real estate investment that aren’t affected by business cycles traditionally viewed as negative like rising interest rates and recession.
As interest rates rise, homes become less affordable. What does that do? It makes demand for rental housing even higher because it becomes the affordable option. The same thing happens when there is an economy downturn or recession. When people are holding back their expenses, especially the largest purchase in their life – buying a house, renting a house becomes an affordable option.

As demand increases, occupancy and rents increase. We have seen the occupancy rate of certain apartments and condominiums in Johor Bahru increased since December 2008, such as Larkin Utama and Wadihana. You can imagine what will happen next to the rent.

This is not the case for landed housing and commercial real estate. For commercial real estate investors, when housing becomes more expensive, market conditions become more strained. This is because given the choice between allocating income to housing – a basic human need – and an office, a potential resident will chose housing. They might even set up a home office. And when market turns gloomy, more and more commercial landlords’ tenants simply won’t be able to pay up. (Read our previous article Why you should stay away from commercial properties now?)

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Why apartment can be the best real estate investment?

After slumping by more than 50% last year, agricultural commodities like corn, wheat and soybeans have rebounded by 20%-25% from their December lows. Investors have been looking forward to smaller harvests later this year. Drought-stricken Argentina, a key exporter, is on track for its lowest soy production in at least five years, reckons Pablo Adreani of Agripac.

This may cause the demand of palm oil to increase later this year since palm oil is always the primary substitute of soy oil in edible oil industry.

Also, recent drought in China is expected to push the crude palm oil price to recover faster from its 70% drop last year. Although the current price of RM1900/ton is still more than 50% lower then its peak of RM4300/ton in March 2008, the price has recovered by 46% from its low of RM1300/ton in October last year.

The weather remains a “wildcard”, and smaller harvests could bolster prices later this year. But for now supplies don’t look too stretched, given last season’s record harvest.

Even so, demand of palm oil is set to rise…

Why now?
Despite the recent recovery sign in agricultural commodities, palm oil price has been depressed by the concern of recession for more than half a year. In the second half of last year, we still remember while crude palm oil price was already on its downturn slope, we still saw most sellers of oil palm land unwilling to lower their price. We believe it was because these sellers were less in touch or ignorant with the global economy situation.

Until end of last year, their attitude became softened after they have been selling their harvests at lower and lower prices for months. Now at this juncture, almost everyone in Malaysia is aware of the slowdown in economy. We are surprised to see pessimism comes with such a slow pace in the country.

We believe now is a good time for you to start looking for oil palm land. In the coming months, you may be able to get prices much lower than what you might have been offered last year. For example, smaller plot of land (less than 15 acres) with 10 years old oil palm trees was asking for up to RM80, 000 per acre in some area of Johor last year. Now you may consider bargaining for RM55, 000 to RM65, 000. You may even offer RM35, 000 to RM45, 000 in some area for larger acreage (above 30 acres).

If you intend to operate the oil palm land yourself, however, bear in mind that most of these lands are not investments that worth borrowing or financing, yet, though worth investing. (Read our previous articles How to know if a property investment is worth investing? and Why you want to take up a loan for your real estate investment? to learn how to know if a real estate investment is worth investing or borrowing.)

The average operating cost per acre is about RM150 per month right now. With the current palm fruit price (around RM320/ton), you may only get 3.7% of annual return from the operation of a 10-year-tree oil palm land with the purchase price of RM55, 000 per acre.

With our special property investment evaluation spreadsheet (which is only available to PropertyMethod.com members), we estimated only when the crude palm oil price reaches RM2600/ton (palm fruit price RM430/ ton equivalent), the oil palm land will become worth borrowing at the purchase price of RM55, 000 per acre, assuming same operating cost.

If you intend to invest for long-term return or be a land-player, take your position this year and you may expect to see significant return for the next 2 years with a ride on the return of inflation.

Crude palm oil price charts
Daily crude palm oil quote
Oil Palm Land for Sale in Malaysia

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Why you should consider buying oil palm land now?

While the festive season had kept consumer spending fairly buoyant, Retail Group Malaysia’s managing director Tan Hai Hsin said it had been lower compared with last year.

“The shopping centres and major commercial centres are still very crowded with shoppers but it is obvious that spending has dropped. Retailers could be looking at significantly slower sales post-Lunar New Year.”

A quarterly survey by the Malaysian Institute of Economic Research (MIER) showed that in the fourth quarter of 2008 (4Q08), the Consumer Sentiments Index dropped to 71.4 points, down 17.5 points from 88.9 points in 3Q08 as households felt the pinch from a softer economy.

While Malaysia’s inflation rate has cooled to 4.4% in December from 5.7% in November on falling oil prices, consumer sentiment has remained subdued on fears of the country entering into a recession amid the deteriorating conditions of the global economy.

Retailers are facing emptier tills. That’s bad news for cashflow. And that means it’s hard to pay the rent. Most stores still have to shell out 1 month’s rent, in advance, to their landlords every month. For those retailers that were feeling the heat at the end of last year, December’s rent day was a big test. Finding the cash for March’s rent day is now likely to be even more stressful.

This year’s going to be really dire for retailers. Most will have survived through Christmas and Lunar New Year but from February onwards it’s going to hit the hardest.

Bad news for shopkeepers is bad news for commercial landlords
Retailers having it tough isn’t much of a surprise. But the knock-on effect means things are going to get much worse for commercial landlords too.

Commercial landlords will have to take some huge hits. Some of their tenants simply won’t be able to pay up.

Both shopping centre and retail warehouse rents also declined year-on-year. What’s more, some shopping malls are having to cut service charges, further reducing their income.

And unfortunately for the landlords, retailing is just one problem. Their overall rent book is being squeezed hard across the board, with things looking particularly bad in the City, where a mix of job cuts and oversupply means rental falls are likely to accelerate. Hence we forecast of a 20%-30% fall in commercial property values this year.

What this means for investing in property
For investors the message is very clear. Retail: don’t touch – well you knew that anyway. And as for commercial property – there’s still a long way to go before we’re anywhere near bargain-hunting time.

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Why you should stay away from commercial properties now?

Jan 9, 2009 – Malaysia Not In Recession Now, Says PM
Malaysia is not facing a recession now despite the global financial meltdown that has badly hit the United States and Europe, Prime Minister Datuk Seri Abdullah Ahmad Badawi said.

Jan 10, 2009 – Malaysia won’t go into recession, says Nor Mohamed
Yet another official is talking…

What did the union and private sector say?
Nov 26, 2008 – Job Losses Feared as Recession Bites
The global economic slowdown is slowly creeping onto Malaysian shores leaving many worried about the impact it will have on workers.

Jan 13, 2009 – Sell Malaysian bank stocks: Citigroup
Citigroup cut its growth forecast for Malaysia to 0.5 per cent for 2009 from 3.1 per cent on lower exports, according to the report. Citigroup’s forecast is lower than the official estimate of 3.5 per cent for economic growth in 2009.

Why governments hate to let us know that we are in recession?
Governments hate downturns. That’s because voters tend to prefer good times to hard times, unsurprisingly. A government that presides over house price growth and full employment comes in for plaudits, regardless of how that growth was achieved.

The basic ideas behind how to run an economy for a long time have been rooted in Keynesian economics. The idea is that governments can take an active role in managing the economy through various tools, including setting the interest rate. You try to make sure the economy doesn’t overheat during the good times, and in the hard times, you make money a bit more available, and maybe increase public spending too, to compensate for the downturn in the private sector and “stimulate” the economy.

The government can’t stop the recession – but it can make it worse
Does it work? Who knows? Because while it sounds good in theory, what you actually get is a government that keeps pressing the “stimulate” button for as long as it can get away with it.

With the coffers empty, there really is very little any government can now do to stand in the way of this downturn. But that won’t stop them from trying. They won’t make things any better. But as a long and grim history of price controls, currency market interventions, protectionist laws, and good old Fannie and Freddie (so-called “government-linked companies”) in US demonstrate, they might just make things worse.

If it really has to, the Government could still do something – instead of wasting tax payers’ money on inefficient and yet corruption-breeding projects or “VALUEable CAPital injection” (oops.. sorry for the spelling mistake), it could cut taxes. That would put more money in people’s pockets, which they could use as they wished.

But this won’t happen. Rather we’ll get a load of high-profile, high-spending, wasteful initiatives that will drive us deeper into the hole we’re in.

What can we do now?
Some good businesses during hard time – answer to uncertainty: feng shui & fortune teller.

Other more-practical ideas: buying essential items in bulks at hypermarts, sharing for saving, recycling, reading financial blogs, etc.

Real estate investment? Why not?
Advice from guru – hold onto gold, income-producing real estate, oil wells, and stocks when pessimism prevails.

Today’s depressed real estate market is the best time to start buying houses, even if credit is tight. Robert Kiyosaki and his wife accumulated income-producing properties when the economy stayed down from 1987 to 1995, even though they were strapped for cash and bankers did not want to lend to small investors.

Finally, and most importantly – “if you do not know what you are doing, no asset can make you rich. Ultimately, what makes you rich is your financial intelligence. Your greatest asset is your brain — so take care of it and protect it from bad advice.”

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Is Malaysia already in recession? What can we do now?