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The State of the Nation: Rental market conditions may sway buy-or-rent debate

SO Kuala Lumpur is the world’s best “city of opportunity” for renters in 2017.

This was what US-based real estate listing service RENTCafé found when it used rent affordability to relook at PwC’s 2016 shortlist of the world’s best 30 cities to work and live in, and ended up rearranging the latter’s ranking on June 22.

According to RENTCafé, the average rent per year used in KL was US$4,500 (RM19,319) against a median household income of US$22,400. That translates into a monthly rent of RM1,610 against an RM8,016 income — about 5% above the 2014 monthly median household income of RM7,620.

Is favourable rent the reason only 53.5% of households in KL are home owners — way below the national average of 72.5%? Or is a shortage of affordable housing the real reason for low ownership?

Whatever the reason, Malaysia could be short of at least one million units of affordable housing by 2020, central bank governor Datuk Muhammad Ibrahim recently declared. The shortage is most severe in highly urbanised states like Kuala Lumpur, where house prices are “severely unaffordable”.

That “rental needs to be a viable option of choice, and not the last resort for households” was listed by Bank Negara Malaysia as among policy lessons to reduce the supply-demand gap for affordable housing.

To be sure, historical data over the past two or three decades globally will show buying to be more financially rewarding than renting as “property prices always go up”.

Yet recent history shows prolonged periods of low interest rates and cheap debt, globally. Can house prices continue to rise at the phenomenal rate they did with interest rates beginning to look up again?

Dr Yeah Kim Leng, professor of economics at Sunway University Business School sees the building of more properties for rent as one way to reduce the number of overly leveraged individuals.

“As supply catches up with demand and oversupply emerges in selected segments and locations, there will be downward pressure on rental that will make renting an even more attractive option. The economy will benefit from a gradual rebalancing of housing supply and demand. In addition, the easing of price pressures that have elevated housing affordability into a national concern will be good for market stability and the well-being of a less-indebted populace,” says Yeah, who is one of two external members of Bank Negara’s Monetary Policy Committee and formerly chief economist at RAM Holdings Bhd.

He expects renting to become “increasingly popular as society and lifestyle become more mobile, housing supply exceeds demand and investment assets grow more diversified”.

“If you are likely to relocate due to transfers or job changes, purchasing a home could incur a higher cost if the prevailing property market condition is soft. You could face a situation [such as] there could be no taker, a long disposal period or a steep price discount,” Yeah says.

His advice for those considering a purchase: “You will also need to be able to live comfortably with not more than 50% of your monthly take-home pay if you are taking a home mortgage.

There are also other expenses that will need to be budgeted for when owning a home, such as maintenance, repairs, furnishings, home appliances and fixtures, he says.

In a nutshell, renting should be seriously considered if: house prices are not expected to rise substantially, there is ample supply at good locations, rent is a lot cheaper than debt-servicing, and one foresees an environment of decreasing rents and higher interest expense amid softer employment and wage growth.

“It’s a tenant’s market,” a seasoned investor says. “Rental can be well below monthly instalments, especially for high-rises … There is no more low-base effect ... the RM20,000 houses in Jinjang 20 to 30 years ago are asking for over 10 times that today. Would you bet on them rising from RM300,000 to 400,000 to RM2 million to RM3 million by the time you retire [in 20 to 30 years]? How much money do you think you can make from selling a unit in Petaling Jaya when you retire if you pay RM2 million today?”

A RM1.8 million loan for a RM2 million property would require a RM9,120 monthly repayment for 30 years at an interest of 4.5%, which would take total costs to RM3.5 million, excluding insurance and maintenance — not impossible but far from the gains seen in recent years.

Even a RM500,000 property requires a RM2,280 monthly payment (assuming a 4.5% interest over 30 years and a 10% down payment) and would end up costing over RM870,000. That can be a stretch for more than 50% of Malaysians with median individual and household incomes at RM1,703 and RM4,585 respectively.

The RM870,000 would be enough to cover 60 years of lease if the rent is RM1,200 a month — true for some condominium units in PJ, a quick listing search on website shows. Renting instead of buying could also mean having at least RM1,000 extra cash a month, which can be invested for higher future returns or income.

A viable rental market with sufficient government oversight also means one does not have to take on debt that he or she cannot afford just so one has a place to call home.
This article first appeared in The Edge Malaysia Weekly, on July 3, 2017 - July 09, 2017.


SunREIT's net profit at RM44mil

KUALA LUMPUR: Sunway Real Estate Investment Trust (SunREIT) posted a net profit of RM43.7mil for the third quarter ended March 31.

SunREIT said its pre-tax income was RM43.7mil comprising realised net income of RM43.2mil and unrealised income of RM500,000 arising mainly from fair value adjustment on financial derivatives.

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Malacca is set to see another skyscraper added to its history, after a RM500 million multi-storey mixed development project by the Hatten Group is completed by 2014.

The project, called Hatten City, will include residences, office blocks, shops and a resort. It will complement Hatten Square and Dataran Pahlawan shopping complex as a must-see attraction, with its futuristic design and a full view of the Straits of Malacca.

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Johor Baru's residential property prices trending upwards

Prices of residential properties in Johor Baru have surged 40 percent since 2006, with Danga Sdn Bhd’s Casa Almyra project having seen a price increase to RM800,000 from RM450,000 in 2006.

Samuel Tan, Executive Director at KGV-Lambert Smith Hampton (Johor) Sdn Bhd, said the value of transactions have leapfrogged in the Iskandar region and property buyers and owners can expect prices to rise by between 10 and 20 percent by Q4 this year.

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Menara Binjai development to alter KL skyline

The Chua family, inspired by the visions of a matriarch, is constructing a new landmark called Menara Binjai in Kuala Lumpur, on the former site of the family mansion.

The late Madam Khor Joo Saik, Dr. Chua Seong Siew’s mother, once foretold that the land where the family home on Jalan Binjai was situated would one day be as busy as Singapore’s Orchard Road.

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