In light of the current downturn, and the lack of direction and catalysts, questions abound as to how long the slowdown is going to be. Some said 1½ years, others longer

The next question then is, how viable are properties as an asset class amid the slew of negative news flow today.

There are some principles when it comes to real estate investments.

In no particular order, the first is that properties come in cycles – there is an upcycle and a downcycle – so it depends on when you buy and when you exit.

StarBizWeek poses some questions to property consultants as below:

Khong & Jaafar managing director Elvin Fernandez

The property sector is expected to remain in the doldrums for some time. Is property still a viable investment class considering the current scenario?

There is a downturn in the property market at present and the severity of the downturn varies from sub-sector to sub-sector, location to location and property type to property type. The property market cannot be said to be in the doldrums.

In the residential sub-sector, and in general, the downturn is not severe. There is a mismatch between the types of properties that have been demanded and offered for some time in the market and the household levels that currently exist.

House prices increased in values and prices ahead of fundamentals such as household incomes and rental returns.
With the realisation that household incomes were not matching the increases in values, and with household incomes growing but not at the pace expected, the market realised that affordability was not at the levels envisaged previously.

So the market is now required to adjust to levels as dictated by the majority of households.

This is happening and the realignment may take a few years and could cause some dislocation.
The residential market is sticky on any downside because it is owned by a large diverse group of people.
Whatever disproportionate levels of speculators in the market has been reduced by measures taken earlier by the central bank.
There is, no great risk of any severe downturn in the market.

Residential property is certainly a viable investment class. While it may not have the sort of bullish outlook as in 2012, the rental returns for the ubiquitous two-storey terrace houses is still a positive net return of 2% plus, marginally down from the peak of 2012.

At that rate, it still reflects capital appreciation possibilities in the future, perhaps not the very immediate future.

In the office and retail sub-sectors, the oversupply of office space and retail malls are somewhat more serious and may need a robust overall policy thrust to nudge them out of the more severe downturn in time.

Having said that, there are still many opportunities in these sub-sectors because the properties are not homogenous. Different office buildings and malls have different secure rental incomes with some leases/tenancies locked in and with step-ups (improving yields).

Net yields from these choice properties can easily touch 6% to 7% per annum.

What is the average overall current rental yield today?

A very broad general hierarchy of yields will be as follows:-

> Two-storey terrace houses – 1.5% to 2%
> Semi-detached and detached houses – 3% to 5%
> Shophouses – 5% to 6%
> Office buildings and malls – 6% to 8%
The lower the yield the more attractive the property is because the investor will be willing to accept a lower yield for safer and better properties.
On the other hand, the higher the risk the higher the yield that an investor expects.
> Hotels – about 8%
> Factories – 8% to 9 %
> Agricultural properties such as oil palm plantations – above 10%

The removal of interest bearing schemes in 2014 January has successfully weeded out speculation. In terms of developers sales 2016 was bad, 2017 was slightly better. What will 2018 be like?

Sales will likely remain flat, which also means that there will be a lot of transactions but not at the same levels as before.
How long do you think the current situation will persist?

In the residential market, two to three years, but that will also depend on economic growth in general.
In the commercial market, two to five years, but that will also depend on economic growth in general.

Despite the current doldrums, there are companies who have no experience in property development jumping into this by buying up pieces of land with the intention to go into development later on. Why is this so?

This has always been the case, year in and year out. Nothing unusual about this and although the returns from property development is a bit diminished from previous rates, it is still attractive when compared with returns from many other industries.

Property development is also a more short-term venture in the sense that you buy a land, assemble a development team, secure approvals, sell and build.

With the emphasis on affordable housing today and these units will enter the market in the next couple of years, what are the catalysts for this sector?

The affordable sector is emphasised today because that is where effective demand exists insofar as the residential sub-sector of the market is concerned and this is because of the current level of household income.

As in any sub-sector, we must not oversupply it into a glut.

PPC International managing director Datuk Siders Sittampalam

Is property still a viable investment class considering the current scenario?

The current property sector is seeing a mismatch between demand and prices.

The market is also adopting a cautious stance in light of the upcoming general elections.

With that said, the ringgit and oil prices have stabilised. These are reliable indicators on the health of the economy.

Still, given the cautious outlook, property demand and supply mismatch as well as the fact that Malaysia is facing one of its largest overhang situation in a decade, the market will need time to recover.
Right now, it is not about there not being enough houses – it is about affordability.

How long do you think the current situation will persist?

I don’t see a rebound until 2019.

Nawawi Tie Leung executive director Brian Koh

How viable is property as an asset class today?

It is always viable but it is a question of whether you should enter the market now.

Given today’s pricing, you may not really find the rent nor tenant that you desire at this moment.
As part of a portfolio of assets, property has to be there.

There is the view that the very high net worth individuals are today investing in bonds and gold.

But that is because many of them would already have properties as part of their wealth portfolio. In fact, they may even have liquidated some in the recent past.

As a Malaysian asset class, at least in the next 1½ years this situation (prevailing weak sentiment) will persist if there is no significant adjustment or market fundamentals, and in the absence of major catalyst.

Do you think prices will drop? In some places, prices have already dropped.

We assume it is an over valued market (today). Things will need to adjust. It is basically not providing the returns expected.

High rise residential 4% to 5%, if you are lucky.

Commercial properties like office buildings and major retail centres will give you generally a yield of below 6% for an en bloc basis, shop offices 3% and shop lots, difficult to say.

There are units that will perform better. Strata shop lots are not performing well

In Cyberjaya, many of the strata shops are empty.

What is the catalyst needed?

More income. Fundamentally, that is the big issue in Malaysia at the moment.

There is a need for higher wages in view of today’s cost of living. That will be the key.

Higher salaries will be able to support private consumption and entrepreneurship.

How do you explain new entrants going into property development these couple of years?

People jump into the property business because they want to diversity.

Maybe their current business are unexciting and they view property as more exciting.

Or they are already in the construction business and they want to go upstream.

Do you like stocks?

Stocks as an asset class are rather volatile at present.

VPC Alliance Malaysia managing director James Wong

How viable is property as an asset class today?

It is viable if one were to buy for own occupation even in the current downturn because there are substantial discounts given. In the secondary market, there are multiple choices.

What is the current rental yield today?

As a broad guideline:

> Landed, 2% to 2.5% versus 4% to 5% per annum 10 years ago,
> High-rise residential, 3.5% versus 7%-9% per annum 10 years ago,

What will 2018 be like?

In terms of prices, it should stabilise, in terms of volume, we can expect to see a high volume of transactions than 2017.
The conclusion of the general election will remove the current wait-and-see attitude.

With the economy expected to grow between 5% and 6%, things should fall back into place.

How long do you think the current situation will persist?

The property market should recover by 2020. The slowdown emerged in 2015.

There is a lot of unsold stocks at the moment and incentives are given to clear stocks.

Developers are disposing of stocks en bloc at substantial discounts. They buy to resell or to rent.

How do you explain new entrants going into property development with no property development background despite the current slowdown?

Many businesses are going no where. Or it may be a sunset industry.

Property development is one way for them to diversify.

They may be in the construction industry, or building materials business or some property-related business.

Although the good old days of making 30%-40% is no more, they can still get a profit margin of 20%, which most developers are happy to get.

What sort of catalyst is needed to spur the sector?

Increasing income but not productivity is not the answer.

A better way is to open up the sector, allow foreigners to buy and invest.

Promoting the digital economy, building logistics hubs and (artificial) intelligence industry will help to boost the economy over the longer term.

Malaysia need to go forward very quickly with new ideas.