This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on February 13-19, 2017
Veteran real estate investor Ong Choon Hock has brought and sold more than 100 properties over the past for decades. He talks about his strategies and why he believes now is a good time to buy.
Investors should consider buying properties now as the market is expected to recover by the second quarter of this year, says veteran property investor Ong Choon Hock.
Using his own Intermarket analysis to study the relationship between the stock market, economy and property market, Ong says he is able to decipher the boom and bust cycles of the real estate market.
“When the [stock] market crashes, the property market will follow suit three to six months later. We saw this in 2008 when the property market crashed six months after the stock market did,” he points out.
From there, investors can see a clearer picture, says Ong. There are periods where the market crash is followed by strong growth for two to three years. Then it enters the mid-cycle consolidation period.
According to his analysis, the local property market is currently in the mid-cycle consolidation period. Over the past two property cycles, this has always lasted less than two years. He thinks this will still be the case during this cycle.
“If we take the second quarter of 2015 as the beginning of this mid-cycle consolidation, we believe that the property market will recover no later than the second quarter of this year. This is what we know from the Intermarket analysis,” says Ong, adding that this is just a preliminary estimate that needs further fine-tuning.
Taking the stock market as the primary indicator, he says the recovery of the property market looks very promising in the new term. “The Intermarket analysis reveals a lot of positive indicators. The Dow Jones Industrial Average, Singapore’s Straits Times Index and the FBM KLCI are not showing any sign of collapse. Instead, the stock markets are exhibiting bullishness.”
Does the mid-cycle consolidation signal that it is a good time for investors to buy properties? Ong says yes. That is why he has started buying real estate again in both the primary and secondary markets. He stopped buying in 2013 for a period of two years and sold RM13.6 million worth of commercial properties between the second quarter of 2015 and third quarter of last year as values rose substantially during the period.
However, he acknowledges that it is quite difficult to get good buys in the primary market today. Back in the mid-1990s or 2000s, investors could buy a row of shop lots — there were usually eight units — when they were launched. In the current market, developers do not sell in rows as the demand is high.
ONG'S INTERMARKET ANALYSIS
1st cycle: 1984 to 1997 (13 years)
2nd cycle: 1997 to 2008 (11 years)
3rd cycle: 2008 to 2020 (12 years)
The stock market is always leading the real economy.
Lead period: one to three months.
Property market is a lagging indicator.
Lagging period: three to six months.
Duration of end-cycle and mid-cycle consolidation
2 to 3 years (1997 - 1998; 2008 - 2010).
less than 2 years (1987 - 1988; 2001 - 2002).
“Nowadays, it is tough to get shop lots in the primary market. So, I also buy them on the secondary market. The advantage of buying in the secondary market is that investors can get the yield immediately,” says Ong.
“Last year, we bought a few properties in the secondary market. For example, a shop lot in Mahkota Cheras, which cost RM2 million, gives us a rental income of RM8,000 a month.”
Ong says there is no difference between buying in the primary and secondary market if investors can get the property at a great value. However, he notes that there may be some price differences.
“For the primary market, it is difficult to buy a property at a great value because developers need to be profitable. But there are times when they are desperate enough to give discounts to sell the property,” he says.
“For the secondary market, investors are mostly pessimistic during the property market consolidation. There will be a tendency for owners to dispose of their properties at any price — usually lower than their intrinsic value — as long as they make some money from their investment. So, investors should always look out for opportunities to buy at a great value.”
Ong is managing director of Marvelane Sdn Bhd, a real estate developer. While it may be a young developer compared with its more established peers, his goal is to grow the company into one of the top five developers in the country in terms of profit in the next eight years.
The 66-year-old started his property investment journey as early as 1976 when he worked as an engineer for some of the largest property developers in Malaysia. To date, he has invested in more than 100 properties and reaped the rewards from them.
Ong adopts two strategies when it comes to buying properties. One is buying commercial landed property as a long-term hold for capital appreciation. For capital gains, he favours residential landed property that can be sold off immediately after obtaining the certificate of completion and compliance (CCC).
“I like using [the latter] strategy because the yield of the residential landed property is low at around 2% to 3%. We do not buy open office space or non-landed commercial property because there is an oversupply of office space. Some of my friends invest in these properties because the yield is quite good, but the capital appreciation may not be what you want,” he says, adding that his core holdings currently include 32 shop lots.
Ong has a focus on the local property market. In the mid-1980s, he invested in the Australian real estate market to hedge against currency risk. He stopped doing that after buying and selling a few properties as the healthy profit was heavily taxed.
For landed residential properties, Ong prefers to sell them within 2½ years from when the CCC is obtained as he does not want to collect low-yielding rents. He would rather cash out and look for other opportunities.
When it comes to landed commercial properties, he prefers to buy, keep and lease it out while waiting for the capital appreciation. “The rental may not be enough to cover the instalments in the first two years. But in the third to fifth year, the rent should be more than enough to pay the instalment. The value of the shop lot would have increased by then. From there, you can gear up to borrow again and this gives you stable cash flow to invest further,” he says.
But not all of Ong’s investment decisions have been good ones. In 1996, he bought a corner shop lot in Hicom Town Centre, Shah Alam, for RM1 million. Upon completion, he could not get a tenant as it was during the 1997/98 Asian financial crisis. On top of that, the design of the project was so terrible that big trucks could not come into the town centre.
“The place became a ghost town not long after all of the aluminium cables were stolen. It has been 20 years and the shop lot is only worth RM1.5 million, but I will not be able to sell it. This was a painful experience for me and I learnt a lot from it,” he says.
Ong has seen substantial returns from his property investments over the years. He says some of his more successful investments saw a gain of more than 100% after gearing within two years.
The return depends on whether the investor uses gearing to enhance his rate of return, says Ong. For instance, in the 1990s, he bought three double-storey terraced houses in Bukit Jelutong, Shah Alam, for RM250,000 each. Knowing the importance of gearing, he borrowed 70% from the bank and forked out only 30% of the price to seal the deal.
“After two years, the property price went up 30%, so I made a 100% profit within a short period. The capital appreciation was fantastic at that time, especially for landed commercial property. So, we still stick to this strategy of using gearing to improve the rate of return,” he says.
He adds that investors who prefer to buy properties using cash instead of gearing would have less financial stress, but also a lower rate of return. So, the returns from property investment vary depending on the strategy used.
Ong says if investors are mentally prepared and have the guts, there are plenty of opportunities in the market. Equally important is that if an investment goes wrong, they must be prepared to take the necessary measures and do not repeat their mistake.
“In the worst case scenario, if investors do not have the money to keep the property, they should sell it and settle the matter,” he says.
“Based on my experience, I think the risk of property investment is quite low. Investors should capitalise on the current weak market sentiment to invest and reap the rewards. This is the same as the stock market. We should remember that investors make the most money when everyone thinks the market is bad.”
Ong says property investors should pay attention to the intrinsic value of the property before sealing the deal. He explains that the property price is determined by the cost structure of the development. Using his own project, Marvelane Homes by the Lake, as an example, he breaks down the costs (see table).
“The cost components include land, construction, financing, compliance and professional fees. Then, there is the profit for the developer. We can predict that land costs will trend upwards due to a shortage of development land in major cities while construction costs will go up due to taxes and labour shortage,” he says.
“We have seen compliance cost rise from 5% in 2008 to 13% in recent years. We can safely assume that compliance cost and professional fees will only trend upwards in the years to come. Under such circumstances, I do not see how property prices will fall.”
Ong has a valid point. According to a survey by the Real Estate and Housing Developers’ Association (Rehda), about 26% of the 157 respondents reported an increase in the overall cost of doing business in the first half of last year. Compliance cost is a major component of the cost of doing business, which is usually incurred when surrendering land for social and community infrastructure.
Examples of compliance cost that can be imposed by the authorities include conversion premiums and payments for the upgrading of infrastructural services, cash guarantees to the local authorities for the damage of existing roads and infrastructure, and contribution to the Construction Industry Development Board and utilities such as Indah Water Konsortium.
What if investors do not have enough seed money when they spot an investment opportunity? Ong says they could turn to developer bridging loan schemes to fill the gap.
“Many developers are desperate to sell their houses and have come out with a developer bridging loan scheme. This makes things easier for house buyers if they can only afford a 10% down payment and only manage to secure a 70% bank loan,” he adds.
Under the scheme, developers lend buyers the amount needed for the rest of the down payment. However, this scheme may come with a catch in the form of a higher interest rate.
According to a news report by The Edge in September last year, Rehda says it is counterproductive to impose maximum interest rates of 12% to 18% under the property developers financing scheme. The scheme is aimed at helping homebuyers with financial constraints, but such interest rates may scare them or the investors away as it would eat into their profit.
One of the main concerns when it comes to properties is that investment is more illiquid than other assets such as equities or unit trusts. However, Ong thinks liquidity should not be an issue if investors have a sizeable portfolio of properties.
“This should not be an issue for investors. They can always tell the bank that the price of the property has gone up and they need more financing,” he says.
“Refinancing the property could also be an option and this will help the investors in many ways. The return from rental should be more than enough to pay the additional borrowing.”
Ong believes that investors can hardly go wrong if they buy in the right place. The prices of landed properties will only go up over the years due to rising costs and land scarcity. Therefore, he advises investors not to buy condominiums for investment purposes as the capital appreciation is very slow.
“Investors need to know exactly what they are buying. Inspection of the property is important and they need to be careful with every aspect of it. If they know both the macro and micro factors to look at, they cannot go too wrong,” he says.
Macro factors refer to the timing of the market, the real value of the property, investor’s creditworthiness and psychological preparedness. Micro factors refer to the tiny details of the development.
Ong uses his own project to demonstrate how important the micro factors are when it comes to the property price and capital gain or appreciation. He adds that Marvelane uses M360, a unique and holistic approach, to build its projects.
He says investors should inspect the ambience, location, amenities/facilities, security and sustainability of the project. They should also look at the design of the building, lighting and ventilation, internet connectivity and overall quality of the project.
“Investors should look at these aspects when evaluating whether they want to live there. Why would anyone invest in a project that they do not even want to live in? If investors believe in feng shui, they should look at this aspect as supplementary data,” he says.