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Factors Affecting Property Value

 

ID-10022282

 

Questions:

1. When buying for own use, how do I evaluate a property and know the factors that make it a good choice?

2. For investment properties, what factors contribute to capital appreciation and increase in rental income?

The following explanations can help you better understand the factors affecting property value:

1. General Economy

When considering the general economy, we are actually examining the following economic indicators:

  • Gross Domestic Product (GDP) - the market value of all final goods and services produced within a country in a given year. The higher the GDP, the more buoyant the economy is likely to be.
  • Foreign Direct Investment (FDI) - refers to the total investment made by foreign companies into companies based in our country. The more FDI comes into our country, the more fund is available to develop the economy and create wealth.
  • Employment Rate -  the employment-to-population ratio. This ratio is used to evaluate the ability of the economy to create jobs, which in general will have positive effects on the economy.
  • Business Confidence - an economic indicator that measures the amount of optimism or pessimism that business managers feel about the prospects of their companies. It provides an overview of the state of the economy.
  • Inflation -a rise in the general level of prices of goods and services in the economy over a year. Inflation reflects an erosion in the purchasing power of money.
  • Consumer Sentiment - an important economic indicator that gauges consumers' buying intentions and level of optimism or pessimism going forwards.


2. Demographics

Demographics is the study of socioeconomic characteristics of a population expressed statistically, such as age, sex, education level, income level, marital status, occupation, religion, birth rate, death rate, average size of a family, average age at marriage.

The following demographic factors affect the property value of a certain area:

  • Size of population and its growth (rural-to-urban migration) - causing property demand to exceed supply thereby pushing prices up.
  • Age and distribution of population - working adults aged between 25 and 45 years are more likely to buy homes.
  • Income level and income growth of population - the average income level and income growth of people in a particular area determine the purchasing power of the people in that area.
  • Consumer behavior of population - for example, young professionals in Damansara or Mon't Kiara areas are more inclined to go for the chic and vogue condominiums, or life-style concept homes.


3. Demand and Supply Situation

In property market, supply is inelastic to demand - meaning that developers are not able to build quickly enough due to lengthy planning and approval processes while demand is rising. On the other hand, when the properties are ready in 2 or 3 years time, demand may have cooled causing an over-supplied situation. Due to the inability of supply to catch up with demand, and vice-versa, property prices can be volatile.

 

4. Location and Accessibility

  • Easy access to highways/infrastructure - centralized locations in urban areas with a criss-cross of highways such as the LDP, Kesas or NKVE are higher in demand and higher in value. There must be easy access into the highways.
  • Light Rail Transit (LRT) and Mass Rapid Transit (MRT) - within 20 minutes' walking distance to LRT/MRT stations is convenient, but not too near to them to avoid parking congestion, noise and possibly more petty crime.
  • Public transportation such as bus stops - is important in areas without LRT/MRT stations, or to get to the LRT/MRT stations.

 
5. Facilities and Amenities

  • Schools, colleges and universities - excellent learning institutions are magnets to home-hunting parents. For instance, Mon't Kiara's international school makes it a sought-after place by expatriates.
  • Shopping centres and hypermarkets - for convenience in buying all kinds of necessities, and because shopping is a favourite pass-time of Malaysians!
  • Variety and quality of businesses - a large cluster of shops catering to a wide variety of needs and tastes makes a place attractive. Variety creates complementarity effect - as a one-stop place for most shopping needs.

 

6.Quality of Environment

  • Serene, clean and green environment - improves the quality of life and add value to the properties.
  • Developments or buildings in the neighbourhood - new developments/buildings in a neighbourhood improve the appeal of the location, whereas the presence of old/obsolete ones has the opposite effect.
  • Crime rate - safety is a basic need that ranks high in the desirability of a location, especially in an affluent neighbourhood.
  • Traffic condition - affects peoples's stress level and health, thereby affecting the property value in an area.


7. Property Features

  • Branding/reputation of developer - affects consumer's confidence in the developer's ability to deliver quality, especially in sell-then-build schemes. In economic recession, properties built by reputable developers tend to hold up their value better.
  • Lifestyle concepts - such as Setia Eco-Park and Desa Park City appeal to the usually affluent and discerning buyers who value a certain concept of lifestyle.
  • Gated and guarded - this has become a basic necessity of late due to soaring crime rates.
  • Standard and quality of building management - the building management can make or break the quality of maintenance and housekeeping of the premises, affecting the property's reputation and value.
  • Property orientation - properties facing directions such as hot evening sun, road junctions, high-tension cables or cemetery are undesirable and are generally lower in value.
  • Views and level -properties facing magnificent views especially from higher levels, or facing iconic landmark such as KLCC Twin Towers - command higher prices, old or new.
  • Special features - such as infinity swimming pool, allocation of multiple car parks or free feeder bus service to LRT/MRT stations make some properties appealing.
  • Quality/taste of renovation/finishing/landscaping - this factor is especially important to renovated resale homes due to wide-ranging tastes of individual owners - some are enchanting or fabulous and others off-putting.


8. Money Supply and Cost of Borrowing

  • Money supply - is the total stock of money in the economy, currency held by the public plus money in accounts in banks. The more money available in the economy and the banks, the more money is available for lending to property purchasers.
  • Ease of obtaining loan - Bank Negara's lending guidelines for banks can affect purchaser's eligibility in obtaining loans and the amount of loans. Recent examples are the 70% cap (maximum margin) on third housing loan, and eligibility based on the borrower's nett income instead of gross income. These measures have a cooling effect on the property market.
  • Interest rate - the Base Lending Rate (BLR) fixed by Bank Negara, which is the reference interest rate used by all banks in lending out money, also changes the cost of borrowing for property purchase. A reduction in BLR encourages purchase, whereas an increase in BLR dampens desire to purchase.

 

9. Cost of Building Materials and Labour

Cost of building materials such as cement and steel, or import duties on marble and tiles, directly impact the cost of building. Increase of labour cost - often due to shortage of labour supply, higher wages or permit's cost - also increases the cost of construction. This factor forces developers to raise prices on new projects, which in turn drives up prices of resale properties.


10. Number of Investors and Speculators in Market

The number of investors and speculators in the property market changes over time due to the perceived opportunities or threads present in the market, arising often from changes in government's policies in regulating banks' lending or property taxes. More investors and speculators in property market drives up prices, while less of them has the opposite effect.


11. Legal and Planning Control

  • Availability of land - strategic vacant land in urban areas are diminishing, especially in the Klang Valley. Land prices are rising due to scarcity of land coupled with increasing population and housing needs.
  • Zoning and rezoning of land use - for example, when Section 13 of Petaling Jaya was rezoned from industrial use to building/commercial use, land value in this location spiked.
  • Regeneration of area - an example is YTL's renewal projects in Sentul which rejuvenated the whole area that was previously unappealing.
  • Property taxes - when Real Property Gain Tax (RPGT) is raised or lowered, property investors and speculators response by opting to enter or exit the market, often en masse, thereby affecting property prices.
  • Freehold or leasehold - Freehold land status is an all-time favourite among buyers due to perpetual ownership and ease of transaction process. Leasehold properties are generally not popular due to restricted tenure, more legal requirements for transfer, and lesser margin of bank loans as leasehold tenure decreases.

 

12. Emerging Trends

There is now a global phenomenon known as the rise of mega-cities in developing world, which shifts population from rural areas to urban centres. This occurs as more and more people are attracted to cities for job opportunities and metropolitan splendour and allurement.

There are economic advantages when people congregate and businesses agglomerate, making the urban society an efficient production and consumption centre of goods and services. When more people are squeezed into limited city land, competition for living and business spaces drives up property prices there.



by Aaron Lee, Property Street
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