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Types of Investment Properties

 

KL Panorama 50

 

Questions:
  • What are the common types of investment properties and what are the pros and cons of each type?
  • What types of investment properties are suitable for me?
 
Types of Investment Properties
 
Condominiums and Apartments
  • The demand for these properties depends on the attitude or lifestyles of people in the area, the changing family structure and price of alternative homes especially landed houses.
  • Young urban working class prefers these properties for their typically near-city locations, generally lower prices compared to houses, the in-house facilities, easier up-keeping and the lifestyle concepts.
  • They are popular investment properties as there are many single working adults, young families, corporations and expatriates as potential tenants.
  • They must be well-located as accessibility and convenience are the top priorities of tenants.
  • Feature-wise, popularity of condominiums depends on views, design concepts, landscaping, number and quality of facilities, maintenance and security standards.
  • As many units can be built on a single piece of land, beware of over-supplied situation in certain locations, causing rentals to be highly competitive.
  • Maintenance fee can be high especially those with modern and luxurious facilities - which will eat into the return (profit) on investment.
  • Lower-priced apartments may produce higher return on investment due to the absence of or lower maintenance fee and high demand for affordable housing.
  • Condominiums generally enjoy higher return on investment compared to landed houses.
  • In Kuala Lumpur, there is currently an over-supply of luxurious condominiums, especially near the KLCC area, as the number of expatiate tenants is currently low. 
 
Houses
  • Landed properties, especially linked houses, are the most coveted choice among Malaysian home owner-occupiers. 
  • In urban areas, they are currently priced beyond the reach of many middle-income people due to scarcity of land.
  • Prices of landed properties will remain strong in future, especially in urban areas, due to high demand and limited supply.
  • Generally, while capital appreciation is higher for landed properties, their rental returns pale in comparison with condominiums.
  • Semi-detached houses are popular with mid-to-higher income families as they are neither too large nor too small and serve as a special niche between linked houses and bungalows.
  • Bungalows in urban areas are mainly owned and occupied by wealthy businessmen and professionals. 
  • Both semi-detached houses and bungalows are expensive to furnish and difficult to rent out to local people due to their high rental rates. 
 
Offices
  • Unlike retail shops, offices need not be in high foot-traffic locations. Ideally, they should facilitate face-to-face contact and reflect the occupiers' image and prestige.
  • Nearby restaurants and ample parkings are necessary for the convenience of office workers and visitors.
  • Accessibility is important and they should be near to major roads, highways or LRT stations. Offices in central business district top the list in this aspect.
  • Offices in suburbs with good infrastructure are becoming attractive as the city traffic gets more congested.
  • There are currently a new trend for high-tech smart offices and solo office-home office (SOHO) concepts that appeal to young professionals and tech-savvy entrepreneurs.
  • To attract well-paying tenants who are usually conscious of business image, avoid investing in obsolete or poorly designed office buildings.
  • There is currently an over-supply of Grade-A corporate offices and rental returns are low. The situation in near future is also not optimistic in view of low take-up rate and increasing supply of offices. 
 
Shops
  • The most important consideration for shops is prime locations with high volume of vehicle and foot-traffic, day and night.
  • Value of shops rises with their earning capacities of businesses operating in them. The higher the business volume, the more rent tenants can afford to pay.
  • Complementary businesses that complete shoppers various needs are definitely necessary, so large cluster of shops makes convenient, one-stop shopping experience possible. 
  • Ample parkings are important, or potential customers will become passers-by.
  • Between city and suburb, shops located along the main road have high exposure. The side of the road where people travel back from work in city tend to be more vibrant as they are freer to pick up their daily necessities, compared to the side of the road where people rush by in the morning to work in city. 
  • As young people spend more generously on fashionable goods and services, tastefully-designed shops with convenient layouts and pleasant environment are attractive to them.
  • Compared to residential properties, landlords of shops have less management responsibilities as the tenants usually renovate and furnish the shops at their own costs. Commercial tenants tend to rent long term as customer loyalty builds up, which means the landlords need not look for new tenants frequently. 
  • Landlords and tenants of shops are interdependent for both to be successful. It helps if landlords have good understanding of business to choose tenants wisely. Landlords of shops in new, quiet and unproven areas may help tenants by agreeing to easier rental initially (even free rental period) and gradually increase the rent as situations improve.
 
Shopping Complexes
  • The success of shopping centres depends on strategic location with easy access and large, preferably affluent population (catchment area). Locations with high concentration of young people with good spending power will do well, as shopping and socializing are their favourite pass-time.
  • Ample parking is essential and preferably at low rates.
  • The attractiveness of shopping malls depends on their tenant mix - the variety and quality of retailers and restaurants that complement one another. Anchor tenants (such as departmental stores and hypermarkets) and mini-anchor tenants (such as food courts, large bookstores or pharmacies) play important roles in drawing crowds.
  • A shopping mall wholly owned by a single entity tends to have better control over the tenant mix, as it has sole discretion in the selection of tenants. A shopping mall with retail lots sold to individual owners lacks such control, and wrong tenant mix may ruin the mall's success. 
  • There must be plenty of entertainment and leisure activities to keep shoppers occupied and stay for longer periods.
  • Designs of the mall and retail shops must be pleasant and enticing to reflect a classy lifestyle attractive to affluent shoppers, young people in particular. 
  • The management plays an important role in organizing promotional activities (such as book fairs, flea markets and sale carnivals) to continuously attract shoppers.
  • For successful malls, rental returns on the retail lots are generally higher than other properties. However, capital investment and management fee are usually substantial and may adversely affect the net rental income.   
 
Industrial Property
  • Factories and warehouses should be strategically located to minimize transportation costs of raw materials and distribution of finished products. There must be with easy access to highways for efficient movement of goods.
  • For consumer products, they should be near to the markets which are usually near cities and urban centres.
  • If the products are labour-intensive, locations with ample supply of high quantity and quality manpower are pre-requisites.
  • For export oriented goods, the ideal locations are near harbours or airports.
  • High-tech industries are ideally located near communication corridors (such as MSC), colleges, universities or research centres to tap into the facilities and talent pools.
  • Heavy or bulky industries should be near the sources of raw materials. For example, stone factories close to the quarries.
  • High pollution industries such as paper mills are legally required to be far from residential areas.
  • There must be electricity and water supplies and industrial waste disposal facilities.
  • When buying industrial properties for investment, beware of the structures' flexibility of use. Some are highly adaptable for different purposes, while others are limited to special uses (such as cold-storage warehouses), or even for a single purpose only (for example, steel mills).
  • Layouts of the industrial buildings are also important, especially the ground floor for efficient manufacturing processes. Assembly lines typically requires long and wide spaces on the ground floor.
  • For small and medium industries, industrial parks with not-too-large detach, semi-detached and terraced factories are suitable. They are mass-produced, have common infrastructure (roads, drainage and sewerage) and facilities (canteen, surau and security) that bring down construction and maintenance costs due to economy of scale. New and modern ones provide pleasant work environment and often look prestigious.  
  • As industrial tenants usually spend heavily on installation of machinery, they tend to be long term tenants, which ensures security of income for landlords.
  • Government's policies on attracting foreign investments, incentives for local manufacturers and industrialization initiatives can affect demand for industrial properties.
 
Vacant Land
  • Vacant land does not generate income (other than rented out as temporary car parks or open storage space) and investment in vacant land generally produces negative cash flow (expenses more than income). 
  • The only benefit is potential capital appreciation, which may or may not happen, or may happen too slowly to be a feasible investment. Investment in vacant land is therefore solely speculative.
  • The value of vacant land is measured by its potential final development. If put to the highest and best use (the most profitable type of development), with planning approval, the greatest value is achieved. Here, profit depends on creative planning and use. 
  • Development on vacant land may produce high profit but may also involve high risk, as market dynamics may change.
  • When buying vacant land, consider the location, size and shape, topography, geological quality, agricultural produce and costs of infrastructure (access road, water and electricity supply, drainage). Beware of steep slopes as development may not be approved by the authority, and it is expensive to cut and fill land and build retaining walls.
  • Investment in vacant land requires business acumen and educated prediction of trends and the direction of city/urban growth.  
  • Banks generally provide lower margin of financing for vacant land compared to other types of properties that produces income. 
  • Planning, approval and construction take years and the longer it takes, the higher the holding costs (bank interest).

 

*Please also read our FAQs on Characteristics of Real Estate Market, and Real Estate Investment.

 

by Aaron Lee, Property Street

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