Is there a silver lining in the face of the Covid-19 crisis and pandemic? How can one tap into good deals during this crisis? Here are three principles of securing great investments in critical times.
BY YVONNE YOONG
A tidal wave of such untold phenomenal proportion and magnitude unleashed its full wave of force over mankind such as not recorded since the Spanish flu pandemic 100 years ago which claimed millions upon millions of lives. Now, 100 years later, the Covid-19 pandemic has reared its ugly head to claim its victims without fear nor favour. In the wake of the post lockdown recovery phase, with property prices also being badly hit, the golden question is whether there is a silver lining — given the pandemic. And if so, how does one go about to identify and secure a good property deal? According to international Property Investment Consultant Dato’ Sri Gavin Tee, there is a silver living after the crisis in which the key strategy for investors is how to ensure they are able to identify and secure a good property deal. Sharing his exclusive investment tips, he opines that after the storm, the lull period will be heralded by a swift pickup in the value of properties for the savvy investor. “Everybody is currently negative about the market; speculating that even in a span of two years, there won’t be a total recovery. Soon after the pandemic, the stock market is speculated to make a comeback. Undervalued properties or in demand properties, I believe will regain their values which is a normal phenomenon after the crisis,” he shares. According to Tee, the most profitable properties is not necessarily those properties that are currently on sale at 20% to 30%of properties on sale. Instead, he opines that one needs to identify 10% of the properties in the market that is able to rebound in two years time regardless if they are properties in the primary or secondary market. Property, he says, is “very individualistic”. “Investors would do well to look at properties which have almost hit the bottom in terms of pricing – and not properties based on the biggest discount given but based on the value and its market cost while they should not be in over supply and so, are in demand. And, thirdly, investors should consider properties in which the price will rebound within two years as a guideline when choosing to buy the property,” he elaborates. Here, he shares his investment tips based on three fool-proof principles:
Principle No. 1: Dismiss Cheap Sales. Consider Best Buys
Debunking the myth: Property price values are determined by the market so some prices are not reflected at their true value “Don’t look at cheap sales but look for best buy,” advises Tee. Following this principle, he cautions investors not to invest based on the biggest discount available in the property market but to base the investment decision based on the value of the property cost hitting almost rock bottom which will regain value within two years. One must also consider what the reason for the property price drop was because if it is due to the pandemic, then the property value would surely rebound after two years or so. Tee bases this rationale to the fact that in two years, tourists will come back to our shores. “It’s a 100-year opportunity. The same logic to business applies in this case, with the lockdown and the Movement Control Order (MCO) being the determining factor for the momentarily decline in the value of the property. The decline in the property value is the same as the lockdown which is not forever,” he explains. And, while normal people are basing their purchase decision on getting a good deal of obtaining a big discount ranging from 30% to 40%, thinking they have secured a good deal based on price drop in percentage but when it comes to investment – that is not the way forward. Instead, one should benchmark the viability of the property by knowing the exact value which has been discounted. A case in point is when the property price may be inflated or speculated higher especially in the example of high-end properties selling at RM1,100 per sq ft initially but ending up being sold at RM1,800 per sq ft. And, during the recent crisis, there’s the realisation that there’s a lack of demand, so the property price is discounted to RM900 per sq ft. This property is not priced at rock bottom, assuming the cost is at RM800 per sq ft. Property price values are determined by the market so some prices are not reflected at their true value so the property prices can be speculated two or three times higher as the properties are not priced at the bottom. Investors are thus advised based on this principle.
2. Cost Method – Ascertain If The Property Price Has Hit Rock Bottom
The question to ask is whether the property price has hit rock bottom. “People want to buy at the lowest price so they need to understand what is the ceiling or bottom price and how do they arrive at the bottom price. Let’s say a medium-cost apartment costs about RM380 per sq ft attribute as its building cost. Supposing the developer sells the units at M500 per sq ft. Should someone sell the unit at a 20% discount at RM400 per sq ft, the advice would be to take the 20% discount as the price is already at the bottom tier as no one can build at this competitive price later on. Property prices can drop based on inflated or speculated prices later on. Properties for own use or medium cost properties do not usually fall into the speculated property segment that much, therefore this cost method is workable.
3. Balancing Demand and Supply
Even if properties are priced near rock bottom, prices could further drop if the units are in oversupply. If the volume of the units are too high, there may be people who desperately need money so the bottom of the pricing can be further dropped. But if the supply of that particular type of properties are limited in supply and the bottom is the bottom, then the important point of consideration is whether the property price can rebound or regain momentum very fast, based on the laws of demand and supply.
Banking On Time
In comparing the lowest pricing (given the biggest discount) as compared to how to make the most returns, it’s about the speed of how fast you can make money. For instance, a one-year increase of 10% as compared to a 10-year increase of 30%shows the difference in gain. What an investor would want at this critical crisis period is to see if the property can rebound in value in a matter of two years. This deals with the right selection of property portfolio as many properties in the market now will not rebound in price value to the normal realm. Neither can many of these properties recuperate or rebound back to status quo pricing even in 10 years’ with the value dropping as low as 50% to 60%. Therefore, the wisdom of this logic spells out that investors shouldn’t bank on the biggest discount they can obtain but how they can get the most value, while bearing in mind that time if of essence. Time is also another determinant factor whether to buy or not to secure a good deal rather than basing investment decisions on how low or cheap the property will be after the discount is secure. And, in the case whereby supply is limited but demand can rebound strongly in a short time – the situation weighs up most favourably. Looking at the example of the hotel industry which has been very badly hit with hotel prices also having dropped to its lowest during this crisis, with many hotels closing down, the low rates is only one factor, maintains Tee. He argues that weighing in the investment decision to buy hotels is feasible as when the lockdown is finally lifted, and all the borders are open – the hotel rebound will rake in the highest in terms of hotel rates in which the hospitality industry is hit the most. However, Tee cautions that unlike retail – it will take time to rebuild the hospitality industry. ‘It’s hard for hotels to make profit but consider buying property and hotels as the room rate can increase higher than property prices. Currently, a quality hotel can charge as low as RM70 per room night in the city centre while in a few years’ time, this rate can be priced above RM200. Tell me, which property can multiply three times higher. So, the price can increase three times. And, if property price can go up three times, then I would advice investors to buy into the property.
Secondary Market Versus New Development
“Likewise, when it concerns the secondary market or developers projects – consider if there are developers giving good discounts of up to 30%. And, weigh in if the same principle of value applies whether this discount I genuine. So, investors need to weigh whether the price given by developers is inflated or too high and if the price is near the cost price, then the discount is genuine,” he adds. Tee is of the view that buying developers projects is also viable as they control and manage the project from scratch. A reliable criterion in choosing the developers to buy from would be those developers which can extend a low price or those who can afford to lose money. He quotes the example of holding power in this case. For instance, if the developer has 500 units but has sold 400 units at a good price prior to lockdown, he argues the developer will then be able to balance out their profit by selling at approximately RM380 per sq ft, having made money from their last sales. However, Tee cautions that in the case of new launches whereby developers will have to sell at RM500 per sq ft, then they would probably lose money and therefore, choose not to launch at all. As investors, we are looking for developers with holding power which can afford to lose money. If they don’t have the margin, the unsold units even selling at a loss is what is called the best deal. “My advice is that developers will extend their best price deal or best offer only for a short period of time which won’t last forever therefore, one needs to take the opportunity to grab these best deals. Why? Because when times are bad, those who have land will stop to build so future supply will be limited. Those giving the best discount will be on the move, and they will have to sell their units. This will not be forever though, so those ongoing projects cannot stop being constructed. But, when the supply doesn’t come in, there will be less cheap sales based on the theory of demand and supply.”