PropertY PeoplE PlaceS (YES) interviews land expert, Tan Hwa Chuan, for tips on investing in land.
Most investors do not consider land as an asset that they would or could invest in, the biggest obstacle being the cost. “This may be due to the misconception that land investment is a game that only belongs to the big players – the tycoons, large corporations or property developers,” explains Tan Hwa Chuan, Director of B.I.G Group of Companies.
“Most investors will look at condominiums, then linked houses or semi-Ds before they start investing in commercial buildings such as shops or offices,” he continued.
“Raw land seems to be one of the most overlooked investments and often taken for granted. Only investors with a higher appetite for risks and returns will venture into the next big league – LAND.”
Tan attempts to debunk this misconception. “Land can be a very profitable investment if you know how.”
There are 3 reasons why land can be very profitable:
- The number of available raw land is very limited. To increase it, we can only embark on reclamation, which is a big and costly undertaking.
- The population in every country is increasing, including Malaysia. According to a census done by Malaysia’s Department of Statistics, the nation’s population stood at 28.6 million in 2010 and is projected to increase by 10 million (35.0%) to 38.6 million in 2040. As population increases, so does development.
- Property developers are constantly on a hunt for the next best area to build a township to house the increasing population. Depending on the location of the land you own and its proximity to the development site, the value of the land has the potential to increase exponentially.
Feasibility Study
Once you have identified a piece of land, one needs to do a feasibility study before making a final decision. This is where they will evaluate the land based on its size, price, location, land type and various surrounding factors.
“We can then determine if the land is worth exploring as we map out the many factors that contribute to the success or failure of a project.”
During the feasibility study, Tan lists out 10 steps that must be undertaken:
10-Stage Feasibility Study
1. Rule of Thumb
This is a quick mental calculation that involves a formula. This requires one to “quantify the land” – the gross development value (GDV) of the land intended for purchase, along with total construction cost (TCC), land cost and profits.
TCC will depend on the type of property you intend to build on the land you are thinking of purchasing. You will generally need to estimate the cost per unit; say, if you want to build link houses, semi-Ds, bungalows, shoplots, a complex, etc. Multiply this with the number of units and roughly calculate how much returns you can get from the sale of the land before and after construction.
2. Basic Data Study
This is generally an analysis of the land– its size, tenure (freehold/leasehold), location, gradient/contour, infrastructure, accessibility, surrounding area, etc. This is where the ‘good land DNA’ comes in – the more ticks, the better.
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3. Site Visit
Not all land deals require site visits at the early stages. The purpose of the visit in the beginning stages is actually to verify if the information you obtained from your basic data compilation matches with what you physically see.
4. Market Study
We should be able to have an idea of how we intend to develop the land – build and develop or perhaps wait and sell.
5 – 7. Local Government, Land Office and JUPEM
Checks with the local government, land office and the Department of Survey and Mapping Malaysia (JUPEM) are crucial as they provide muchinformation on what can or cannot be made of the land, encumbrances, setbacks, any regulations and orders the land is bound by, etc.
Information retrieved here is crucial as this is where you can get guidelines for the potential project you intend for your land purchase. You should also purchase the local plan covering the particular plot of land you are interested in.
8. Frequent Site Visits
You need to visit in the mornings, afternoons, night times and during weekdays and weekends. Why? Because only then will you discover the differences during the different times. “For example, for a plot of land near Pudu area, in downtown KL, we saw prostitutes in the morning about 11am. We then discovered they were night club girls doing this part-time before they report for work at 6pm. So, we needed to decide whether we could accept having prostitutes nearby. Luckily for us, the solution came in the form of the owner of the mixed development nearby. As a shariah-compliant company, this state of affairs cannot continue. Plus, there is also a mosque nearby. We believed these girls would eventually leave the scene so we proceeded to buy the land. True enough, eventually, there were fewer of them around.”
9. Layout Planning
We can start to plan the layout after we have done everything as per above. We then put all the components together and decide what to develop on the land – whether condo, landed or shoplots.
10. Financial Analysis
Similar to Rule of Thumb, this requires much calculations but based on more accurate financial figures. At this stage, we will be able to see the viability of the project, in terms of cashflow position (after we service the loan each month). This is also the stage which will determine if the land will deliver profits or losses. With all the information at hand, you will be able to make a firm decision by now.
Prioritise Gut Feeling
Having said that, Tan cautions that investors should never underestimate their gut feeling. For example, he aborted a deal even after years of discussions, negotiations and deliberations. This is due to his gut feeling, and in the end, he was proven right.
“In the early stages prior to level one of the 10-Step Feasibility Study framework, you should not neglect your gut feeling. If you visit a place and you get an uneasy feeling, follow your instinct,” he shares.