Are Freehold 5* KLCC Properties A Good Hedge Against Inflation?
Picture Credit Nour Betar, Unsplash
“Freehold properties in prime locations are a hedge against inflation.” I heard the above line in a late night chat show about the property market in 2021 hosted on LinkedIn a couple of days ago. Well, RC thinks that might be true for landed properties in Bangsar bought a long time ago.
Two of my better half's relatives bought a bungalow each at Lorong Kemaris Satu in Bangsar back in the 1970s. The price they paid? About RM77,000 each. Of course, in the 1970s, Bangsar was considered not a particularly prestigious area to own a house. It was mostly ex rubber land. There was no Bangsar Shopping Centre then. In the 1970s, Bangsar was really a backwoods area, not the current hangout of Millennials trying out the latest watering hole or fusion restaurant in the warrens of Telawi.
Today, even an original Lorong Kemaris bungalow -unrenovated, and in its original 1970s condition is worth at least RM2.3million I think. That’s because the land in Bangsar is valuable.
Source: TradingEconomics.com
But what about prime freehold 5* high rise condominiums in the heart of KL? Take for example three luxury KLCC condominiums that were launched around 1999-2000, the 5* Kondominium Kirana (since rebranded Kirana Residence), the 5* 3 Kia Peng and 4* Hampshire Park. In an earlier post on my blog 360 KLCC, I mentioned how I came to buy a 3000+ st unit at Kirana Residence direct from the developer in 2000. I didn’t need to use an agent because the property market in KL was in the doldrums. I knew I could get a big discount going direct. Although the country had just recovered from the Asian Financial Crisis of 1998, sentiment towards investment properties was fragile. Most property investors just preferred to stay on the sidelines. The Ringgit had been the target of speculators and was still subject to capital controls when I signed the SPA with the developer in 2000.
I took out a bank loan to finance the purchase in 2000. I think but cannot be 100% sure the banks prime lending rate was then around 6 to 6.5 per cent. But I was able to get a fixed rate loan at 4% from a foreign bank for the 1st year, thereafter on Prime + 1%. If interest rates ever climb back to those levels, I wonder how many property investors will still be able to pay off their current loan installments…(I think it's sad but an entire generation of property investors in Malaysia seems to have grown up thinking they have a God-given right to access cheap bank loans or the government is going to bail them out if the proverbial SxxT ever hits the fan again)
My 3000+ sf unit was a mid floor unit that was a leftover unit with a list price psf around RM550 if my aging memory is correct. So after a 10% discount, my cost price for my 3000+sf Kirana Residence unit was around RM500 psf in 2000.
Fast forward to 2021, what do you think the Current Market Value of my 3000+ sf freehold Kirana Residence unit just 100 metres away from KLCC Park is worth? A PropNex KLCC area specialist I got to know this year said it's worth RM750psf. I've not visited KL since December 2019, so have been out of touch with the KLCC market. I rang another KLCC area specialist that I last ran into at Kirana Residence about 4 or 5 years ago to ask the same question. The agent - let's call her Y- remembered my voice and name without any hesitation. I think Y is very good at what she does. Her estimated market value was the same as the other KLCC area specialist - RM750psf.
Of course, a 2000 Ringgit is not the same as a 2021 Ringgit because of inflation. So let's do some quick calculations. What is RM500 psf in 2000 equivalent to in 2021 after 20 years? Let us assume inflation ran at 3% per annum for 2000 to 2021. So RM500 psf in 2000 will after adjusting for inflation (and assuming zero real capital gain) will be equivalent to about RM800 psf in 2021. That’s roughly an increase of 60% in nominal terms after 20 years. Hardly a stellar performance. Well at least I managed to rent my 3000+ SF Kirana unit out for most of the past twenty years. The longest void period I went without a tenant and still had to pay my loan installments was I think 9-11 months.
My current rental in 2021 is just RM8000 per month, even less than what I got twenty years ago (In 2000, I rented my unit out for RM9300 pm). Yes, 2021 -the Year of the Pandemic- is on the way to becoming my worst year as a KLCC landlord. If you compared my 2021 rent now, adjusted back to 2000 levels using the GDP deflator between 2000-2020, my current rental is around half of what I got in 2000. As the CPI basket of goods and services comprise a lot of price controlled items, the GDP deflator is to be preferred. But how to adjust psf using the GDP deflator is out of the scope of this post.
While the prices of prime freehold KLCC properties have been coming under pressure, the opposite is true in Red Dot Island. Leasehold HDB (public housing) flat prices are soaring. Why? I asked S, my brother in law who works in Red Dot Island , and has a HDB flat in the suburb of Bishan for his take why the property market there is getting red hot.
Here is his ad verbatim reply via email:
“My 1,302 sq ft Bishan HDB flat (I reserve the term apartment for private homes) should be around SGD$720,000 at the minimum so that works out to SGD$553 psf at least.
A lot of cross-border deals are being curtailed by Covid-19, cos most folk would want to see the place physically.
My dad's Rio Vista 2 BR condo in Hougang is fetching at least SGD$850 psf.
The market has gone mad - HDB five-room (3 BR) flats in Bishan fresh on the market after the 5-yr occupation period are close to SGD$900 psf.
New condo launches even as far away as Tampines are around SGD$1,450 psf. Jadescape in Shunfu near my place launched at over SGD$1,800 psf, I would not even pay SGD$900 psf for it - there is simply little good value these days.
The pandemic is partly to blame because every one who kept their job has so much spare cash, cutting down on transport to work, less going out socialising and spending plus no overseas travel - so tens of thousands of people are upgrading, and simply thinking nothing of overpaying.
Thank goodness new flats bought direct from HDB are still possible at below SGD$300,000 in towns like Tengah and Jurong West.
Regards, S”
To be continued
Notes and disclaimer
I am not a registered investment advisor with the relevant authorities in Malaysia. My last investment advisor’s licence in another jurisdiction expired circa 2001.
Fresh off the boat as a newly minted MBA, I was recruited to work in the Housing Development Board (HDB) in Red Dot Island in the early 1980s. I was assigned as an Assistant Secretary to Head, Resettlements Department at the old HDB HQ at Maxwell Road. My main job responsibilities were to take the minutes of the weekly department meeting and to coach the department’s Quality Control Circles to win a prize at the HDB interdepartment QCC competition.
