Different Types Of Property

Buying a piece of income-generating property requires a lot of research. In Singapore, where I am from, it is fairly easy to know where the hot property spots are. Being a small island, properties in Singapore tend to appreciate over time due to the “island effects”. Island effects refer to a phenomenon where constant demand for property where land is scarce results in an increase in property prices. In addition, property-related information such as the future masterplan and price trends are readily available on our government websites or our property investment website.

Nevertheless, Malaysians are very creative when it comes to the different property types – even more so than Singaporeans, I’d say. You have SOVOs, SOFOS, SOHOs, and so on. Therefore, it can be a disorienting experience for those wanting to invest in property, especially for newbies.

If you are thinking of buying but unsure how to go about it, fret not. There are basic rules that you can apply to your purchases. Whether you are a first-time homeowner or a seasoned investor, this book will cover the different types of property across Malaysia in incredibly sought-after locations among local and foreign investors.

The Basics

Before buying property, you must understand some of the basic property types in the market. There are two categories that are generally popular among investors: residential and commercial.

Residential

Residential properties refer to properties that are used for your own stay. In Malaysia, residential property is categorised as “housing development” under the Housing Development (Control and Licensing) (Amendment) Act 2007 (HDA). This property type is a basic human need, generally for long-term occupation. Under the HDA 2007, owners are protected to use the property for “human habitation”. Types of residences include landed homes, apartments or condominiums.

While a residential property is usually used for your own stay, you can generate income from it if you were to sell the property or rent it out.

Commercial

Commercial properties are generally used to generate income. They include office, retail, shoplots, hotels and shophouses. As an investor, commercial properties enable you to collect rent, either on a monthly or quarterly basis. Some business owners buy a commercial property as it protects them from rising rental costs.

This enables them to manage their cost more effectively.

The following are among some of the most common types of commercial property in Malaysia:

Office Lots

These are used for the day-to-day operations of a company. Typically, office lots are located in a financial district or the city centre. In Malaysia, Kuala Lumpur is the centre of business and commerce. Many of the offices are located in the Klang Valley. However, of late, small office blocks are mushrooming in areas away from the city centre (see SOVO/SOFO/SOHO).

SOVO/SOFO/SOHO

Short for small office versatile office/small office flexible office/small office home office, these properties are essentially offices for emerging enterprises, very much suited for those in the creative and start-up industries where the lines between life, work and play are often blurred. Typically, such entrepreneurs use these properties as their home and office space. Such properties often come equipped with high-speed Internet connection, electricity and water – all the necessities required to run a business. Note that, when used as a living space, you will be charged higher rates for your utilities.

Retail Units

These are typically located in shopping centres. In some cases, the developer will prefer to lease out the retail space rather than sell it. The developer might also sell each individual unit to investors. Depending on the arrangements, the units can be either managed by the developer or the owner. In the former, you will get a return on your investment on a monthly or quarterly basis while the latter means you have to manage the property on your own. When sold to investors, the developer may or may not control the types of businesses that are allowed to operate in the retail unit.

Shoplots

These refer to stand-alone properties designated for commercial use. They are typically three to four storeys in height. Investors will usually buy an individual unit that can be subsequently rented out on a floor-by-floor basis.

Shophouses

These generally refer to pre-war buildings used for running a business and for the entire family to stay. In some areas, such as George Town in Penang, shophouses have historical value and are preserved as part of heritage conservation efforts. Due to their intricate architecture, history and limited numbers, shophouses are valued among astute investors who would usually convert such buildings to boutique hotels, retaining much of their architecture.

Hotel Suites

Hotel suites are located near major tourism landmarks. Such properties are only for investment, meaning you get rental income on a quarterly basis. Typically, investors can get up to 21 days of stay, depending on the developer. The developer will either manage this property via its property management arm or will ask you to manage it on your own. When buying this type of property, you must understand the location and area well to see whether demand for it is high enough.

Leasehold or Freehold?

These properties can be either freehold or leasehold. Both refer to how long you can hold or own the property. In Malaysia, the most common mode of holding is via freehold, meaning you can own the property forever. However, of late, leasehold is becoming more common. Leasehold gives you a limited period to own the property, which is usually 99 years or 129 years.

Asset Or Liability?

The first thing a twenty-something Malaysian will buy after landing his first job is likely to be a car. Now, I understand that cars here are a necessity. However, it is not an asset as it does not appreciate in value over the years. In fact, it is a liability; every month, you need to fork out a sum of money to service your car loan, petrol, parking and so on.

Property, on the other hand, is an asset as real estate tends to appreciate in value over time. You can also receive income if you were to rent out or sell your property. Knowing what assets and liabilities are is important so that before you purchase something, you will know if it will increase or decrease in value over time. In essence, this is known as financial literacy, which is important to have so that you do not end up living beyond your means.

So why do most Gen Ys choose to buy a car first rather than a piece of property? I suspect the main reason is the lack of financial literacy.

The lack of this knowledge is indeed worrying and is supported by findings from a recent survey of more than 1,000 young professionals aged between 20 and 33 years old. Conducted by the Asian Institute of Finance (AIF), the survey showed that the majority of Gen Ys (38 per cent) are living on high costs of borrowing while 47 per cent are engaged in expensive credit card borrowings. In addition, when it comes to financial literacy, 58 per cent of the respondents rated themselves as having average financial knowledge. Meanwhile, only 28 per cent felt confident in their financial literacy and ability to handle day-to-day financial matters.

Gen Ys are also experiencing money stress with 70 per cent who own credit cards tending to pay the minimum monthly payment while 45 per cent do not pay on time. What is even more shocking is that only 37 per cent sought financial advice from a professional advisor or planner while only 26 per cent said they had dealt with a financial advisor they trusted. Sixty-five per cent cited family, friends and co-workers as the primary source of financial advice and information.

To keep your head above water, you must take charge of your life. This means tracking your bills, paying them on time and then filing them. This is a good habit and it enables you to track your expenses and gives you a sense of financial control. Do not ignore your bills in the hope that they will vanish – they won’t, and they will accumulate over time, adding to your stress.

On top of that, you must set aside money for your savings. But that is not enough – your savings must then be invested in an asset class that will enable you to create wealth. Why? Because of two factors: inflation and currency depreciation.

Whether you like it or not, the cost of living is going to continue increasing. We can see tnis in the costs of food and other basic necessities. Also, the ringgit has depreciated greatly this year. However, if you compare the graph of inflation and the ringgit against the property index across Malaysia, you will see that properties have increased in value over time. Therefore, the only way for you to beat inflation and currency depreciation is to invest in property.

Buying a piece of property has many benefits. Firstly, it will enable you to have a roof over your head. Secondly, and most importantly, it can create wealth for you, if you invest wisely. Now, I know what you are thinking: yes, you would like to buy, but affordability is an issue.

As a general guide: to witness an appreciation of your asset, it is important that you buy from an established developer with a strong track record during the first phase of its launch. This is because the first phase is generally priced at an affordable level as the various infrastructure is still being developed. This gives your property greater room for capital appreciation and thus enabling you to witness an immediate asset appreciation during the subsequent phases.

One example is Albury in the township of Semenyih, by UMLand. During the first phase of its soft launch in August 2015, this landed gated and guarded project was launched from around RM240 per square feet with full facilities.

In the subsequent phases, during the next five years, the property is expected to be launched at around RM450 to RM480 per square feet. As such, within a short period of time, you would already have witnessed an immediate capital appreciation by at least 50 per cent. That is quite a substantial enhancement of assets via investing in property!

Now, let’s look into housing affordability.

Housing Affordability

This has been a contentious issue among Gen Ys since the last general election (in 2013) as income has not kept up in tandem with rising property prices. However, is it really true that properties across Malaysia are expensive? Let’s look at some key data.

Results of a study by Institut Rakyat (IR) released in December 2014 confirmed this, showing that the Housing Affordability Index across Malaysia ranges from moderately unaffordable (3.16) in Melaka to severely unaffordable (11.41) in Sabah.

The index measures affordability in each state by comparing the median household income to housing prices, using the most recently available data from official sources. Housing that costs more than three times the annual income of the median household is considered unaffordable.

When ranked from the most unaffordable states, Sabah took the top spot at 11.41 points, followed by Sarawak (9.04) and Kuala Lumpur (8.22), Selangor (5.88), Pulau Pinang (5.83) and Kelantan (5.54). The three most affordable states were Melaka (3.16), Negeri Sembilan (3.17) and Johor (4.20). However, it is worth pointing out that the average housing prices for these states are still three times the annual income of each state’s median household.

Taking the data from the Ministry of Finance’s Economic Report from 2014 to 2015, the institute’s research showed that the median household income in the first half of 2014 was RM4,258 per month. Accordingly, the institute’s findings suggest that an affordable home should be priced at RM153,000 and below.

Such a house should offer a built-up area of at least 800 square feet and three bedrooms in order to suit a family’s needs.

So from the findings here, we can conclude that, yes, housing across Malaysia is unaffordable. If you feel that you have been priced out from the market, fret not. There is more help on the way.

The Government Responds

Realising that affordable homes are in short supply, the government has since established the PR1MA scheme in 2012 to help low- to middle-income households across Malaysia. The scheme enables those earning between RM2.500 and RM 10,000 per month to buy homes priced between RM 100,000 and RM400.000.

However, the institute’s findings showed that PR1MA homes are still overpriced by 11 per cent. According to their research, when applying their housing affordability criteria of being within three times annual income to PR1MA homes, a household earning RM2,500 a month should be paying RM90,000 and under for an affordable home, whilst those earning RM 10,000 a month should be paying RM360,000.

During the recent Budget 2016 announcements, the government seemed to be aware that more needs to be done to tweak the system so that you can own your first home. One of the major initiatives to cope with rising costs of living is the First House Deposit Financing Scheme to be established by the Ministry of Urban Well-being, Housing and Local Government (KPKT).

Under this scheme, prospective homeowners will get help in paying for the deposit. In all, RM200 million has been allocated. The government has also set aside RM1.6 billion to build around 175,000 units of affordable housing which will be sold at 20 per cent below market prices. Ten thousand units are expected to be completed next year. For more information, please visit www.prlma.my.

With so much to look forward to, 2016 is an opportune time to start your property hunt! But where to begin?

The Big Five (Plus a Disclaimer)

Before we begin discussing the different types of property in the next chapter,

I have decided to focus on the hot markets across Malaysia. This is because Malaysia has a huge property market spanning from Johor to Sarawak. However, not all of these markets will result in the capital appreciation of your property. For the ease of those just starting out, I have identified five key markets that appear attractive to local and foreign investors: Johor, Melaka, Kuala Lumpur, Selangor and Penang. For those looking for their first home or property to invest in, I will discuss this in detail when diving deep into the various markets later on.

For more information about Malaysia property investment , please visit out website.