Malaysia was hit hard by the Asian financial crisis 20 years ago. Although the market has substantially recovered after government intervention, it slumped again in 2009 due to the increase in the base lending rate and an oversupply of retail properties. In addition to that, property prices have risen by 8% in 2014 and a whopping 77% since 2004.
In view of these past events, Malaysians are hesitant to invest in real estate. A successful investment requires proper risk management as well as the skilful balancing of risk and expected return. With the correct implementation, real estate can be a safe and profitable form of investment.
Real estate can be divided into four main categories:
- Retail (Shopping centres, neighbourhood stores, commercial strips, and stand-alone properties)
- Condos and apartments
- Industrial (manufacturing, production, distribution and warehouse facilities)
- Office (professional buildings)
Investors can enter any of the sectors by entirely owning the properties, in conjunction with partners, or by investing in real estate investment trusts (REITs). Direct ownership of real estate offers more control while removing the need for a middleman, while investments in trusts provide more liquidity. In general, trusts can be sold in a short period of time without the need for a noticeable difference between the sale price and the current market value, hence increasing its liquidity. Real estate, on the other hand, is only usually sold after its value appreciates, and this process may take up to a few years.
The following are the reasons to why real estate is a sound investment.
Ease of Analysis
Valuing a piece of property is as easy as calculating the realistic expenses and rental income. For example, if you are able to borrow at 4% and rent the property out for a 6% yield, you have already landed yourself an investment with returns. And if you have the financial means to invest, real estate can be purchased for the intention of reselling for a profit, or better known as house flipping.
Other type of investments such as stocks, on the other hand, requires you to rely on the figures that have been reported to you by the company. Keep in mind that companies have their own ways to make the numbers look better on paper, e.g. by adding one off gains, using amortization or depreciation strategies, and adjusting account receivables just to name a few.
Exposure to Opportunities
An increasing number of investors are looking beyond traditional assets to the so-called “real assets” in an effort to protect themselves from risks generally related to traditional portfolios, such as inflation and market volatility. On the other hand, real assets, which are tangible in nature, are high in intrinsic value due to their usefulness, e.g. a property can be transformed into a parking lot if it is located close to a metro or shopping mall, or it can also be converted into a rental property. However, it is important to take into consideration any outward expenses incurred for maintenance, renovation, or repair as properties have the tendency to wear down overtime.
Investing in real estate also acts as a diversifier especially during unstable economic climates. Certain REITs invest in all four types of real estate, so by spreading out your investment and not keeping all your eggs in one basket, you are minimizing the risks involved in the event of a crisis. Investors became aware of how crucial uncorrelated sources of returns are, and the need is felt even more keenly in the recent months in Malaysia.
You are not restricted to investing only in the real estate of your country. If you are able to filter out and put money into regions which are economically stronger, you will have reserve assets and funds in multiple currencies to help insulate your real estate portfolio against national or global economic changes. Investing in real estate in countries such as Singapore, London, San Francisco or Hong Kong will be exceedingly safe and profitable as the prices fall the least, recover the quickest, and gain the most.
Hedge Against Inflation
In an environment where the inflation is high, financial assets such as bonds quickly lose their value in real terms, while the prices of real assets remain relatively stable or may even increase. Although the near-term risk of inflation may be lower, the aggressive policies that have been put into place to ease any financial crisis have made the prospect of higher inflation more likely in the years to come. The enormous monetary and fiscal expansion, falling currency value and the prospects of an economic recovery are likely to be inflationary triggers.
Great Long-term Yield
Real estate, whether it is commercial or residential, can be turned into rental properties which are able to provide investors with a consistent cash flow as means of extra income. Moreover, the general trend for the prices of property is to appreciate in Malaysia, making real estate a profitable investment in the long run.
Many financially savvy and successful investors believe in real estate investment; with proper research, you too can start making sound real estate investments as well! Start now by learning more about the ways to better manage your personal finances at CompareHero.my today.