The Edge Investment Forum on Real Estate 2018: Bridging the generation gap in the rental market

This article first appeared in City & Country, The Edge Malaysia Weekly, on April 16, 2018 - April 22, 2018.
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Lights, camera, selfies ... Dubbed one of the most fascinating generation cohorts of the century, millennials are notorious for their different interests, workplace behaviour and fickle spending habits, so much so that TIME magazine in 2013 labelled them the "Me me me" generation. Their world views and behaviour are set to shape the economy and the property market.

Influenced by technology, education and social media, millennials, also known as Gen Y, are those born in the early 1980s to the mid 1990s, and are now between the ages of 24 to 38. They are the generation after Gen X.

In many parts of the world, there has been a shift of attitudes in home ownership as millenials reach their peak home-buying years. Since the homeownership rate peaked in the US in 2004, the biggest drop has come from households that are led by millenials under the age of 35, according to Census Bureau data. In the UK, research by the House of Commons Library found that 59% of households led by a millenial are renting, with only 38% owning their own homes. Twenty years ago, young people were more likely to own than rent.

 Unsurprisingly, there is now higher demand in the rental market in Malaysia from millenials. “Today, only 33% of millennials in Malaysia can afford to own a property, according to HSBC’s ‘Beyond the bricks’ study’,” The Real Rockstars Coaching founder Raphael Wong said during his session at The Edge Real Estate Investment Forum (REIF) 2018.

The HSBC study on international homeownership found only one-third of millenials (those born between 1981 and 1998) are able to afford to own homes due to escalating home prices and slower salary growth.

“Malaysian millennials are having a tough time surviving financially. Their financial concerns in general include the high cost of living, unaffordable property prices, inability to save money, incapability to pay for unexpected emergencies or medical problems and not having enough for retirement,” said Wong, a real estate coach, trainer and entrepreneur.

“Millennials also tend to have uncertain jobs and experience difficulties in securing loan or end-financing from banks and financial institutions.”

Wong focused on why the rental market appealed to millennials in his session, “Renting to millennials 101: What do they want?”.

 “Currently, millennials make up the largest market segment (26% or 8.4 million people) in Malaysia. Investors should see it as a good opportunity for property investment,” he asserted.

“There are two main exit strategies in property — invest to sell or invest to rent. When it comes to the latter, the ideal situation is to rent out to generate better cash flow.

“Investors should focus on capturing the largest target market (millennials) to improve their return on investment (ROI). To date, the average rental yield is about 4% against an interest rate of 4.3% to 4.5%, which would result in negative gearing. The key to overcome this situation is to target and to focus on the highest rental demand — the millennials. ”

Ipoh-born Wong, a registered estate agent since 2012, explained that renting is viable and favoured by millennials. “Personally, I have moved house more than eight times since I first came to Kuala Lumpur a few years ago. However, renting has enabled me to invest in 11 properties.

“This is a feasible method for investors, especially millennials and young investors looking to invest in property for the long term,” said Wong, a former Malaysian Insitute of Estate Agents (MIEA) youth chairman.

 

An untapped market

In investing to rent, it is important to understand the different market segments and their requirements, Wong said, breaking in down into a few categories by generational demographics.

“In the context of Malaysia’s population, millennials or Gen Y — between the ages of 24 and 38 — make up the largest segment with purchasing power (26%). This is followed by Gen X (39 to 53 years of age, 17%), baby boomers (54 to 72 years of age, 12%) and the silent generation (73-year-olds and above, 2%).

“Meanwhile, Gen Alpha (between one and five years of age, 8%) and Gen Z (6 to 23 years of age, 35%) comprise the segment without purchasing power or steady income.”

Interestingly, Wong said 86% of millennials in Malaysia rate the high cost of living as their top three biggest concerns, according to research by iMoney.my.

 “There is high rental demand among millennials due to a lack of affordable properties. Most young adults are weighted down by student loans, car loans and credit card bills. They have a lot [of debt] to settle before they can even think of purchasing a house.

“Renting is a good option as they can pay slightly less than a monthly mortgage for a house.”

Millennials who earn a monthly income of RM3,000 can only afford houses priced at RM200,000, Wong said, based on the study, “Measuring the Gen Y housing affordability problem” by the International Journal of Trade, Economics and Finance.

“The median property price in Malaysia (across all property types and borders) is about RM500,000. This would result an interest rate of about 4.3%. With an average monthly income of RM3,000, this is unattainable for most millennials,” he pointed out.

Wong also highlighted the property overhang in Malaysia. “It is no secret that slow market absorption has led to an increase in the residential overhang, with 20,867 units worth RM12.26 billion in 2017, a 40% increase compared with 1H2016, according to the Valuation and Property Services Department at the Preliminary Property Market 2017 briefing,” he said.

The bulk of the overhang units comprised condominiums and apartments priced from RM500,000 to RM1 million, he said.

“This may also apply to the secondary market, and not just the primary market. It is quite a tough market at the moment, but where there is a challenge, there is an opportunity,” he observed.

“Hence, millennials matter to the rental market because they make up a large percentage of the current applicants (for renting). The trend towards renting over home ownership will probably not change anytime soon.”

 

How to attract Gen Y

Notwithstanding their financial constraints, millennials are drawn towards renting at sophisticated developments. Wong provides some tips and trends on how to attract the millennial market, apart from the run-of-the-mill facilities.

“They are particularly attracted to properties that are digitally engineered, for example, an apartment that can be controlled via an app in an iPad,” he noted.

“Millennials are also drawn to eco-friendly developments. This group is educated and cultured, and would like to practise green living. A development that helps conserve energy and water would be more appealing compared with the average development. This includes energy-efficient appliances.”

Social spaces are also at the top of their wish list. “It is important to understand that millennials enjoy socialising and living in a community. Part of their lifestyle is entertaining guests. Thus, developments that offer larger spaces for entertaining and dining, smart storage, built-in shelving and bars would be more attractive,” Wong said.

Another key draw is entertainment. “Millennials tend to value experience. A development that offers entertainment, be it in the form of a shopping mall, retail, restaurants or bars, is highly attractive to them.  Thus, mixed-use developments or those connected to or near to entertainment outlets would lure more millennials,” he said.

Wong added that this generation cohort also loves pet-friendly developments. “In general, they are quite the animal lovers and foster pets in their homes. A property that is pet-friendly would be an added bonus. Pet-friendly features such as hardwood or composite floors will tolerate pet accidents better than carpets.”

 

Hot spots

Some hot spots for the millennial rental market are Bandar Sunway, Bangsar South, Mont’Kiara, Setapak and Petaling Jaya, according to Wong. “Section 13 in Petaling Jaya is going through a major transformation, from industrial to commercial lots. Bangsar South is also attractive as it is now a rebranded area.”

Millennials are drawn to transit-oriented developments (TOD) or developments that are highly accessible and connected to the LRT, MRT and other public modes of transport, he said. Convenience is also highly sought after.

During the question-and-answer session, Wong was asked why the number of parking bays offered per unit, espeically in new developments, is being overlooked and how that would impact investors and renters. “Parking lots are important and to rent an additional parking lot in a development in a good area would cost around RM150 per month. Perhaps investors may want to cover the cost to attract renters and earn more returns,” he suggested.

“With the LRT and MRT lines being built and more public transport available, parking lots may not be such an issue in the long term.”

Another question was on the role of a developer and an investor in managing a smart home, or technology that would appeal to millennials.

“Developers play a crucial role in developing smart homes that are appealing to this segment of the market by offering different, innovative technologies. Meanwhile, for investors, it is always good to keep up with the market trends and look at aspects of the property that can be improved. For example, I once changed a traditional wooden lock into a digital lock with card access for one of my investments, and managed to find a tenant almost immediately due to that,” he said.

He was also asked about strategies to get positive cash flow in property investments in this trying market. “One of my personal strategies is to sub-let my properties [renting out rooms separately]. For example, one property I invested in is in Sungai Buloh near HELP University. There is about a 99% occupancy rate among the three hostel groups in that area,” he said.

“All in all, I believe it is our responsibility as investors to research the development, the location and the target market and find ways to maximise our profit and cash flow.”

He foresees millennials driving rental demand in the next decade. “Renting provides the flexibility needed when starting out in one’s career. This especially applies to those with student loans and debt.

“Investors should really look at millennials (and also Gen Z, for the long term for student housing and so on), to make the most of their investments,” he concluded.