Friday 29 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 18 - 24, 2016.

 

The local property market has seen frenzied buying in recent years as real estate is considered by many to be the perfect investment in the face of rising inflation. Property prices have skyrocketed since the global financial crisis in 2008. 

The channels created by property developers to make it easier for people to buy properties have also contributed to the boom. Unsurprisingly, many investors have their portfolios heavily weighted in property assets. 

The current downturn in the property market, however, is a cause for concern as such overexposure may not be healthy in the long run.

“Many investors pooled their funds to buy properties in bulk. The developers gave them discounts, say about 10%, but the selling price remained the same on the sales and purchase agreements. This allowed investors to use leverage to buy more properties. Some developers even allowed investors to make downpayments with their credit cards,” says Paul Khoo, managing director of Standard Financial Adviser Sdn Bhd.

The downturn, which began last year, saw prices stagnating and rental yields falling on the back of weaker demand and oversupply. Many investors are finding it hard to sell their properties while struggling to meet their debt obligations. As the down cycle is expected to continue, what should investors do? 

Financial advisers say investors who have allocated too much of their portfolio to property investments would do well to reassess their holdings. Properties with slow appreciation rates, poor rental yields and low prospects should be sold off to help them cut their losses.

Yap Ming Hui, founder and managing director of Whitman Independent Advisors Sdn Bhd, says investors who are not able to rent out their properties should act fast. “If the apartment or condominium you own has poor prospects and you are not able to rent it out, you should sell it before the owners of the other units start dumping theirs and driving down prices. You should sell your unit as quickly as possible for a higher price,” he adds. 

While this is not an easy decision, Yap believes it is a necessary one before things take a turn for the worse. “From what I understand, banks will increase your [housing loan’s interest] rate if you default on your loan payment a few times. This will put you in an even worse situation. If you cannot repay your debt after a few months, the bank will foreclose on your property. And even if your property is sold at a lower-than-market price, you have to accept it,” he says.

By freeing up capital invested in such properties, investors will be able to redeploy the cash in better-performing asset classes such as currencies and stocks in the near term or even properties with better prospects over the longer term, says Yap.

“There could be opportunities in other asset classes following the Brexit vote, such as stocks or currencies. Investment opportunities could even emerge from the property market itself,” he adds. 

“We are now at the early stages of a property slowdown. In one or two years’ time, you may be able to buy a better property at a good price with the cash.”

Financial planners say properties should not be more than half of one’s investing portfolio as they are illiquid assets. “Investors should have a strong cash flow to diversify into other asset classes. It is not a good idea to hold more than 50% of your total assets in properties, especially during a down cycle. If investors have 50% in cash, they should diversify into other asset classes and countries, especially when the property market slows down,” says Bryan Zeng, general manager of independent financial advisory firm FA Advisory Sdn Bhd. 

In fact, he advises investors to allocate no more than 20% of their portfolio to any asset class. “That is because if anything happens to a certain asset class and values go down, the other asset classes will be able to provide diversification.”

Some people are invested heavily in properties passed down by their parents as inheritance. To reduce their allocation in such holdings, Zeng says they can consider refinancing these properties and redeploying the funds into other asset classes.

 

Stress-test your financial position

It is uncertain how long the slowdown in the real estate sector is expected to last, but it will impact investment returns. 

“The property market is depressed. It is flooded by supply but lacks demand, especially in the apartment and condominium subsector. Rental yields are low at 2% to 3% after taking into consideration the mortgage and maintenance fee. Even [the prices of] luxury condos in certain areas are depressed,” Zeng points out.

Investors should be aware that interest rates tend to go up in times like these. In fact, some banks have already raised the interest rates for their housing loans. 

“Rising rates are something that investors need to consider because banks’ earnings are already depressed and margins are thin. It is possible they could increase their loan rates at some point,” says Zeng.

Khoo says the Brexit vote has lowered the possibility of another interest rate hike this year by the US Federal Reserve. Bank Negara Malaysia, meanwhile, cut its overnight policy rate by 25 basis points to 3% on July 13. This is expected to give property investors some breathing space. 

Hence, there is no time like the present for property investors to stress-test their financial position, as the possibility of rising interest rates poses a serious risk to their repayment capability.

“The best way to conduct a stress test is to measure their loans against their repayment capability to see if there is a need to rebalance their investment portfolio,” says Khoo. 

Investors should test the health of their financials over the next few years against factors that could potentially impact their ability to pay off their debt. They should incorporate factors such as a rise in interest rates and factor in the possibility of unemployment or lower bonuses due to the tough economic conditions. If the projected payment amount is beyond their current affordability, they should consider rebalancing their portfolio.

Investors who need to raise cash quickly to meet their debt obligations could rent out their property via websites that provide homestay services to travellers such as Airbnb. “A couple of property owners who could not sell their investments rented out their properties via Airbnb and have managed to generate some income,” says Khoo. 

Meanwhile, Zeng suggests that investors who have more than one property could consider moving into the property with the lower rental yield and renting out the one with the higher yield. “Investors have to do some research and analyse their property holdings. It would be good if they could hold on to those with good potential as prices tend to rise in the longer term,” he says.

“However, yields of high-rise apartments and condos are really low now. It would be better to place the money in a fixed deposit.”

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