Many of us are seeking investments for our companies that can bring some stability to our investment portfolios as compared to the gyrating KLSE, as seen over the past few months. Real Estate investments is an answer to this stability as:

  1. Real Estate investment can act as an hedge against inflation
  2. Real Estate investments can provide significant cash flows of between 4% - 9% yield which is more tempting than the cashflow of equities
  3. Real Estate investment has an upside for capital appreciation
  4. Real Estate investment does offer some form of tax benefits. Other than depreciation, capital gains tax can reach a minimum of 5% for corporations in Malaysia a compared to Corporate Taxes.

Generally there are 6 main sectors you can choose from i.e. Office Buildings, Retail Centres, Hotels/Serviced Apartments, Residential Properties, Development Land/Projects, and Industrial Properties.

Below we outline a brief commentary of the Office, Retail, Hospitality, Residential and the Industrial sector and our opinions of investment opportunities in Kuala Lumpur in the respective sectors. These opinions should be regarded solely as a general guide with specifics being verified upon interest to invest.

Office Sector
For the first quarter of 2012, rentals and market prices in the Klang Valley remained generally stable, with exception to the older buildings and buildings in poor locations which have difficulty competing with the newer completions and will likely have to drop rents to retain existing tenants or attract new ones. Yields have been stable, ranging from a 6% to 9% per annum.

Though there is an overhang in the Office Sector, good and healthy opportunities for corporate investments are still available. Our hot picks are based on the following criteria:

  1. Buildings located in the Golden Triangle Area (Along Jalan Sultan Ismail , Jalan Bukit Bintang, Jalan Ampang and KLCC)and Damansara Heights Area
  2. Prime Office Buildings (generally offering above average quality of office accommodation and less than 10-15 years old. Average Rentals from circa RM3.00 psf per month onwards)
  3. On En-Bloc only. We do not recommend purchasing properties on strata basis for offices.
  4. Profile of tenants a good mixture amongst prominent MNC's and local companies/public listed/conglomerate
  5. Tenancies are well structured (break clauses, rent reviews, term tenancies etc)
  6. Very strong Management

We have come across properties fitting the above bill and a couple also offering guaranteed returns based on a sale and leaseback basis. In terms of development, we anticipate high demand for high-class offices in the same locations.

Retail Sector
There has been an increase in supply of retail space with new malls coming on board i.e. Paradigm Mall, Nu Sentral and the Setia City Mall which comprise a total of 2.05 million sq ft of NLA and are targeted to come on stream during the remainder of 2012. Rentals and market values have remained stable this year with Malls in the city centre able to command higher rentals by virtue of limited supply of good malls in the city. Yields are ranging from about 7% - 9% as well.

There are however, very limited opportunities to invest in the Retail sector and we strongly recommend this sector, based on projected demographics and economic growth. Our hot picks for this sector are as follows:

  1. Buildings located in the Golden Triangle and Residential Locations with High Purchasing Power or within close access to these residential locations
  2. Close to Public Transport
  3. On En-Bloc only. We do not recommend purchasing properties on strata basis for retails. An investor has to be very strict here as generally malls need very strong management and it gets stronger with a single owner
  4. Wide Range of Goods and Attractive Features within the Mall(strong lifestyle and contemporary based Tenancy Mix, not the same old tenants)
  5. Quality Management and Services. Just like Hotels, Management is almost everything in a Retail Centre. If the existing centre is not doing well and due to quality management, there is an opportunity to capitalize here as the turnaround potential for malls is really big in the property sector
  6. Able to keep pace with the latest shopping trends
    In terms of development, we advise medium sized malls in the above locations and go in with a strong Management & Marketing Consultancy Team that not only knows the retail market but also knows the retailers and retailing.

Hotel/Serviced Apartments
The hospitality sector is a very lucrative sector in the property market due to its potential free cash flows. A strong Management Company/Team is essential and the success of your investment in the Hospitality industry will strongly hinge on this. Management Companies that are innovative in their appointments (such as willing to share the trading risks or even provide guaranteed returns) and management style are what you should look out for.

Also note that Tourism Industry is now the biggest industry in the world.

Though there are over 28,000 hotel rooms in Kuala Lumpur and 4,800 serviced apartments, at the moment, occupancies have been steadily picking up since the September 11th incident. Room rates have also remained stable this year with some hotels and serviced apartments recording increments. Anticipated yields for hotels and serviced apartments range from 6.5% to 11%, depending on category and locations.

Our hot picks are hotels and serviced apartments with the following traits:

  1. Within or around KLCC, top resort destinations that are accessible (Penang, Langkawi, Kota Kinabalu, Kuching, Kuantan) and even suburbs of Kuala Lumpur for Serviced Apartments.
  2. Functional Room Designs and General Layouts
  3. High End and Medium End Categories (low end category provide cash flows but low yields for the same management costs) to cater for international and domestic tourism
  4. Potential to offer products to the more discerning consumers

A word of caution though, hotels and serviced apartments would initially require some capital injection, but with the right management, these efforts are really lucrative. Very strongly recommend this sector.

Residential Properties
For corporate investments, we only recommend low-density high-end condominiums that are sold or developed en-bloc basis i.e. boutique single development-one owner. The main reason is lack of supply of these types of properties and also the quality of tenants are really good. Locations you should be looking at include Ampang Hilir, U-Thant, Bangsar, Damansara Heights, Petaling Jaya (note: no such development in Petaling Jaya yet).

Other success factors include:

  • High privacy and security
  • Ample facilities
  • Efficient, functional and spacious layouts
  • Quality finishes and fittings.
  • Quality of the detailing and construction of the building
  • The quality of the management and maintenance of the building

As mentioned, there are not many in the market and any opportunity should immediately be secured.

For development, the high-end market is a good market. But we also recommend run of the mill property development in growth areas of Puchong, Kota Damansara, Cheras, Sg Buloh, USJ, Petaling Jaya and Bukit Jalil.

Industrial Properties
We do not anticipate much action in the industrial sector in the short term and we only expect consolidation. Only AFTA is expected to contribute towards the recovery of this sector. With this anticipated recovery, our advice is investments in distribution centers and warehouses cum showrooms in high traffic areas like in Section 13, Petaling Jaya, Glenmarie and even Ulu Kelang.

Though real estate investment has a lot of upside to offer in your portfolio, caveat emptor as real estate investment has also its fair share of drawbacks, the main being:

  1. Real Estate investment has a high cost of entry and ownership
  2. Real Estate investment offers less liquidity as compared to equities
  3. Real Estate investments generally require a long holding period

With this in mind, it is always good to back up your Corporate Real Estate Investment decisions with sound research, a structured decision making process and reliable advice.

En Bloc High End Condominiums Can Provide Good Cash Flows