Updated: May 29, 2020
In our previous MCM-Blog we have reviewed what Land Acquisition is, what are the important factors that you shall always look out for. Now it’s time to move onto the 2nd phase of the PILC what is: Construction / Property Development
The biggest profit-making ratio in the entire PILC can be contributed by the construction and development stage. However, due to the very huge capital involvement and high expertise and team are required, as such, this segment is usually controlled or monopolised by big corporations and conglomerates.
In recent years, there have been many established main contractors and builders
re-positioning their business strategy to become full-fledged developers coupled with some MNC's organising their construction or property development division or subsidiary to participate in this lucrative segment when in view of this lucrative profitability.
They often offer a very lucrative entry package like low or zero deposit package to attract purchasers. Sometimes, outgoing expenses like legal documents, stamping fee, duty and even interest during construction can also be fully borne by the developers, so that the projects can sell off within a much shorter time period, which translate to more profit to developers.
Some developers are even offering leaseback / buyback option from the property investors on certain ROI per year, for a number of years especially if the developers have committed to do business with reputable parties. This can be like renting to MNC's for their business premises or staff accommodation or to universities for their hotel business and so on. If they use a third party’s property, this leaseback strategy will save the developer a lot of cost.
Likewise, this leaseback model also works well for some knowledgeable investors who do not want to be involved with the hassle of handling the properties themselves. They will have a steady tenant, i.e. the MNC's, the hotels, the universities, who still need to operate their business on the tenancy. It also acts as a safeguard against potential global economy downturn as when the economy recovers to the its normal cycle, the investors can then either continue to lease back to the tenant or another new tenant at a higher prevailing market rate or outright sell the property at a higher value with existing tenancy agreement.
There even a debate on whether Malaysia should continue with the concept of “Sell Then Build” or switch to “Build Then Sell” which may add additional cost to developers, discouraging smaller developers without huge working capital. This may ultimately increase the overall property prices if the “Build Then Sell” concept is imposed. So now is still the best time to take advantage of the prevailing opportunity in the property development cycle in Malaysia.
In Malaysia, there are many real estate investment opportunities especially in the property development phase where most of the investors’ category, ranging from beginners to sophisticated investors can benefit.
What is Property Development?
Real estate development, or property development, is a multi-faceted business, encompassing activities that range from the construction and release of existing buildings to the purchase of raw land and the sale of improved land or parcels to others. Developers are the coordinators of the activities, converting ideas on paper into real property.
How Does It Work?
Property development includes developers buying land, financing real estate deals, building or have builders build projects, creating, imagining, controlling, and orchestrating the process of development from the beginning to end to meet customers’ requirements. Developers, generally coordinate the activities converting plans, needs and ideas into property.
Why Participate In Property Development Phase?
Lower Capital Outlay:
When buying completed properties at secondary market, the initial capital outlay can sometimes require cash as high as 30%-40% of the property purchase price. However, if you buy properties before any property construction works, sometimes you are able to purchase the property on a much lower budget or sometimes without having to pay the down payment (zero-down) with the creative package provided by the developer.
Buying property directly from the developer, will most likely allow better financing packages from financiers as the developer and the financiers have tied up for the particular property project and the property price too.
Potential Appreciation upon Completion:
During the construction period (usually 3-4 years), investors just need to serve minimal interest based on progressive payment claimed by the developers. Usually the property price will appreciate 10%-20% on the purchase price upon completion.
Another important advice is “Follow where the Government Invest”, always buy properties close to the Government’s mega-projects, like international financial hub, infrastructure etc., as an example, the upcoming Tun Razak Exchange (TRX) in Kuala Lumpur will have benefits and potential opportunities not just TRX itself, but will benefit the nearby properties too.
To be continued… Phase 3: Management, where we will share this strategy on how to maximise the space optimisation for better ROI, please stay tuned on next Friday Read.