A COUPLE of weeks ago, a bit of controversy arose over the purchase of two residential units in One Menerung, located behind Bangsar Shopping Complex.
For non-city dwellers, Bangsar is an upscale commercial and residential area next to Damansara Heights, one of Kuala Lumpur's most prestigious neighbourhood. The developer is Bandar Raya Developments Bhd (BRDB). It is unclear how much the two units actually cost. There are reports which cited that one of the units cost RM9.8mil and the second unit cost RM6.9mil. For the sake of consistency, let us just put the two units at RM6.9mil each.
Although it was reported that both are condominium units, it is also likely that the units may be landed duplex units as the entire project is known as a condominium project.
According to a previous press report, the Government had given a RM250mil loan to the National Feedlock Corp (NFC) for the cattle business but a portion of this money was instead used to buy two residential units in One Menerung, besides other uses. There are many interesting aspects to this cattle versus property investment episode.
The NFC is managed by the husband of Women, Family and Community Development Minister Datuk Seri Shahrizat Abdul Jalil, Datuk Seri Dr Mohamad Salleh Ismail. The rationale behind the diversion of funds from cattle to bricks and mortar was given during a press conference in mid-November.
According to press reports, the investment into these two units is rendering NFC a monthly rental income of RM70,000, or a gross return of about 13%, for each unit. Initially, it seemed quite impossible for a condominium to fetch that kind of rental. Even a bungalow in Damansara Heights does not fetch that kind of rental. Later, it was revealed that the monthly rental is RM18,000 for a unit.
At RM18,000 a month, a year will provide the buyer a gross rental income of RM216,000. Annually, this means a gross rental income of 3.13% (216x100/6.9). But the units come with a monthly maintenance and sinking fund charge. The monthly charges at One Menerung is at the rate of 55 sen per sq ft. Assuming that the unit is 6,340 sq ft, that works out annually to RM41,844, or RM3,487 every month.
The gross rent of RM216,000 less maintenance charges of RM41,844 is RM174,156. This means the annualised net rental income is 2.52%.
Now this is the interesting bit. In a press conference, it was revealed that BRDB gave NFC a cash rebate of 10% of the purchase price of the units. Assuming that both units are priced at RM6.9mil, this means apart from the rental income of RM216,000, the buyer received another RM690,000, or RM57,500 a month from the developer. This works out to the buyer receiving about RM75,500 (RM57,500+18,000) a month. Based on the 10% rebate excluding the rental income, over a 24-month period, the buyer received about RM1.3mil from BRDB for the two units.
But this 10% rebate ends next month, which means come January 2012, the return on investment takes a drastic fall from a return of 13% to 2.52% net, or 3.1% gross. This is the fixed deposit interest rates offered by commercial banks today.
This episode of giving a 10% cash rebate over 24 months raises other questions. Did all the other buyers of One Menerung receive the same 10% cash rebate over a period of 24 months? According to a former staff of the company, different incentives were given at different times to different buyers.
One Menerung was launched in 2006. In the first quarter of 2008, it was reported that One Menerung was doing well with 85% of the units sold. If that project was doing well, why did BRDB give that 10% cash rebate?
A developer who declined to be named says it is possible for developers to provide some form of incentive to push sales. But the quantum must be reasonable. There are also cases of buyers getting bulk discounts when they buy multiple units.
On a larger scale, why would BRDB, a very reputable developer give buyer or buyers a 10% cash rebate which stretches over 24 months? This effectively reduces the price of the properties, and the company's revenue. Normally, it is a one-off thing and is clearly spelled out and given when the property is sold.
When the price of a property is fixed and that price is approved by the Government, the developer cannot increase the price without prior approval. However, there is no issue with reducing the price of the property, although by right, this should not occur as it gives rise to other issues, the developer says.
This leads us into another area, the marketing of properties. Just as there is today, a buy-one-get-one-free in the supermarket and fashion, these purchases are small and for day-to-day use. These purchases cannot be compared to property purchases.
When it comes to property investment or an outright purchase because of a need, it is a different ball game altogether. Afterall, buying a property is a very big commitment that goes on for years and if the loan tenure is long, for decades. While it is fine to invest, decisions have to be weighed very carefully. Each investor has different needs and wants and for many of us, property investment will be the largest monetary investment many of us are likely to make in a lifetime, apart from a car. Because property prices tend to increase in Malaysia, this does not mean that property prices will not fall. It may fall for a period. Because there is always that risk, it is best to use one's own money to invest in property simply because it is a long-term investment.
As property, be it commercial or residential, is a popular asset class in Malaysia as elsewhere in Singapore and Hong Kong isn't it time that Malaysia set up a sort of regulatory framework under the ambit of some housing related assocation to govern how developers should conduct their business? This framework could include the selling and marketing of properties.
By all means, let there be some form of “inducements to buy” but let this enticement be reasonable. This is an important issue for the simple reason that property development and investment is very closely linked to the banking sector, which is the backbone to any national economy. If one falls, the other falls with it. As we have seen in the West, it was the property sector which rendered the US economy the way it is today.
l Assistant news editor Thean Lee Cheng finds these “cash rebates” very attractive, but instead of giving rebates, why not just price the property lower?
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