CITY Valuers and Consultants Sdn Bhd managing director PB Nehru (pic) says developers know “property prices will trend lower” if buyers are unable to finance their purchases.
“This can have negative consequences in their earlier as well as future phases. So it is better to help buyers by providing guaranteed finance and ‘tie up’ the purchasers than to carry expensive unsold stock.
“If the developer is a listed company, the share price of the company (and hence the wealth of the shareholders) is related directly to the projected gross development value (GDV) from the scheme,” says Nehru in an email.
Nehru also highlighted “the needless high prices paid to land owners by companies.”
“All it takes is for one company to buy a development land at a high price based on their projected GDV and, lo and behold, all landowners quote this price and all land prices rise,” he says.
“The cycle repeats itself because the developers who pay high prices based on projected perpetually rising GDVs then have to build (increasingly more) expensive units to support their land purchase prices. They then have to create innovative marketing strategies to sell these higher priced units,” he says.
This is what the market is seeing today, Nehru says.
On the current slew of creative marketing available in sales galleries, he says this strategy of low initial outlay and deferred payment will not work for office, retail and other commercial properties as the demand for these is much less. These schemes will also not work in the residential market if there is no population or economic activity there to generate demand.
Nehru says demand comes from owner-occupiers, investors and speculators. Speculators are those who buy with the intention to flip. Investors buy with the intention to rent out the property to get a recurring income.
This means that even among the investors and speculators, ultimately there has to be an occupier/secondary buyer. And in order for a property to be sought after, there has to be economic activities in that particular location.
In the case of the provision of business grants for commercial properties, this is not so much an inducement to buy, but to encourage the owner to begin business operations earlier instead of sitting on a property and doing nothing with it, says a property consultant who declined to be named.
An entrepreneur who buys a commercial unit will only be able to get his “prize” of a business grant if he begins business operations from the unit within a year of getting vacant possession. It will not help speculators or investors. The objective of providing business grants is to spur and encourage vibrancy in a new location, says the source.
Ultimately, the developer will use “the buyers’ own money” to pay rebates, discounts and freebies the buyer thinks he is getting for free. The developer wins but the buyer is happy because he thinks he is winning.
“We can thus expect more developers to adopt these inducement-to-buy strategies going forward,” he says. Developers need to know their purchasers... whether they are owner-occupiers, investors or speculators as each will be driven by different instincts.
Owner-occupiers are attracted to location in relation to their centre of gravity which can be their place of work, or where they currently reside, or where there is easy accessibility to a LRT/MRT station. They must also be able to afford the down payment and the monthly mortgage payment.
“If these criteria are met, then the developer does not need to offer any discounts, rebates, interest-free construction periods or other marketing strategies,” says Nehru. They will still buy as any rebates or freebies that come along are seen as a bonus.
“Investors and speculators, on the other land, look at the ‘deal’ they can get out of the developer. They need their ‘investment’ to make a capital gain upon delivery of units due to the discounts, rebates and interest-free construction period.”
Investors will also need “the certainty of rental income – the rent must be near enough to the monthly mortgage repayment such that they are effectively getting a free property for a mere 10% down payment and with discounts which are often more than the down payment,” says Nehru. A speculator is not bothered by the “rentability” of his purchase. He just wants to flip it when it is completed.
Another property consultant who declined to be named says the current slew of schemes offered by various developers may actually benefit the buyer. It will set some developers apart from others, he says. He expects more schemes to pop up in the coming months.
There is a caveat to all these, however.
“If the property is RM1mil, the buyer must not be allowed to get a loan for RM1mil. It must be a loan less the discount, or rebates, or freebies.
“The banks who give the loans must know what is the real price, likewise the valuation department. Otherwise, we will be creating a future problem. If there is a foreclosure a few years later, the banks will have a problem valuing the house because the discounts are not clearly stated.
“There has to be a real transparent price, and loans must not be given based on a headline figure. By having this transparency, the system (of monitoring house prices) will not be disturbed,” he says.
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