High asking price and unattractive rental yields put off investors
THE selling price of heritage properties in George Town is expected to consolidate between RM550 per sq ft (psf) and RM1,800 psf because interest from overseas investors has waned due to unattractive rental yields and high asking price.
Raine & Horne Malaysia senior partner Michael Geh tells StarBizWeek that over the past 12 months the transactions for heritage properties in George Town have slowed.
“Even at the present price of between RM550 psf and RM1,800 psf, it is still difficult to find buyers, although the pricing is competitive compared with heritage properties in other countries,” Geh says.
According to National Property Information Centre’s data, heritage property transactions in George Town in 2017 were between RM2,300 psf and RM2,800 psf.
“The properties with land areas of 2,108 sq ft and 1,288 sq ft are located at Armenian Street and Penang Road, sold respectively for RM5mil and RM3.64mil last year. However, these high-value transactions are rather unusual.
“The most popularly transacted prices in 2017 ranged between RM1,000 psf and RM1,800 psf.
“The larger the land area of the heritage properties, the lower the price psf.
“The smaller the land area, the higher the price per square feet,” Geh adds.
From 2002 to 2012, heritage properties in George Town were in dilapidated conditions but some passionate locals and overseas investors entered the scene, refurbished and restored some of them.
“After spending substantially on them, it was normal for them to expect some kind of return on investments (ROI).
“However, the annual rental yield, hovering now between 2.5% and 3.8% per annum, is not attractive enough to draw further attention from overseas investors,” Geh says.
According to Geh, the monthly rental is hardly sufficient to cover the interest.
“If you were to buy a heritage property in a prime area for RM1.8mil, with an 80% loan, the monthly interest on the loan is about RM10,000.
“However, due to the poor rental market, it is difficult to get that monthly rental amount.
“The actual rental paid is between RM3,000 and RM8,000, depending on the location, size and condition of the pre-war property.
Geh says the rental yield should be more than 5% in order to be attractive.
The rental yield is the net rental over a 12-month period divided by the market value of the property.
According to Geh, the choices of what you can do with a heritage property is pretty much limited in George Town.
“Heritage properties are usually renovated to be used as a food and beverage (F&B) outlets or as hotels in George Town.
“Thus, all over George Town, you can see many F&B outlets and budget hotels competing for business. This leads to pricing pressure and eventually margin erosion.
“Whether the tourist arrivals and size of the local population can in the long run sustain the F&B and hotel businesses remain to be seen.
“Potential investors will always consider the ROI,” Geh said.
According to Geh, there is good long-term prospects if investors are not after immediate ROI. If that is the case, then investing in such properties is a wise decision simply because the supply is limited.
There are only some 3,853 units of such properties in George Town’s heritage core and buffer areas, according to George Town World Heritage Inc.
According to Geh, there are people interested to buy such properties for long-term investments or for business purposes. The deciding factor is the price. If the selling price is attractive and have a good yield, there will be transactions.
“But how many are willing to lower the selling price after spending a hefty sum to restore the properties. This is why the asking price is high,” he adds.
On The Rice Miller Hotel & Godowns in Weld Quay, which is out for sale by tender, Geh says the property should have no problem attracting interest from local and overseas buyers involved in the hospitality industry.
The Rice Miller Hotel & Godowns, comprising two restored nineteenth-century heritage buildings, has a hotel, a residential component and commercial outlets.
Property Talk principal Steven Cheah concurs that the asking price of heritage properties in George Town are on the high side.
“There are overseas investors from Singapore, China, and Hong Kong looking for heritage properties in George Town, but are deterred by the high asking price. They are trying to get 5% to 10% knocked off from the current pricing.
“These investors are looking to generate a rental income from their investments,” he said.
Meanwhile, Ghee Hiang Group executive chairman Datuk Ooi Sian Hian says the economic viability of heritage properties in George Town is precarious.
Ooi is a professional architect specialising in the restoration of heritage properties.
“Currently, landowners have a tough time finding tenants who can afford the rentals and be able to operate their business profitably. There are too many conceptual themed museums, souvenir shops, lodges, food and beverage outlets in George Town now for the businesses to be sustainable.
“Moreover, there is an overhang of office space and issues of traffic congestion and acute car-parking shortage within George Town. These issues make it unattractive to convert heritage properties for office use.
“If the plan is to renovate the property for residential use, there is the need for car parking bays. If you can’t provide that, you would have to pay RM25,000 as contribution to the local authorities.
“Investors or initiators may not acquire any more heritage properties in George Town if they cannot derive a reasonable income from their investments. Furthermore, heritage property values are not in tandem with rental yields,” he adds.
Ooi says the present conservation of the heritage core zone in George Town is too large.
“It is about 250 hectares at the buffer and core zones. That’s a lot to cover if there are at all significant places and areas of interest true to Unesco’s elements of living heritage and cultural diversity values.
“It will take about a week for tourists to cover on foot. They would need bicycles to cover the area where there are a lot of vehicles.
“Since there are no special lanes for the non-motorised vehicles, it is rather dangerous. In Malacca, at least the streets in the heritage zones, smaller and manageable in scale, are closed to motorised traffic,” Ooi says.
The Malaysian Institute of Architects (PAM, Northern Chapter) past chairman Datuk Lawrence Lim says foreign investors may lose interest in this segment of the property market due to high restoration and conversion costs.
Most owners prefer to sell to investors because of prohibitive restoration cost.
“Conversion fees to change residential usage to commercial is also high, at RM100 per square metre which works out to about RM19,000 for a pre-war property of about 2,000 sq ft in built-up.
“You would also need to pay RM25,000 for a car park bay to the local authorities if there is no plan to provide car parking bays,” he added.
After factoring restoration and conversion costs, they hesitate to buy because it would take some time before they could recoup their investments.
“Our Lim Association owns a number of heritage houses in George Town that have attracted the attention of foreign investors. The feedback from them is why spend so much just to convert the property for commercial use before even doing business, which may turn out to be unprofitable,” Lim says.
Restoration cost is high due to the stringent requirements by the local authorities to use authentic construction materials with cost of restoration ranging between RM150,000 and RM500,000 per unit.
“The cost to restore the roof alone is about RM80,000, while the cost to replace floor tiles is between RM70,000 and RM80,000. A 2,000 sq ft built-up area can cost about RM150,000,” Lim adds.
Lim, who is also East Design managing director, says the company is now undertaking restoration projects for heritage houses in Hong Kong Street and Magazine Road.
“We are restoring the Kun Kee building at Hong Kong Street, the manufacturer of Penang’s famous white coffee. The other project is 10 pre-war units in Magazine Road, for commercial use.”
The core heritage zone of George Town covers 109.38 hectares and includes heritage hotpots such as Love Lane, Malay Street Ghaut, Carnavon Lane and Carnavon Street.
The buffer area covers 150.04 hectares and includes Dr Lim Chwee Leong Road, Prangin Road, and Transfer Road.