5 risks when investing in Malaysian real estate

As with any investment, due diligence and ample research into the property market are needed to make an informed decision.

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Investing in property could potentially net high returns. Unlike many other forms of investment, real estate is based on a basic human need for shelter; and an ever-increasing population means prime land is a relatively limited resource with increasing value over time.

That said, property investments could be risky if one is not mindful of factors impacting real estate in Malaysia. Here are some common risks when it comes to property investment in the country.

1. External factors

Property prices are strongly influenced by factors beyond one’s control, especially economic conditions. A strong economy usually translates to strong demand for housing, which leads to higher property values.

But when unemployment rises or economic growth falls sharply, many lose their jobs and are unable to pay mortgages on time or at all. This drives down property prices as distressed owners “dump” their properties onto the market far below their original purchase prices or valuation.

For high-rises, lack of maintenance and upkeep in common areas may deter prospective buyers, which in turn harms prices. And unlike landed properties where value is attached to the land, high-rise properties could see prices dip in the long-term as the building ages and newer projects are completed in the vicinity.

Other political and social issues such as natural disasters, crime, and changes in urban planning could also negatively influence property values in the short term.

2. Shifting outlooks

The property market works in cycles, much like the economy, and experiences periods of recovery, boom and recessions.

The number of searches for condos and serviced apartments on PropertyGuru’s website has dropped dramatically in favour of terrace houses during the pandemic.

Smart investors pay attention to these cycles in the property market. Those who purchase properties before the bubble bursts or recessive periods begin have the most to lose.

Malaysia’s property market had been receding even before the pandemic due to overhang, where new properties remained unsold after nine months. This surplus has resulted in a buyer’s market, where purchases have ample choice and sellers have to compete to secure a buyer.

Meanwhile, the pandemic has prolonged the recessive phase, while the volume of searches for condominiums and serviced apartments on PropertyGuru’s website has dropped dramatically in favour of terrace houses.

3. Risks of delay, abandonment and inflated prices

New projects are attractive investment opportunities owing to developer rebates, defect liability periods, and government incentives such as the recently concluded Home Ownership Campaign.

However, buyers must contend with the risks of delay or abandonment when purchasing properties in the primary market. In October, the housing and local government ministry identified 79 abandoned housing projects involving 17,724 housing units and affecting 11,824 buyers in peninsular Malaysia.

While risks of delay are a concern, buyers of residential properties are entitled to liquidated ascertained damages thanks to clauses in the sales and purchase agreement.

Also, since prices in the primary market are set by the developer instead of market forces, sometimes the properties sold might also be overpriced.

In such cases, prices could dip in the secondary market, or owners might be stuck with negative cash flow as falling rental rates do not match monthly mortgage repayments.

4. Terrible tenants

One of the most lucrative aspects of investing in real estate is the prospect of rental income. Part and parcel of being landlords, however, is having to deal with problematic tenants who could cause property damage, not bother about upkeep, or default on rental payments.

Landlords might have to deal with troublesome tenants who cause property damage or are not bothered about upkeep. (Freepik pic)

Eviction is no easy feat as landlords have to fork out on legal costs, while recovering overdue rentals or utility bills could be impractical.

Hence, clauses in tenancy agreements are vital in the event of unruly renters. Landlords might also want to consider hiring a property-management company instead of liaising with tenants directly.

5. Non-liquid nature

Liquid assets, such as gold, silver, stocks or bonds, can be bought or sold for cash reasonably quickly. A property, however, is a non-liquid asset that can take months to secure a buyer, and even more months before any money is received.

This also means investing in the wrong properties is not easily undone, and it could take years before one sees capital appreciation.

For those looking at real estate as an investment, it is prudent to understand the risks involved in direct ownership versus real estate investment trusts or other indirect ownership vehicles. But when done correctly, the risks above can be mitigated or avoided altogether.

This article was written by Vigneswar Rajasurian of PropertyAdvisor.my, Malaysia’s most comprehensive source of property data, property analytics and insights.

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