By Vigneswar Rajasurian
Terrace houses have been the dominant choice of Malaysian buyers in the past five years, according to the Q1 Property Market Update by PropertyGuru DataSense.
The market update showed landed properties dominated investor transactions in the Klang Valley and Johor but placed second in Penang behind flats.
The preference for landed properties in investor transactions poses a potent question – what is the investment proposition of high-rises and how does it stack up when compared against landed properties?
The advantages and disadvantages of investing in landed properties versus high-rises are discussed below.
Better capital appreciation for landed properties
Landed properties are a safer bet against depreciation as the value is attached to the land. Hence, holding on to landed properties in the long-term often translates to much higher resale value.
An exception applies however to leasehold landed properties that could deflate or stagnate towards the end of the lease.
Non-strata landed properties give investors added flexibility. Investors may choose to modify the façade to be more appealing, extend the built-up area and add more rooms to maximise rental returns (subject to local council permits).
The biggest drawback for landed properties in the city centre is the expensive purchase price. Investors may opt for more affordable landed properties in the outskirts or new townships but it often comes at the expense of better rental demand and capital appreciation.
Moreover, rental returns of landed properties in the city often do not justify the higher purchase price – leaving investors with negative cash flow when paying off monthly loan repayments.
Since individual-titled landed properties do not require a monthly maintenance fee or sinking fund paid to a management corporation, investors are also responsible for the upkeep of the property. These may include costly repairs such as roofing, rewiring or repainting of the façade that eat into savings.
Landed properties may also lose out to high-rises in terms of security, however gated and guarded communities are soon becoming the norm.
Cheaper prices and better rentals rates for high-rises
To point out the obvious, high-rises are cheaper to purchase and typically offer a variety of layout types at differing prices within the same building.
What may be less obvious to new investors is that high-rises can command better rental rates than landed properties thanks to common facilities and better security.
Hence, the lower purchase price and higher rental rate translate to better rental yield and can generate positive cash flow for investors each month.
Investors can also capitalise on the added convenience some high-rises offer.
From transit-oriented developments (TOD) with direct connections to rail networks or integrated commercial zones within the development that offer more amenities, these factors appeal to prospective tenants.
However, poor management or non-payment of maintenance fees by owners can ruin high rises. Neglect, abuse of facilities and increasing cost of maintenance as the building ages can lead to reduced demand and individual owners struggling to rent or sell off their units.
Investors should examine the conditions of common areas and general upkeep of the building before purchasing a high-rise in the sub-sale market.
While high-rises do also enjoy capital appreciation, at a certain point as the building ages, the growth in value may begin to stagnate or deflate unlike landed properties where value of the land continues to increase.
Bear in mind, high-rise properties with commercial titles will also incur higher utilities bill and buyers may only be able to secure an 85% loan margin.
Long-term and short-term objectives
Location, type of title, nearby amenities and public infrastructure are among the primary considerations when purchasing any property, be it landed or high rise.
Investors looking to hold on to properties in the long-term as an appreciating asset may find landed properties best meet their objectives.
However, those focused on a more affordable investment with moderate capital appreciation and aim to earn the best rental returns in the interim may instead wish to invest in high rise properties.