Monday, July 09, 2007

Asian Real Estate

Or Why Malaysian Real Estate Is So Cheap

The Star highlighted the relative property values in the region. Basically the entire series of articles was to highlight how "cheap" Malaysian property prices were. As higher end prices zoomed to stratosphere in Singapore, there was some spillover into KL and Penang high end as well. In the table compiled by JLW and OSK on regional comparisons among luxury condos are the current average psf in ringgit (usd):

Kuala Lumpur 560 (164)
Singapore 4,616 (1,357)
Bangkok 714 (210)
Jakarta 425 (125)
Hong Kong 5,563 (1,636)
Shanghai 1,225 (360)
Beijing 646 (190)

What would be useful is to look at GDP per capita to get a gauge on income per person. Its not exacting but a good indicator (in USD).

Malaysia 10,400
Singapore 29,700
Thailand 8,300
Indonesia 3,700
HK 36,800
China 6,200

Now it would be easy to look at GDP per capita in usd / psf in usd to get some interesting ratios:

KL 63.4x
Singapore 21.9x
Thailand 39.5xx
Indonesia 29.6x
HK 22.5x
Shanghai 17.2x
Beijing 32.6x

The lower the ratio, the more unaffordable it would be. Obviously, KL sticks out like a sore thumb, its "cheap" and "affordable" no matter how you cut it. What's interesting is how expensive and unaffordable the luxury condos are in "poorer nations". Which is to say when it gets to highly unaffordable levels, safe to say that the bulk of purchasing involved foreign buying and/or speculation.

Still, why is Malaysia so cheap la? Is this the best buy story for the decade? Well the short answer is NO. The long answer is also NO. And here's why:

KL real estate is one of the cheapest in Asia - another reason why 5 star hotels in Malaysia are also among the cheapest in the world. One can understand if Malaysian real estate values lag those of more developed nations such as Singapore, Hong Kong, Seoul or Tokyo... but KL even lags Indian cities, Bangkok and certain places in Jakarta. We can understand why Shanghai or Beijing would be more expensive too compared to KL - population, out-sourcing and investment.

A "poor" country can have high city real estate values - hence a big factor is city population. You need to cram a lot of people into a tiny space, then real estate values will soar - take New York, Tokyo, HK, Singapore, Bangkok, Shanghai, Shenzhen, Jakarta, Karachi, Mumbai ... many are in the region of 10-30 million city population. KL has about 5 million but it is also quite spread out. So, another factor is it has to be CRAMPED - or rather business activity CBD has to be cramped. If you want KL prices or Penang prices to shoot higher, ask the politicians to double the population of KL or Penang. We have to have people bumping into each other all the time while walking on sidewalks, then our property prices will surge. We have to double the time we spend travelling to work, then our property prices will surge. Good tradeoff?

Another factor for high real estate values is whether you are a financial center. Is your city a crucial outpost to doing business in the region - HK, Shanghai, Singapore, Tokyo, New York, etc... KL is neither here nor there. What about Bangkok? It certainly is not financial center. Well, it has a super duper population (have you seen the weekend exodus from Bangkok every Friday). Even though it is not a financial center, it is the center for a country with a very decent population size. If your capital city is the center of a country with a decent population, you can be assured of good commercial real estate values - e.g. Thailand, Taiwan, India, South Korea. Decent population size means critical mass achieved in many areas, esp domestic demand. We need Malaysia to move quickly from 26 million to at least 60 million. Mahathir was right after all - throw away your condoms and let's procreate like there is no tomorrow, so that we can have a better tomorrow!

Then you can have some good ripple on effect on real estate values. If you are not a financial center, you can still command high rates if high-value services businesses are aplenty. Hence Singapore's commercial real estate will have a very strong long term uptrend as it does not depend on its reputation as a financial center/port/MICE biz like HK but moves higher up the value-added curve by encouraging designers/inventors in animation, biotech, education, etc. Does KL look like a city with good high value added industries? Hmmm... I can think of Islamic Finance as the one area where we could adopt the "blue ocean strategy". Our MSC achieved only 10% of what we set out to do. Our main revenue comes from oil & gas, plantations and other soft commodities - they are not high value add industries with the exception of oil & gas.

Good amenities and public infrastructure would not be a bad thing, look at Tokyo, HK, Singapore or even New York - but infra is not that crucial in giving higher real estate values. If you look at the capital cities of the high GDP per capita countries such as Oslo, Stockholm, Helsinki, ..etc.. you will find that good infra is a good thing but does not necessarily translate to stratospheric real estate prices. Infra wise, KL is better than Bangkok, Jakarta, Mumbai but we still lag their real estate prices.

Lack of good quality commercial space will also spruce up real estate values. Just look at Indian cities, cities in Vietnam or even Jakarta. We in KL, unfortunately builds okay buildings cheaply as land is cheap and plentiful. I mean, KL commercial just keeps getting drawn wider and wider. First the CBD, then the city kind of move wider to include PJ, then it moves out to Shah Alam, now Klang. Too much cheap flat land. Now, we are extending into IDR as well. The picture is so clear. Commercial real estate value in Malaysia will lag the rest of Asia, even some cities in Vietnam (my gawd), and it will not change until the fundamentals change.

Foreign investors and/or foreign speculation can drive real estate values up. But they need to be convinced of more upside. Just consider the factors cited, Malaysia does not look like having good upside or remotely standing a chance of catching up to their neighbours, so why would foreign property investors dive in? We may see some interest in IDR as there could be some decent upside in store but its limited at best.

At the end of the day, cheap real estate is not a bad thing. It improves our affordability. It helps to attract FDI in particularly for industries where land is a big cost factor. There is NO Asia average median real estate pricing where we all gravitate to. We will stay where we are in the pricing curve unless one or more of the factors above changes significantly for Malaysia. Short answer NO, long answer also NO.


sopskysalat said...
This comment has been removed by the author.
sopskysalat said...

good one dali! you open my eyes further to the underlying mechanism of property prices. thanks!

My family has a house in Kampar, Perak. It is more of value destruction for us... But if to see from the perspective of commoner, not too bad afterall, housing are affordable.

hellthy correction said...

public fareast property and resorts fund.....wise to invest in dali? i understand its a new asset class on its own.

Anonymous said...

I like this blog is fantastic, is really good written. Congratulation. Do you want to see something more? Read it...:Great investment opportunity in Costa Rica: beach real estate, condo, condos for sale. Visit us for more info at:

Asset Class Returns In The USA

The brilliant snapshot of asset class returns compiled by Blackrock makes for interesting analysis. See if you can deduce any pointers from...