Real Estate Sector in Malaysia: 15-20% Return on Investment

Interview with Previndran Singhe, CEO of Zerin Properties

Are you mainly involved in hotel sales?

It is basically, hotels, corporate transactions, sale of office buildings, malls, development of lands and relocation of companies to Malaysia. A lot of them are coming to Malaysia.

What are these different business models?

There are four – corporate hotels, corporate non-hotels, office leasing and luxury residential properties.

Let us start with the hotels. What is the output for this sector? Can you provide some insider information that people might be interested in?

Malaysia’s tourism market is huge. Every year we get around 26 to 27 million tourists from around the world. This has increased the demand for hotels. Kuala Lumpur being the capital city has attracted a lot of hotel investors and hotel brands. We have seen new brands coming in. The big players like the Marriotts are opening their Courtyards here; the Sheratons are opening their Four Points here. We see the Four Seasons coming in. The W has come in.

We see other big brands knocking on our door at the moment looking for opportunities to actually take up lucrative high end properties in Kuala Lumpur. The local authority already has a projection that by 2020, they will be needing 22,000 rooms and we are still short. We are probably at about 15,000 rooms at the moment. It’s a target that needs to be achieved in order to sustain the growth of tourism.

How do you help investors?

There are two parts to a business. We help the investors coming into Malaysia by helping them purchasing properties. We sold our Four Seasons Resort and Spa in Langkawi to Kingdom Hotels from the Middle East. We sold a couple of hotels to Indonesians. We actually source properties for them to purchase these properties. Secondly, of course is arranging land for purchase, so that they can build what they want.

Third is helping existing investors in Malaysia, who are looking for brands. So, we source hotel management companies for them. For example, we have closed a deal with Marriott Courtyard, one with Four Points by Sheraton and we are in the midst of closing a deal with a 5-star brand for S to come in to manage property for investors.

How important is it for these international brands to have a local partner and to get to know the market?

A lot these brands actually come in independently and they work as consultants, provide management services to the investors. It is not very important for them to have a partner, but I think they need to know the lay of the land and the workings of the system here, which is not very different from many parts of the world.

But a lot of these brands actually need to understand what’s happening here locally, who are the main players in the market, where is the growth in the market, which are the markets they should be able to go in.  

What is the output for the real estate market in Malaysia and in Kuala Lumpur in particular? What are some of the hotspots?

In terms of the hotel industry, I would say KLCC, the Golden Triangle is very hot. We see that area growing further with the new infrastructure improvements coming in. With the new MRT trains coming in, we see KLCC becoming a hot property. Demand for the office sector and for the hospitality sector will pick up.

There is also great demand for the hospitality sector in KL Sentral, it being the central station. There are a couple of hotels there and those hotels really run full at the moment. A newly opened hotel  already boasts high occupancy in KL Sentral. The general outlook of the market is very positive.  It’s not going great guns, but it has a positive trend. There is a strong corporate demand. It’s a fully functional market, a lot of liquidity in the market, commodities are still selling. Oil palm prices are still holding, though it’s not as high as it used to be. And that’s fueling the market.

Has this sector experienced any downturn as a result of recent events?

The hospitality sector is very sensitive to external events. Unfortunately, when MH370 happened, the shock that reverberated through the Chinese market was very powerful. The immediate impact was that hotels and markets that depended on the Chinese markets were affected. Occupancies dropped. But because of our good relationship and knowing that it is a third-party factor and it had nothing to do internally, markets have picked up again.

We do see strong improvements, occupancies for the markets focused on the Chinese market have picked up. With regard to the corporate investment market, we see very strong demand, mainly due to the government’s Economic Transformation Program. The government started this Program and it has already shown good results.

Programs like Invest KL, involving relocation of companies to Malaysia have very beneficial. The River of Life and the TRX projects have all propelled heavy investment and a lot of activity in the corporate market. 

Let’s talk about the rental – the office leasing.

That’s been a very good market. Due to the Economic Transformation Program, the markets are expanding; a lot of companies have expanded. There are two parts to a business, one is what schemes like Invest KL and the marketing of Malaysia have done as a result of which companies are relocating to Malaysia.

There is demand for office space there. Second is the local space, where we have MNCs and local companies or SMEs. Due to the strong demand in the market, the expansionary growth of the market, demand for office space has increased as well. So, we get calls from companies, who want to expand. It’s is a bit of a long term job, because they need to plan when and how fast they need to move.

Generally, the occupancy now is about 80%. We have seen the occupancies stabilizing, but we see a very strong demand. Notwithstanding, there is a lot of supply coming in as well. There are stocks. There is going to be extreme oversupply in the market. I don’t foresee that, because the supply is very structured. It is not coming in all at one go. I still see the demand being very strong. At the end of the day, even if all supply comes in and there is no demand, occupancies will still be very strong, somewhere around 75%.

At the same time the market will move from quantity to quality.

Yes, there is a very strong flight to quality. In the Golden Triangle, close to 45% of the buildings are more than 25 years old. A lot of tenants are moving from the old buildings to the newer buildings. So, what is happening to the older buildings?

If you have the opportunity, please visit the Bukit Bintang and you will see that some of the old office buildings are being converted to very nice boutique hotels. They are generally in good locations, probably not kept up with the times, but the optimum use at the moment is their use as boutique hotels and they are used very well. That’s why I am not very concerned about oversupply.

Please elaborate on your company’s plans of leasing? What services do you offer to the companies and what makes it different from other competitors in the market?

When it comes to office leasing, we are very detailed, the RFB process or how we qualify our customers is very specific. The most important asset to every company and every executive is time. Our approach to every potential tenant is “look, we need to save you time. This is how we qualify you.”

The single biggest difference between us and other companies is knowledge. The amount of research, the  knowledge we have on office buildings is how we can save you time. If you want 5000 to 50,000 sq feet in the city, we have it online, on our app, on our website. We can tell you immediately what’s available, what’s not. Our turnaround time is very fast.

And of course the clients appreciate this responsiveness?

Yes, it’s been fantastic. Some of the deals we have closed and are handling at the moment are with MNCs and local companies have been fantastic. That’s very good retention and referral businesses because they really appreciate what we do. We don’t’ want to waste time. We understand the importance of your time and our time. It works very well. So, it’s level of service and turnaround time that sets us apart.

The third line of your business is corporate transactions. Please elaborate.

Yes, corporate transactions in the likes of office buildings and malls. Malaysia has a very good investment regime. It allows foreigners to own properties freehold in Malaysia. This includes malls and office buildings as well. With that, we get a lot of interest from investors around the world. We have got Kuwaiti firms that own office buildings here, Indonesian companies that own malls here. We even managed to sell a mall to Lee Ka Shing, one of the richest men in the world. We are involved in all of this.

What is the investment potential and return investment that you get from owning real estate properties?

I think net yields generally vary between 5% to 8%.  But the targets are generally between 15% to 20%. That is very achievable.  You wouldn’t want to come with a lower IRR. You are putting in so much money, but the yields are between 5% to 8%.  Why the IRRs are high is because the capital growth is still very strong.

Economic growth is still pretty aggressive at 5.5%. So, there is a lot of growth in the market.

What is the current outlook for the economy and investment?

We are a net commodity, oil and food exporter. All this has been fuelling a lot of growth in the country. In addition, the government has introduced a lot of the economic transformation programs such as emphasizing on oil and gas, down south the RAPID project is already showing a lot of results. A lot of these projects are showing good results. My outlook for the economy for the next 3 to 5 years is that we can expect a lot of positive growth, there will still be a lot of opportunities. In terms of businesses and service sector, oil and gas and hospitality will be the main sectors that will show a lot of growth. For the real estate market, I think office buildings and malls and hotels are the three main focus areas.
There will definitely be shortage of industrial facilities and warehousing and logistics as we grow. As our business proximity to China grows, by virtue of them wanting to invest in our ports and our railways, we also see benefits in the warehousing and the logistics sector as well.

Have you seen a lot of activity in the sale of land?

Yes, to foreigners and to local people alike. More and more foreigners are coming in to build, instead of buying the end product, especially in the hospitality sector. In the office building sector, a lot of people want to buy and get the yield, but in the hospitality sector people want to build their own product. Even in the retail sector a lot of foreigners build their own product. Recently it was announced that Land Lease from Australia has come in with a big project in Kuala Lumpur as well.

So, the volume of these transactions has been increasing?

Yes, it has. In terms of overall volume, it’s fair to estimate that every field has a growth rate of somewhere between 5% to 10%.

What about real estate prices with regard to malls and hotels? Have they gone up significantly or are Malaysian property values low when compared to neighboring countries?

When you compare to neighboring countriess, there are a lot of opportunities. Especially with the high-speed rail project, which will connect Malaysia to Singapore. There are a lot of opportunities in Kuala Lumpur. Prices have been a bit stagnant. In fact growth has been only been 5% to 10%. There has not been a substantial growth in terms of office space and mall price prices for the past two years. Prior to that there was strong growth. But I reckon this was also because of the government putting in measures to cool down the property market to ensure that market growth is sustainable. Our central bank is very progressive. Our central bank governor has won numerous awards for managing the fiscal policies of the country. So, in Malaysia, the property prices never peak and never drop unnaturally. Our property price movements are always gradual. If there is a blip, it flattens and it goes up and it flattens. That’s what is happening now. We are on a flat period for generally the whole market because of the strong measures put in by the government. However, what we can observe is that good properties in good location are showing 5% to 10% growth, and that would at be the lowest.

Has Malaysia never experienced a property crash?

In the 1980s, it did experience it during the Asian financial crisis. But since then the central bank has brought in measures for systemic control, so there won’t be any collapses. It has also introduced responsible lending guidelines, so the quality of borrowers is very good.
To answer your question, I think since the Asian financial crisis we have not seen a crash in the property market. I think the population growth is very strong, demand is very strong. There is organic growth within Malaysia itself. And for the past two years the government has been controlling the prices. So, I just don’t see a crash coming any time soon.

What makes Malaysia a more popular destination for foreigners than Singapore and Indonesia?

As a place it is easy to live in. Number 2 is cost. Cost of living here is relatively cheaper. Thirdly, it is the fact that you can actually own freehold property while you are here doing business. It is another plus point for a lot of companies.

When you compare it with Southeast Asia, a lot of companies will look at Malaysia as on the same tier as Singapore, but cheaper. But our infrastructure is much better than our other neighboring countries. If we compare ourselves with Indonesia, Bangkok and Philippines, when it comes to the ease of doing business, we are still so much better. Of course Singapore is fantastic. Everything is great – ease of doing business, infrastructure, but there is a price to it. That price might impact some businesses. That’s why, we are on the same level as Singapore, but at a better cost.

What would be the natural positioning of Malaysia? Is it in between Singapore and say, Thailand?

Yes, that would be the natural positioning. That would be how I would market Malaysia. But that’s not what the government wants to look at, it wants to showcase us as an island on its own.  But yes, the natural position of Malaysia is as the second best city in Southeast Asia.

How do you view the government’s initiative to transform Malaysia from a middle income to a high income economy?

I think that is a very important initiative. It is a cultural and economic mind shift. So far the transformation programs have been working. It will be great if you get to speak to the two ministers in charge of this. The numbers speak for themselves. But from a perspective of a business person, we see the impact in the demand for business, the business growth. We are already experiencing the benefits of the transformation of the economic program. It’s done well. We would like to see more. But, I think it is great. If it wasn’t for this economic transformation program, we would probably be way behind. It’s a fantastic initiative.

What is the major challenge to the real estate market and to yourself?

The major challenge of the market is the tightening of the lending guidelines by the central bank. That has reduced transactions. But the demand is still high. People still want to buy, so they just need to find ways of funding themselves.

So funding is a big issue?

Funding is available, but the lending guidelines that the central bank imposed are strict. Earlier they could get a margin of 80%, now they only get a margin of 60%.

So, they have to invest the remaining 40% on their own?

Yes, but this challenge is mitigated by the fact that we are a high saving nation. The savings ratio of the country is fantastic. We do have provident funds. There are a lot of people dipping into this in order to invest in the real estate as well.

What are some of the most important reforms or regulations that are going to impact the market?

I think the biggest reform introduced by the government has been to make the government service more efficient. Previously we used to wait two weeks for a passport, now it’s a day. Even for foreign investment coming to set up a company, it is much faster. Everything is more efficient. Even in the real estate business transactions, previously, we had to wait very long for a transaction to take place. This delay has been shortened. This is the biggest reform yet. We would like to see some more changes. I think everybody wants to see everything on time, online, but that has been the biggest impact in terms of doing business in Malaysia. It has become more efficient.

Would you like to add anything else?

 I think the Economic Transformation Program has been fantastic. That has really positioned the country very well. If you have chance have a look at what is happening down south with RAPID, for the petroleum hub.  You can see how well the government has planned it. To have actually spent a lot of money and taken the initiative to build the petroleum hub is another core business for the country.

Could you tell us a little more about you and tell us what sets your company apart from other companies?

When I started this business, I made it very clear that I will have time for every client. That is exactly what I do. We like handling big deals, we have a big impact in the market, but we are a very small company. We are a boutique firm and so we can actually spend time with our clients and that is the big difference. You get my time and the efficiency of my top staff. This is the level of commitment that we have. Look at us like a private bank, where we actually look into your affairs personally.

Where does your clientele come from?

Generally, the bigger real estate companies in Malaysia have a strong link with the Middle East.

Can you elaborate more on that, because we are very present in the Middle East?

The Middle East has a strong affinity to Malaysia. There are a couple of Middle Eastern banks here, a lot of Middle Eastern investments here. The government is in partnership with the Kuwait Investment Authority and the Abu Dhabi Investment Authority. So they have got a big presence here. I think we do see more of that coming in, not necessarily at the Sovereign fund level, but at the private company levels. They come here to invest in real estate in general. That would be their main form of investment. Some of the hospitality companies have invested in real estate companies here. Albathia Group for one has invested in real estate companies. They do the development. 

What was the largest transaction you ever undertook?

My largest single transaction would be the Four Seasons Langkawi for 410 million US dollars with the Kingdom Hospitality from Saudi Arabia.

Were they happy about the transaction? What was the feedback?

They were very happy. The feedback was that it was one of the nicest hotels they have ever bought. It is providing them good returns. They are really enjoying it. You should go and have a look at the hotel, it is very nice.

Do you still see significant opportunities in the hotel industry? Is it not saturated? The occupancy rates are running at 80%. Is this continuing?

I think you need to decide on which hotels you want to invest in. Occupancies are flat, I agree, but I also do see growth. You should buy based on the future, potential growth of the country, the kind of tourism. There is a strong market for service apartments, for luxury hotels and for limited service hotels.