Commercial vs residential real estate

Whatever the economic climate, be it a bull or bear market, there will always be opportunities for investors. When it comes to property investments, many prefer housing units. But what about commercial real estate? What are the questions we should be asking before we make the plunge into property investments?

"We think the commercial market is a more lucrative and stable market for investment even though the investment floor may start at a slightly higher level," Hectares & Stratas Management Company Sdn Bhd managing partner Stephen Tew tells City & Country.

He adds that good quality commercial real estate will generally not drop significantly in price during a downturn, but it will remain flat. Tew is currently holding a series of public seminars on "The secrets to success in investing in commercial real estate", targeted at first-time investors and focused mainly on the Klang Valley.

Comparing the advantages of commercial real estate versus residential real estate, Tew says there is a longer tenancy period for commercial real estate, which translates to a shorter vacancy period, less refurbishment cost, less commissions payable and less management time required.

He adds that deposits for rentals are also better as the market practice for rental deposits is three months plus a month's advance. "When there is less supply in the market, it could mean higher capital appreciation," he says.When it comes to commercial real estate, the main categories to consider investing in are strata offices, shops houses, strata retail and office units.And if one has very deep pockets, one could consider buying commercial land, shopping complexes and, ultimately, hotels, he says.

There are numerous factors to consider before one invests in a commercial property. Questions to ask include:
* How much is one willing to invest?
* Does the property need refurbishment?
* Are you buying for speculative purposes?
* How far is the property from where an investor is based?
For example, if the investor is from the Klang Valley, is he willing to invest in properties as far as Johor?

Hot spots
Tew, who is also a past president of The Malaysian Institute of Estate Agents (MIEA), favours real estates located towards the southwest of the Kuala Lumpur city centre including Bangsar, Damansara Heights, Sri Hartamas, Petaling Jaya, Subang Jaya and towards the east of Kuala Lumpur in Ampang. To the south of Kuala Lumpur are some areas along Cheras to Kajang. "Any further than that, it may not be as investable. Not to say it is not good, but the market gets smaller. Section 9 in Shah Alam, for example, is very good and so are certain areas near Klang town," he adds.

Tew highlights four main areas he considers to be good for commercial real estate investments — Bukit Bintang/Imbi in Kuala Lumpur, SS2 in Petaling Jaya, Taipan in Subang Jaya and the Telawi area in Bangsar. He says Bukit Bintang/Imbi caters to the tourism market, while SS2 enjoys good traffic and Taipan has a young and vibrant market.

"Telawi is in a high-end enclave and while there may have been changes there in recent years, it is still a good investment area. In good locations, inflation will do the job for you," Tew reasons.

Two decades ago, he says, standard shops in SS2 were valued at around RM700,000 and today, they are being transacted for RM3.2 million to RM3.5 million. Shops in Taipan are now being transacted at RM1.5 million to RM2 million while in the Telawi area in Bangsar (depending on which street), they are going for RM4.5 million to RM5 million.

Tew adds that 20 years ago, shops in Bukit Bintang/Imbi were transacted at RM1.3 million to RM1.5 million but today, they are going for RM6 million to RM7 million, which is about a 500% increase.

As for buying properties directly from developers (primary market) or completed units (secondary market), there are advantages and disadvantages for both, he says. The advantages of buying "off the plan" (primary market) properties are that the properties are usually cheaper, brand new and marginally lower on cash requirements while the disadvantages include the risk of the project being abandoned, delays in completion, difficulty in ascertaining what you are buying, and once completed, hundreds of buyers could be getting their keys at the same time (tenancy issues).

On the other hand, buying completed units allow one to analyse the surroundings. The market is also current and there is a higher possibility of immediate income as the property might already be tenanted and "what you see is what you get".Auction properties, says Tew, are not for everybody as there are many factors one has be consider and be aware of.

He believes there are always opportunities for investments as there will always be sellers in good or bad times. The current economic slowdown, says Tew, is not as bad as some predict it to be. He has reservations over reports that Klang Valley would be badly affected by the global economic downturn as "we are still enjoying full employment". He also believes that domestic consumption will be steady due to the country's positive population growth and strong middle-income segment

--Written By Rosalynn Poh, 21-Jan-2009 (www.theedgemalaysia.com)