Property has long been a favourable investment opportunity for many in Malaysia. But like any investment, real estate investment does not come without its risks.
Return on investment is never truly guaranteed, meaning that understanding the types of investment risks in the market is crucial to assessing whether this is the right opportunity for you.
Property investing in Malaysia has created some impressive success stories over recent decades, with a market that’s broadly offered favourable opportunities, particularly in the resilient residential sector.
Buying investment property is no sure thing however, so in order to help you understand the challenges, we’ve put together some property investment advice and potential risks for you to look out for.
Without further ado, here are the 5 risks that you should be aware of before entering the property market.
1. House prices are impacted by complex factors
While some may view property investment as a sure-fire success story, there are multiple factors which impact whether this will be the case. Understanding these risks is crucial but often complex.
Location is a key component of this. Take a single-storey terraced house in Bangsar, with an average house price of RM375,000 in 2001.
Thanks to growing interest in the area, that same house would be valued at approximately RM1.27 million in 2017, a capital appreciation of 239%.
This kind of return may make you enthusiastic about investment in property, but the same return can’t be guaranteed in another area. Do your research and understand that risks vary from location to location.
Property prices are also subject to both economic and political shocks. While the circumstances may show a favourable environment for your investment, you need to take into account wider investment risks when considering your opportunity.
That means understanding your financial capacity to cope with shocks if they occur.
2. Outlook changes from year to year
Historical property prices can be a good indicator of return in a particular area, but it’s important not to fall into the trap of assuming that trend will continue.
Property investment in 2019 might look a great deal different than it did in 2011, when Malaysia’s property sector was enjoying a period of substantial growth.
Property prices tend to travel in cycles, with Malaysia currently experiencing a mild downturn.
The current residential landscape is influenced by a significant ‘ property overhang ’ – essentially when houses have been completed but remain unsold for more than 9 months.
These cycles are another risk to consider when assessing your exposure to the market.
3. Rental returns can be tricky
Rental return is an important part of the equation when it comes to assessing the financial viability of many property investments.
According to the Malaysian Institute of Estate Agents (MIEA), properties in Klang Valley could expect an average annual rental return of around 3%. But an average is not a guarantee.
Finding tenants is one particular challenge, and you should factor in the risks of a period of zero rental return on your cash flow.
Your rental property may still enjoy capital appreciation without a tenant, but it won’t assist your short-term cash flow if nobody is paying the rent.
Repairs and unforeseen costs to a property should also be considered, something that can significantly offset the value returned by a rental property for a given period.
You need to factor these potential risks into your cash flow when thinking about investing.
4. Loan values impact your economics
This is a particularly important risk for buy-to-let investors looking to take loans to cover a property purchase.
The same economic factors which impact your considerations about property investment and rental returns also impact your loans.
If you’ve taken out an interest variable loan to purchase property, you need to be aware of the risk that the repayments on that loan could increase above the return you gain on your property.
Always consider the potential for interest rates to change when calculating the economics of taking out a loan to purchase a property.
5. Your capital is tied up
Property is not often an easily divested asset, and is generally considered a long-term investment, with minimum five-year time horizons often cited for significant capital return.
If you’re seeking a quick return on investment, or envision a situation where your financial circumstances require an immediate liquidation of your assets, you may find your capital locked into a property and exposed to the challenges of the current market environment.
Looking to explore your own property investment opportunities? Take a look at PropertyGuru’s range of services to see how we can help.
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