COMPARATIVE INVESTMENT PERFORMANCE OF CONDOMINIUMS AND SERVICE APARTMENTS IN KUALA LUMPUR

EDDY SYAMSINOOR BIN MARSHAM

VALUATION & PROPERTY SERVICES DEPARTMENT JOHORE, MINISTRY OF FINANCE MALAYSIA LEVEL 7 & 8, PUSAT PROFESSIONAL JALAN DATO SYED MOHD MUFTI 80000 JOHOR BAHRU JOHOR DARUL TAKZIM TEL: 607-2239933, FAX: 607-2234266

ABSTRACT This paper examines the investment performance of condominium and service apartments in Kuala Lumpur. Due to market demand for both properties, this paper will explore the different between this property in term of outgoing, demand, return and legislation issue. Yield of condominiums and serviced apartment was constructed by using a simple and universal measure of investments. 1.0 INTRODUCTION

Living in service apartment or condominium becoming a trendy nowadays, going by the number of new launches underway and planned within the Kuala Lumpur city centre and its peripherals and they have reportedly turned in pretty good sales. The strong take-up of these two types of property show there is an opportunity to invest either in condominium or service apartment. The first serviced apartment development in Kuala Lumpur was MiCasa Hotel Apartment by Tan & Tan Development Sdn Bhd, which was launched in the late 1980s. It offered 250 apartment units for rent on a short- to long-term basis (daily, weekly or monthly), Condominiums, on the other hand, first come into the market with the development of the Desa Kudalari apartments in Ampang in 1976. In general, the purpose of this study will be to explore the relationship between house attributes and house prices. Specifically this paper will attempt to investigate the profitability between two types of houses, namely condominium and service apartment.

2.0

STATEMENT OF PROBLEM

The demand for serviced apartments is mixed with the demand for condominiums as the majority of purchasers do not see the difference in these two types of properties. Having said that, there are some buyers who see the difference and have raised concerns about investing in serviced apartments, particularly as these developments are not governed by the HDA.

Location is often cited as the main criterion of a residential property investment. But even before one looks at where to buy, a bigger question is what to buy. Should one invest in a condominium or a serviced apartment? In general, the purpose of this study will be to explore the relationship between house attributes and house prices. Specifically this paper will attempt to investigate as below:i. ii. iii. Is there a difference between serviced apartment and condominium? Which of these properties give the better return? Serviced apartments are they hotel-like properties for long-staying guests or condominiums with a commercial title? 3.0 LITERATURE REVIEW

Baum. A (1984) Investment can be described as placing capital at risk in return for a reward. The amount of the reward depends upon market conditions. Demand and supply interact to produce price. For a given investment opportunity, demand will influence price. Demand is the product of the collective purchasing power and psychology is their perception of the features of the investment opportunity. The essential feature of investment is giving up the immediate use of capital. Simply for this reason, a positive return would be required in normal circumstance. The amount of that return required by potential purchase of an investment will be determined by perception of the following: a) Risk; b) Liquidity; c) Transfer cost; d) Holding cost; e) Divisibility and accessibility; f) Ownership Spin-Offs; and g) Income and capital growth. The golden rule in property investing has always been location, location and location. Indeed, the key to ensuring good returns from property investment in the long run is to get the location factor right.

4.0

ISSUES TO BE STUDIED

What should investors look for when assessing a condominium or service apartment opportunity? i. ii. iii. iv. Outgoing Value & Return Demand Legislation

5.0 5.1

SCOPE OF RESEARCH Location The focus of the study is condominiums and services apartment in Bandar Kuala Lumpur, Mukim Batu and Mukim Kuala Lumpur due to availability of data (Appendix 1 provides a map of the different mukim in the Federal Territory of Kuala Lumpur).

5.2

Time Factor As there is no significant change show on the transaction within 2004 2005, data will be based on transaction of selected condominiums and serviced apartments in Kuala Lumpur in 2004-2005. Rental of selected condominiums and serviced apartments in Kuala Lumpur are also based on transaction in 2004 2005.

5.3

Serviced Apartment And Condominium The focus of serviced apartment is on serviced apartment unit that owned by individual private investors. The condominium schemes are selected base on the condominium that are within the vicinity of serviced apartment that use in this research.

6.0 6.1

DEFINATION Defination Of Condominium Condominium derives from the Latin word dominion mean control and the word con mean one or more persons. It thus means the joint control-control of property by one or more persons.

6.2

Defination Of Services Apartment There is no standard definition of a serviced apartment, it is typically considered to provide short-term, self-contained accommodation with additional services. Generally the apartment will include a small kitchen or kitchenette (fully equipped), with a living room in additional to the bedroom(s) or a studio bedroom. However, the concept of serviced apartment has evolved lately to become more residential in nature, catering to local demand instead of business travelers. Hence, many serviced apartment projects in our market today are not purpose-built serviced apartment and operated by hotelier such as The Ascott, Lanson Place and Micasa Serviced Apartments. Instead, developers have adopted the concept of serviced apartment into their residential condominium development for land that is zoned for commercial development to capture the market segment of condominium dwellers.

6.3

Defination Of Housing Accomodation Under the Housing Development (Control and Licensing)Act 1966, Housing Accommodation includes any building, tenement or messuage which is wholly or principally constructed, adapted or intended for human habitation and partly for business premises but does not include an accommodation erected on any land designated for or approved for commercial development.

7.0

METHODOLOGY

This section will explain the data, their sources, and the variables that will be used in this study. 7.1 Data to be collected i. ii. iii. 7.2 Transaction of selected condominiums and serviced apartments in Kuala Lumpur from 2004-2005 Rental of selected condominiums and serviced apartments in Kuala Lumpur from 2004 2005 Facilities and service provided by condominiums and serviced apartments

Instruments to be use Form Table Chart

A simple and universal measure of investments is the relationship between income and price. In its most simple and popular form this becomes Initial income = Yield Price Initial income is used simply because income may vary over time. The initial yield conveniently ignores value changes over time, whether caused by income or capital growth, and is a single measure of a complex amalgam of the advantages and disadvantages of an investment. By making subjective adjustments to initial yield it is possible to construct a yield which adequately compensates for the package of advantages and disadvantages which characterize an investment. In order to attempt such a process, however, a starting point is necessary. 7.3 Observation i. ii. Take up rate for new launch condominiums and serviced apartments Numbers of condominiums and serviced apartments in Kuala Lumpur

8.0 8.1

DATA ANALYSIS Outgoing

Table 8.1 below shows the comparison outgoing of condominium and serviced apartment. Table 8.1 Outgoing Of Condominium And Serviced Apartment ISSUES Assessment Tax Utility Rates CONDOMINIUM Based on residential rate 6% from annual value (DBKL) Based on residential rate Syabas Tariff Tariff Price per m3 (RM) 0-20 m3 21-35 m3 35 m3 and above TNB Tariff Tariff Price per kWh (sen) 1-200 kWh 201-1,000 kWh 1,001 kWh Quit Rent 21.80 28.90 31.20 Based on commercial rate For town area RM4.00 smp RM3.00 Minimum Charge (RM) For all kWh 32.30 0.57 0.91 1.70 RM5.00 Charge (RM) 0 - 35 m3 35 m3 and above SERVICE APARTMENT Based on commercial rate 12% from annual value (DBKL) Based on commercial rate Syabas Tariff Minimum Tariff Price per m3 (RM) 1.80 1.92 Minimum Charge (RM)

RM30.00

TNB Tariff Tariff Price per kWh (sen) Minimum Charge (RM) RM7.20

onward Based on residential rate For town area RM0.65 smp

From the table above shows that assessment tax, utility rate and quit rent of serviced apartment are based on commercial rate, which are higher than residential rate. For those who intend to live in serviced apartment they should consider these. 8.2 Demand

Table 8.2 below shows the existing stock of condominium and serviced apartment in Kuala Lumpur in 2005 Table 8.2 Mukim : 1. Section 1- 100, 2. Ampang, Batu, 4. Cheras, 5. Hulu Kelang, EXISTING STOCK OF3.CONDOMINIUM AND 6. Kuala Lumpur, 7. Petaling, 8. Setapak

SERVICES APARMENT
Condominium/ Apartment Serviced Apartment

40,000 30,000 20,000 10,000 0 1 2 3 4 5 6 7 8 MUKIM

Table 8.3 below show the number of overhang condominium/apartment & serviced apartment units at Kuala Lumpur in Q2 2005 that unsold for more than 24 months.

Table 8.3 Number Of Overhang Condominium/Apartment & Serviced Apartment At Kuala Lumpur In Q2 2005 Existing CONDOMINIUM/ APARTMENT SERVICED APARTMENT Stock 101,001 4,422 COMPLETED Unsold Percentage 134 0 0.13 0.00 UNDER CONSTRUCTION Stock Unsold Percentage 25,538 2,975 658 80 2.58 2.69

JUMLAH

The table above show the strong demand of condominiums and serviced apartment in Kuala Lumpur. The unsold unit is below than 3% from the stock available. 8.3 Value and return

Table 8.4 8.5 below shows the price and rental of condominium and serviced apartment from various areas in Kuala Lumpur in 2004 2005. Table 8.4 Condominiums Name Of Condominium Almaspuri, Mont Kiara RM680,000 (RM4,595 smp) RM6,000/ (RM41 smp) Price Monthly Rental Yield (%) 10.6 Size 148 s.m Remarks

Mont Kiara Astana

RM835,000 RM1,000,000 (RM5,387RM6,452 smp)

RM4,000 RM6,000 (RM26 RM39 smp)

7.2

Size 155 s.m

Mont Kiara Palma

RM400,000 RM500,000 (RM3,361 RM4,202 smp)

RM3,000 RM4,500 (RM25 RM38 smp)

9.5

Size 119 s.m

Mont Kiara Pelangi

RM500,000 RM580,000 (RM3,876 RM4,496 smp)

RM2,600 RM3,500 (RM20 RM27 smp)

8.9

Size 129 s.m

Puncak Prima Sri Hartamas Villa Ampang

RM400,000 (RM3,361 smp) RM420,000 (RM3,590 smp)

RM2,600 (RM22 smp) RM2,500 (RM21 smp)

7.8

Size 119 s.m

7.1

Size 117 s.m

Bistari Condo

RM285,000 RM320,000 (RM2,336 RM2,623 smp)

RM1,900 RM2,500 (RM16 RM20 smp)

8.5

Size 122 s.m

Angkasa Impian

RM360,000 -RM381,300 (RM2,727 RM2,889 smp)

RM2,800 - RM3,500 (RM21 RM27 smp)

9.6

Size - 132 s.m

Table 8.5 Serviced Apartment Name Of Serviced Apartment Berjaya Times Square Sucasa Apartment Plaza Damas 38 Bidara Price RM720,000 (RM7,236 smp) RM365,000 (RM4,148 smp) RM165,000 (RM4,342 smp) RM300,000 (RM4,545 smp) Monthly Rental RM5,700 (RM57 smp) RM2,600 (RM30 smp) RM1,200 (RM32 smp) RM2,150 (RM33 smp) 8.6 8.7 8.6 Size 88 s.m Size 38 s.m Size 66 s.m Yield 9.5 Remarks Size 99.5 s.m

Table 8.6 below shows guaranteed return offer by the new serviced apartment in Bandar Kuala Lumpur. Table 8.6 Guaranteed Return Name Of Serviced Apartment Menara PGRM Services Suites Golden Avenue Guaranteed Return 6% 5% Term 2 years 2 years Remark No service charge Free 5 days stay per annum From the table above shows the range of yields between 7.1% 10.6% for condominium and 8.6% - 9.5% for serviced apartment. This finding show that the yields of condominium and service apartment are not much different.

10

8.4

Legislation

Table 8.7 below shows the different of condominium and serviced apartment in term of legislation issue. Table 8.7 Legislation issue ISSUES Title Legislation CONDOMINIUM Residential Govern by Housing Development (Control & Licensing) Act,1966 SERVICE APARTMENT Commercial Not govern by Housing Development (Control & Licensing) Act,1966 because it is not fall under definition of housing accommodation in the act. From the table above show serviced apartment is not govern by Housing Development (Control & Licensing) Act, 1966, if anything happen to the project say abandoned, the only course of action for the buyers is the courts. They cannot bring the matter to the Housing Tribunal..

9.0

CONCLUSION

First and foremost, we have to distinguish the fact that not all condos/serviced apartment are the same, and this analysis will not apply across the board. Findings of the above study show that the yields of serviced apartment and condominium are about the same. Location, tenant profile, maintenance and a developer's reputation and commitment to re-invest are some of the many factors that help shape capital values and rental yields. From the finding above serviced apartment can be define as condominium sitting commercial land. For investor who are intend to invest on serviced apartment the should consider about utility rate, assessment tax and quit rent that are based on commercial rate and beside that serviced apartment is not govern by Housing Development (Control and Licensing) Act 1966.

11

The question of which is better depends on a myriad of personal preferences. Today, a home is not simply a roof over one's head, but a total lifestyle experience best typified by condos or serviced apartment that offer comprehensive recreational facilities and most importantly, security. The attraction of serviced apartments is that they offer the comfort and facilities of hotel, with the privacy and facilities of home. As in the star on 26 July 2004, why do developers go for serviced apartments? The main reason is to cuts down on red tape, save time and cost.

10.0

SUGGESTION

For those who are intend to invest in service apartment that promise guarantee return, ther are some point to consider: Income streams can be variable and costs can be significant - while the figures may stack up during the research stage the ongoing success is dependent upon the quality of the management structure. As management rights can be bought and sold on the open market the management of your asset can be inconsistent. Say if the guaranteed rental is 7% of the purchase price for the next three years, calculate the amount that the vendor would have to put aside for all the unit owners. Check with the developer where the trust fund/security is to guarantee such a scheme? On top of the possible pitfalls of buying a yet-to-be built property, wherever possible, evaluate the risks and returns of each property by an independent research report. Don't forget to include the payments that you would have to make - monthly service charges, sinking fund, insurance, administration fees, legal fees etc - before calculate your returns. As the lease period ends, the investor should be able to support their mortgage repayments if there is no income from the rentals. Consider that the utility rates, assessment tax and quit rent are based on commercial rates, which are higher than residential apartments. If the investor wish to sell their apartment, would they be able to find a buyer?

11.0

Acknowledgements

12

I would like to thank my wife Pn Roslina Ismail, all the staff Valuation & Property Services Department Wilayah Persekutuan Kuala Lumpur and validation panel of Interest Group for their advise and assistance in coming up this paper.

12.0 1.

REFERENCES Alan Leong (2000), Guide To Condominiums And Apartment Valley. Kuala Lumpur, Leeds Publications. In The Klang

2.

Baum.

A.

(1984),

Real

Estate

Investment

Analysis

And

Performance

Measurement. 3. Chern Rui-Yee (1985), Condominiums and Apartment : An Overview on The Rental Market, Housing & Property Digest Vol 4 18: 159-170 4. Hasmah Abu Zarin (1996). Factors Influencing Demand For Up-Market Condominium In Kuala Lumpur. Kuala Lumpur, The Surveyor.

13

5. 6.

Jones Lang Lasalle Hotels, Issue 12, September 2002. Serviced Apartment. Laws Of Malaysia, Housing Development (Control And Licensing) Act 1966 (Act 118) & Regulations. Kuala Lumpur, International Law Book Services.

7. 8. 9.

Property Market Report 2004, 2005. Residential Stock Report, Napic, VPSD (Q2, 2005) Tunku Halim (1996), Condominiums, Purchase, Investment and Habitat. Selangor, PelndukPublications.

14