Commercial or residential?

If you had the means to invest in property, which would you choose — commercial or residential? "Both have their strengths and weaknesses," says Kumar Tharmalingam, regional president of FIABCI (International Real Estate Federation) Asia Pacific/chairman of Hall Chadwick Asia Sdn Bhd. Addressing this topic at The Edge Investment Forum on Real Estate 2008 themed "What's hot; what's not", Kumar says that it is a common dream of many Malaysians to own a house for the family and to have the opportunity to buy a commercial property as a personal office or as an added income for when they retire. But in today's market, the opportunity to own more than one form of real estate is not a luxury many people have.

Kumar presented several case studies to show returns on investment (ROI) in both types of properties.

Based on the Sri Hartamas property, a monthly interest of 8% or RM3,370 requires a salary of RM15,000 gross per month to support the loan. On the other hand, using Cheras as an example, a RM8,000 income is needed to qualify for a loan. This is based on the basic rule that 30% of one's gross income is the maximum that banks will accept for a loan. There are variations, of course, depending on one's family status. Traditionally, lower loans are given out when it is a family with a single income with one child, or double income with two children. All three properties also show that returns on total value is higher than current inflation which means that these are worthwhile investments.

Kumar points out that on paper, commercial properties make better investments but require a larger deposit. "Also, in commercial properties, ROIs have less leakages as tenants generally pay outgoings like all the renovations that need to be done," he adds.

The downside of investing in commercial properties, however, is that land values rise with inflation and buildings depreciate over time. "Multiple ownership has issues of management. So, over a longer period, landed property is better for the next generation. Remember that in the long run we all die anyway. So who should benefit?"

Kumar also cautions that one has to be aware of other factors when making investments. These include poor planning, poor quality developers and poor local councils. "They can make your prime location today look like secondary locations tomorrow," warns Kumar.

He says one should also watch how new developments affect transport, parking, public amenities and ownership changes. And never take your eye off the political and economic landscape, he adds.

According to Kumar, the Klang Valley remains an attractive investment area because it is well-connected and offers good infrastructure. "The quality of life is determined by proper infrastructure and the Klang Valley is well connected to airports and highways. Our medical facilities coupled with education, shopping and entertainment are other plus points that attract investors," he says.

"All the above demonstrate that the value of housing depends on "neighbourhood capital" that is invested by other parties. The more investment in such projects, the higher the values of real estate. Migration adds to this value and Klang Valley has the highest number of migrants per year," he adds.

As values escalate due to inflation and scarcity of land in the Klang Valley, Kumar says it is still possible to look at investments through partnerships or by private equity which allows potential investors to jointly purchase prime commercial real estate as a group, with an investment time frame to exit when the yields and the capital values have improved. - By The Edge Daily

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