Property investment in Malaysia is divided into four parts. According to the director of B.I.G Group of Companies Tan Hwa Chuan, a typical property investment roadmap in our country starts with condominiums and then it continues to linked houses before property investor start investing in commercial buildings such as shops or offices. As a matter of fact, property investors will just stop here.
Tan states, “They (investors) will give due consideration to buying and investing into more condominiums, linked houses, shops and offices but never in land. If I may qualify this, only investors with a higher appetite for risks and returns will venture into the next and big league – LAND.”
In his opinion, raw land seems to be one of the most overlooked investments and often taken for granted. “It may be due to the misconception that land investment is a game that only belongs to the big players – the tycoons, large corporations or property developers,” Tan says.
However, little that Malaysian investors know that land is such a profitable investment. In his book, Make Big Money via Land, Tan explains three benefits of land investments:
- The number of available raw land is very limited. Whatever land we have on earth is exactly what we have left. To increase, we can only embark on reclamation, which is relatively big and costly undertaking.
- We cannot deny the fact that the population in every country, including Malaysia, is increasing. According to the census done by Malaysia’s Department of Statistics, the nation’s population stood at 28.6 million in 2010 and is projected to increase by 10 million (35.0%) to 38.6 million in 2040. As population increases, so do developments.
- Property developers are constantly on a hunt for the next best area to build a township to house the increasing population. Depending on the location of the land you owned and its proximity to the development site, the value of the land has the potential to increase exponentially.
- Financial expert KC Lau, meanwhile, when asked about the benefits of land investment, elaborates further by mentioning these benefits of land investment:
- Less risk – imagine your land got hit by a bomb, it is still a land anyway.
- Greater flexibility for maximizing value – you can plan your dream project on it.
- Land is a finite resource – supply never increase (unless reclaimed from sea), but population is going up!
- For flipping, there is literally zero maintenance required, compared to a property.
Tan however thinks that the procedure of land investment will make it hard for buyer to flip it. He said that the methods are important in “analysing a piece of land for development, the methods in conducting feasibility study and how to ascertain a good return on investment.” The first and foremost part to examine even before we learn the method is the project life cycle in the world of property development.
PROJECT LIFE CIRCLE
Tan claims that “every step in the cycle is just as crucial to the viability of the project.” The steps in the project life cycle are illustrated in Figure 1.
The most important step is the feasibility study. It kickstarts the journey of land investment. This first step is crucial as it helps us determine if the land is worth investing. At this step, lands are evaluated based on size, numbers, price, location, type and the various surrounding factors.
FEASIBILITY STUDY FRAMEWORK CHECKLIST
“In my learning years and right up to my development experience, I have come across quite a few feasibility study methods being used by different people and companies. Every model has its own strengths. Sometimes it is also due to familiarity. They however share a common ground and I’ve compiled them as my personal 10 Level Feasibility Study Framework. I have used this method in all my projects successfully and they have proven to be effective.” Tan adds.
The 10 Levels are:
In Tan’s opinion, this framework can help sellers and buyers to seal an excellent deal. By following this framework, we can save a lot of time and avoid either the sellers or buyers backing off. We must meet the sellers in person and ask for exclusive on the land, subject to our due diligence report.
To do a thorough study of this framework is going to take one to two weeks; hence starting with the 1:10 rule of thumb can definitely help us save time.
“With 10 acres, then with the rule of thumb you can get the GDV of RM100mil. But your cost is not more than RM20mil. If the agent says this land is RM30 mil, you know already that there’s no need to see the land. There is no need of site visit and basic data study, so you already save some time there.”
AMALGAMATION & CONVERSION
According to JP Land Sdn Bhd, amalgamation is the process of combining two or more adjoining pieces of alienated land. Originally the lands are held under separate land-titles, and after the lands are combined, they will be held under a single land title with all proprietors appearing in the title together with their shareholdings.
An amalgamated agricultural land that is converted into residential land can indeed give you triple return of capital. Tan explains, “For example, you do 60 high-rise units per acre. So for 2 acres, you got 120 units. And then your GDV is RM500k per unit. So you do 120 times RM500k, you can do a GDV of RM60mil.”
He adds, “Instead, for 1.9 acres, if you cannot do high rise, so maybe you do a residential. Residential land of 1.9 acres, let’s say you do 10 units per acre. You can do only 19 units. 19 units maybe are selling at RM800k, so you have a RM15.2mil on GDV. Can you see how a 1.9-acre land generates you RM15.2 million of sales, compared to 2.0 acres of land generating you RM60 million of sales?”
Tan highlights that in order to do land conversion, the first thing we need to apply is development order. Only then, the land can be converted from agriculture to residential, or even commercial. However, before one decides to do amalgamation or conversion, Tan suggests that one must think of the reasons why they have to apply such strategy for their land investment.
DRAWBACKS
Before one buys a land, one must “judge the market,” says Tan. Market study is very important for you to know how fast you can get your money because land investment can take a long time to reap profits.
“Sometimes if you don’t get a good deal, you have to wait very long. But the key point is that it takes too long around 10 to 15 years to recover,” Tan adds. One must study the trigger points of the area before investing in the land.
Another drawback would be that there is not so much income for land investment. There would be no rental income for land investors. If they “buy land near the main road, or buy land for car park purpose, for pasar malam purpose, funfair, then you’ve got income. If you buy agriculture land, you still have income. But if you buy land for development purpose, normally for the first year you don’t have income. The first year is for approval, so you can’t really rent to people. You need 9-12 months for you to get approval before you want to launch the project or sell the land to developers,” Tan says.
Lau agrees and he thinks that land investment requires high capital. “Depending on the land category, the financing part is not as high as you can get for residential properties. For example, for bungalow land you might be able to fetch 70-85% financing. But for agricultural land, majority of it are bought with less than 50% financing. Therefore, land investment is not viable if you don’t have substantial capital. Most lands can’t generate income unless you invest more money (capital injection). For example: property development, planting agricultural products (palm oil, fruits etc), apply for land use conversion, etc.”
TIPS FOR LAND INVESTING
The essence of land investment is not a lot of capital, but the aim. Tan emphasises, “When you see land, you must have an aim. The criterion is the same with property investment that is to look for good deals.” According to Tan, land investor must aim for a ratio of 1:10. For example,
- Land Cost vs GDV = 1 : 10
- Working Capital vs Profit = 1 : 10
Tan states that the benchmark is often 1:10. In other words, for every RM1 invested, we must expect to get a return of RM10. How we are going to achieve the ratio depends very much on how we structure the deal.
Lau adds by giving some tips to those who want to venture in land investment. He says, “To reap the return of land investment, you must understand that it is quite a long term plan. The closer it gets to the prime location, the higher the price. So it makes perfect sense to acquire lands in the direction of growth. If you have the knowledge, skills and network to further develop a piece of land, I don’t see any downside at all.”
In his opinion, it might take decades for the land to appreciate. There are possibilities that the development will not come to your land during your lifetime, but it might be your descendants who get to enjoy the value. Land investment is possible with enough knowledge and planning. However, investors also need to be patient and think thoroughly before making a decision.
–PROPERTY INGISHT