Real estate developer, is a business that got everyone envy & jealous recently, just the same when you mentioned you are an industrialist during the 1980s' in Malaysia. In order to understand how real estate become a hotcake in the recent year, we need to understand the process of how a developer launch and complete a project.
Nevertheless, land is the first issue, best scenario is a developer has land bank before market booming in year 2007, but suddenly... XXX logistic company, YYY trading company & ZZZ manufacturing company just decided to venture into real estate market, so a hanging project since 1998 Asian crisis, a land next to a public toilet or even a jungle 50KM away from Kuala Lumpur become valuable & precious for real estate development.
Anyhow, after a land being purchase, developer needs to hire land surveyor, town planner, architect, engineer & etc in order to obtain approval from authorities before launching the project. Its normally takes 6-12 months during the stage of planning & obtaining approval, but the crucial part is to get subdivision of individual title for landed property & strata title for high-rise building when the project completed in order to hand vacant possession & title to purchaser no more than 6 months. Sound like a developer needs huge capital to kick-start a project? Actually, they don't.
A developer can approach landowner for real estate development through joint-venture / profit sharing, so now the land is officially free. The developer will get the landowner to sign an agreement called Power of Attorney (PA), which means the developer has the right to develop and most important the right to mortgage the land. So now, a developer just need to get the landowner to sign a PA, and get a tight connection with bankers, and get a loan to start development. When the loan being obtained, developer already has the cash-flow to hire the professionals to get approval from authorities.
Next, project launching. Developer will get the very same bankers to be the financing panel for the project, and all the people will rush-in to the sales office, and beg for a property. To lessen purchaser's burden and allow them to afford more properties, developer will offer FREE legal cost, stamp duty, furniture, and some even shopping voucher, but all the FREE items actually comes from the selling price. Unable to pay for 10% down-payment? How about just by paying RM8000? RM5000? RM3000? Or RM1000 and you can own your dream property immediately...To good to be true? It's real! But, please provide your documents such as identity card, payslip, saving account and income tax receipt in order to get MAXIMUM LOAN AMOUNT.
Developers never care about the 10% down-payment, in fact, the balance of 90% for the selling-price is where they aim for. I called this strategy as 90-100 profit, you set your selling price by ignoring the 10% down-payment, and focus your profit in the 90% balance which you will collect. Is a very simple calculation, let's say i'm selling a cellphone, the cost is RM1000. I would buy a beautiful casing, bluetooth device and a memory card at a cost of RM200. I'm looking for a profit of 50% based on my cost (RM1200 x 50% = RM600), but i want you to pay nothing, so i will set my selling price by using this formula...(Cost + Profit)/90X100 = RM2000. All i need is to get a bank to finance this cellphone for a margin of 90%. So now, no 10% down-payment, and i'm giving you FREE gifts, and you can get a 90% loan for this cellphone. RM2000 (selling price) - RM1000 (cellphone cost) - RM200 (FREE gifts) - RM200 (10% down-payment) = Wulala... a handsome RM600 profit.
Did i mentioned developer get a loan on the land before launching the project? Yes i did. But how can the buyers apply for a loan for the very same project on the very same land which already has a loan? Shhh...this is some sort of developer-banker secret deal, please do not tell BNM. In fact, not every developer able to get this kind of financing from a bank, a loan to developer based on the land, another loan to the purchasers based on the project. You needs to be a Giant in the real estate industry, which means, you need to have huge loan amount with a bank that's too big to fail for the bank.
Developer Interest Bearing Scheme (DIBS), was a scheme introduced by developer during 2009-2013 before Malaysia government banned it during Budget 2014. This was a marketing tool that's so great in deceiving property buyers that they don't pay anything at all until the property completed. When you buy a newly launch project, developer will start to construct the building stage by stage, from foundation to structure, from structure to facility such as road & drainage. The developer will progressively claim the percentage of completion from the bank based on architect certificate. In another way, the bank doesn't release the full loan amount until your property is completed and the period of warranty is due. So a bank will allow two options for the customer, start the agreed loan installment amount for principal plus interest, or serving the interest only before the full loan release to developer. The DIBS scheme is the developer will absorb the interest amount before handing the vacant possession to the client. By serving the interest during the construction period, the amount might only be one-forth to one-third of the agreed loan installment amount. When the purchaser start to serve the loan after DIBS ended, they will realize that the principal of the loan is being untouched. Why the developer so generously to help the purchasers? Just using the 90-100 profit strategy.
5. Commodity Push
Malaysia economy highly dependable based on two oils - crude & palm.
The above charts, tell me Malaysia is in the best years from year 2009-2014, as both prices was performed in the best in history. All i want to say is, may year 2015 onward, god bless Malaysia.
One thing worth mention, palm oil is planting on land, due to the history high of crude oil price in year 2011, many people bought agriculture land for palm oil investment, and guess what? Today palm oil price unable to sustain their loan anymore.
6. Speculation
"Our currency is depreciating, you should invest in real estate!" "If you do not buy it now, you, your grandchild, will be the homeless generation!" "Real estate is much better than equity, you can see it & touch it, and it just appreciate everyday!"
The above statements can easily be seen or heard everyday. Yes, the currency is depreciating, the saving rate is low and the equity market is in violate, but is all this factors driving the real estate pricing high and higher everyday?
My opinion, real estate is something tangible, but in a way, i believe the price of real estate is something so intangible. Maybe is the market force, but i have been seeing more and more symptoms which so similar during the 1997 Asian Crisis.
I still recalled what happened in 1997, when i was 11, and how my family struggled through the hard time, how the equity market brought a disaster to my family. I still recalled how my family been cheering during the 1995 & 1996, how we were having luxury dinner, shopping, enjoying oversea traveling.
There is so much similarity compare to now & the 1997 crisis, that almost every month a new project launch, just like almost every month a company being listed during the pre-1997 crisis.
Li Ka-Shing, one of the most successful entrepreneur in Hong Kong once mentioned:" when everyone is talking about the same investment portfolio, the crisis is around the corner."
Normally, before a crisis, fate will put all factors into the same basket, i think this time, the basket for real estate bubble...just being filled up.
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