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Property investment - adopt a cautious approach

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Normandy Advisory Services Sdn. Bhd (Licensed Investment Advisor)
15th Floor Menara Multi-Purpose, No 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur
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After years of robust growth, the Malaysian economy is generally expected to slow down. The extent of the slow down very much depends on the outcome of the budget. What would a slow down mean and what could be the effect on people and property?

A quick look at the simple economic clock depicted below will provide some insight as to what could likely happen. We have seen strong economic growth, interest rates on the rise and stock prices falling. The next stage in the cycle indicates falling property prices and slowing of economic activity.

One may well ask - stocks at this moment are not generating my expected returns why not consider property as an investment? Property has always been considered as a relatively stable form of investment. Nevertheless, the values of property can generally fall as well as rise although not as volatile as stocks.

Given the current scenario, investors should certainly exercise caution when contemplating property investment. Since its sharp take-off in 1994, the property sector as a whole which includes the office, retail, hotel, residential and industrial sectors is expected to reach progressive stages of oversupply over the next few years.

What about genuine home buyers? For this group of people, there is a need to be cautious. General important criteria will be the location and the type of house you intend to buy.

Prices in prime areas may not go down as drastically as demand in popular areas is generally sustained while those who can afford to hold and wait will not be willing to let go at extremely low prices.

Based on notion that the economy is gradually heading for a slowdown, purchasing power for most people will likely be affected. Although not yet serious at this stage, the issue of oversupply particularly in the office and retail sector is certainly looming.

The residential market while subject to the same economic influences as other property sectors is usually more resilient. Of course the high end residential market is usually the sector which is affected most. Cashed-up residential property buyers who sit back and wait will likely to be able to pick a dream home cheaper than they imagined.

At a glance, the overall property market appears to have already consolidated after peaking during recent periods. For instance, in the non-residential sector, some developers have reported slower sales of many new office and retail units.

As the property sector represents a significant component of the overall economy, it is not likely to shine in view of an imminent slowdown in economy.

The government-linked Malaysian Institute of Economic recently indicated that one of the four downside risk factors that could slow economic growth is a possible sharp decline in property prices which will likely lead to less construction next year.

Financing the purchase is another consideration. The relatively high interest rates environment will make it more expensive for financing property. Undertaking too many loan commitments could result in difficulties in repaying them in the future.

Do not be swayed by attractive initial offerings such as low interest rates now. Possible higher rates usually associated with economic slowdowns in the future will have increasing impact on your ability to pay off your loans as banks adjust their loan rates.

There is a higher probability for interest rates to edge upwards in the future rather than downwards. During a downturn in economy, most investors will prefer to embark on a prudent financial management. Investors are most likely to turn cold shoulder to property.

Weight out your likely ability to cope with the rising costs of financing during difficult periods ahead - does the extra cost justify the investment now?

Financing conditions affect property investments as demand will be affected by the rising cost of funds. Lack of demand will in turn cause property prices to soften or even tumble in some cases.