Historically, yes. Ownership of residential properties that are appreciating in value has been one of the biggest drivers of mass wealth creation, which also underpinned the growth of the middle class globally. This is because the home is one of the most widely owned assets, far more so than stocks and bonds. But what happened in the past does not necessarily mean it will continue into the future. Indeed, rapid price appreciation in recent years has put home ownership beyond the means of many and, for the younger generation, buying a home no longer represents a key milestone.
Buying a house to stay in is better than renting one, no question
We demonstrated a few months back that the math remains strongly in favour of home ownership versus renting, that is when the choice is between buying a house or renting one to stay in.
In the long run, the comparative value of owning a home far exceeds that of renting. This is the case even when the rental yield (rental as a percentage of house value) is lower than the mortgage rate, primarily because both the rental and house prices will rise in tandem with inflation, at least. (This is the norm, except in very few cases such as in Japan where the population is ageing and falling). This means that the cost of renting (an expense) will keep rising while home ownership is an asset whose value will appreciate with time.
But what about buying residential property purely as an investment, that is, not to stay in but to rent out for investment returns? Property has been a dependable investment asset in the past, especially in terms of building generational wealth. What of the future?
What about buying a house to rent out for investment returns?
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We did a simple comparison of the total returns of several major investment assets (see Table above). Between 2012 and 2022, investing in Malaysian property fared better than buying stocks on Bursa Malaysia, keeping money in fixed deposits as well as investing in Malaysian bonds.
For example, the total returns (based on Edgeprop data) were roughly 106% for both landed and non-landed properties. Landed properties typically enjoy stronger price appreciation but rental yield for non-landed units are higher. (Of course, in reality, total returns will be slightly lower than this figure, after taking into account vacancy periods, maintenance costs as well as agent/sales commissions, other taxes and fees).
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These returns were far higher than say, the 23.7% gains for the FBM KLCI, and investing in Malaysian property stocks.
Total returns for the Bursa Malaysia Property Index was -16.4%. Yes, that’s a negative return for the past 10 years, including dividends. This is because in addition to falling sales, profits and margins, the property stocks also suffered a massive valuation de-rating on account of their poor outlook. The average price-to-book valuation for property stocks fell from an average of 0.84 times in 2012 to just 0.4 times in 2022 (see Charts 1 and 2). In other words, property companies’ share prices fell far more than their actual book values, which were still growing, albeit at a slower clip, as most of the developers remained profitable despite the challenges (more on this later).
But Malaysian property has not performed as well when compared with US stocks or Singapore real estate investment trusts (REITs), made worse by the ringgit’s depreciation. Total returns for the S&P 500 Index (226.1%) far exceeded that of Malaysian property, and even more so when taking into account the ringgit’s depreciation over this period (370.5% total returns in ringgit equivalent). The strengthening of the Singapore dollar against the ringgit also lifted the total returns of S-REITS (REITs listed on the Singapore Exchange S68 ) to 124.2% (in ringgit terms). There are exchange-traded funds (ETFs) that track the S&P 500 Index as well as the S-REIT Index, and are easily accessible and tradeable for investors.
However, the case for residential property as an investment instrument in Malaysia is less conclusive in recent years — as the property market grappled with “artificially inflated” prices and oversupply. According to the National Property Information Centre or NAPIC, the median house price had been relatively flattish since 2015 and only started rising anew in the past two years. In fact, our analysis based on “same house” data in the Klang Valley shows that prices fell between 2017 and 2022 (see Chart 3). In other words, investing in properties would have yielded far lower total returns since 2015.
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Property market struggled for years in aftermath of DIBS bubble burst
The last property boom in the early 2010s was driven by massive speculative activities on the back of the Developer Interest Bearing Scheme (DIBS) that was introduced in 2009. In a nutshell, the scheme allowed developers to absorb all the interest costs on mortgages during the construction period. One, this significantly reduced the cost for house buyers during construction, thereby boosting demand. And two, developers imputed the additional financing costs into their selling prices, thereby artificially inflating property prices. The artificially inflated property prices and reduced upfront costs gave buyers (speculators) further leverage and bigger profits on a quick flip of the property upon completion. It soon became clear that the steep increase in property prices was a growing problem — housing quickly became unaffordable. The DIBS scheme was abolished in Budget 2014. Demand promptly collapsed. The steep price increases between 2012 and 2015 were in effect pulled forward gains, resulting in stagnant house prices in subsequent years (see Chart 3).
It took the property market years to recover from the DIBS bubble burst. But the demand-supply dynamics are finally improving.
We think the worst is over for Malaysia’s residential property market
Demand (sales transactions), which had shrunk sharply from the peak in 2011-2012, recovered in 2022-2023 while the slowdown in housing starts has gradually pared the overhang (see Charts 4 and 5). As a result, house prices have started to move higher in the past two years. We think demand and prices will continue to trend higher going forward, supported by Malaysia’s stillfavourable demographics.
Demographics remain supportive of demand growth
Population growth is slowing but remains positive, that is, total population is still rising. Globally, property prices are positively correlated to population growth (see Chart 6). The number of households is also growing on the back of total population growth as well as declining household size, which incidentally is negatively correlated to income levels. In other words, the average household size tends to be smaller in higher-income countries (see Chart 7).
The moderation in house price gains over the past few years have also helped affordability. As we have explained in detail previously, household incomes have been growing at a faster pace than house prices, on average. As a result, the average home price-to-average household income has been declining (lower ratio means higher affordability) (see Chart 8).
All the above is supportive of rising demand and house prices.
Conclusion
We think total returns on property will be positive on average — better than they had been since the DIBS bubble burst — but not as good as during the previous boom (that was super-charged by unsustainable speculative buying). Naturally, location, type of property and price range will make a difference in terms of the actual returns, as would other considerations such as the developer. For example, we suspect mid-range properties will generate better returns than high-end ones.
In the shorter term, we think total returns from property stocks listed on Bursa will likely be higher than investing in physical properties. It is the same economics. Property sales for large developers are recovering, which would translate to stronger revenue, margins and profits (as the properties are completed) over the next few years (see Chart 9). But with the improved earnings outlook, the previous valuation compression should gradually reverse. Hence, there is more upside.
As we noted above, the average price-tobook valuation had fallen from 0.84 times in 2012 to 0.4 times in 2022. In fact, the priceto-book valuation has already recovered to just under 0.6 times currently (see Chart 2). Bear in mind, some stocks will always trade at a discount due to real or perceived idiosyncratic risks such as governance concerns and trust in major shareholders and management.
Whether one chooses to invest in physical property, property stocks, foreign stocks, bonds or other alternatives will, of course, depend on individual preference, risk tolerance, available capital and other considerations such as liquidity, diversification, tax, convenience and so on.
Ultimately, investing in real estate over the long run is about the country’s macro management, stability, trust and credibility, which affect its currency, immigration, trade and investments. The question for Malaysian property investment is whether the ringgit is in secular decline. Of course, as countries like Singapore, Canada and Australia know too well, “success” could also be a double-edged sword. These countries impose countermeasures such as direct or indirect taxes (including vacancy tax) on foreign property buyers. It is not possible to develop and analyse each of these cases in a single article. The point being, there are many options and opportunities. And knowledge is your competitive advantage.
Box Article: The Western media was, is and ever shall be weaponised for Western interests
Protectionism comes in many forms, some more creative than others. There is no question that nationalism and protectionism is rising around the world, a backlash against unfettered capitalism and globalisation, and the resulting inequality over the last three decades.
Case in point, the US-China trade war has never been about trade imbalance, not by far. It is a war waged by the US to contain China’s rapid progress in technological advancement, particularly in artificial intelligence (AI) and bioengineering, high-performance computing and clean energy, as well as for geopolitical influence and dominance. The US is embracing the same game plan employed by incumbents to defend against new challengers (disruptors) — by leveraging on its incumbency position, investments and domination in old and existing technologies. The ultimate objective is to maintain its tech leadership and preserve its hegemon in the world.
We wonder if the negative focus on Singapore’s “dirty money problem” is not another form of protectionism (“soft barrier”) — one where the Western media is not only complicit, but a weapon wielded against those posing challenges to the West’s dominance and interests. To quote Bloomberg’s article “Singapore has a Dirty Money Problem”, Singapore has been remarkably successful in “attracting the super-rich and building a finance industry that’s made it one of the wealthiest countries on Earth”. No doubt, the island-state has taken business away from traditional money centres such as London, Switzerland and Luxembourg.
There will, inevitably, be dirty money flowing through every major financial centre. The only question is to what extent. Singapore is certainly not alone in this. The Basel Anti-Money Laundering (AML) Index, developed and maintained by the International Centre for Asset Recovery (ICAR) at the Basel Institute on Governance, ranks Singapore 118 out of 152 countries for money laundering and terrorist financing risks (the higher the ranking, the worst the risks). Notably, the US has the same exact score of 4.30. Given that the countries have the same score, one must ask why Bloomberg’s headline did not include the US.
The US also tops the Financial Secrecy Index, which ranks countries most complicit in helping individuals hide their finances from the rule of law, facilitating tax abuse, enabling money laundering and undermining human rights of all. The index is maintained by the Tax Justice Network, a respected global organisation focused on researching and advocating for policies to address issues related to tax evasion, tax avoidance and financial secrecy. Singapore is number 3 on the list, after Switzerland.
And look no further than the multibilliondollar 1MDB scandal, which involved multiple major financial centres including Singapore, Switzerland, the US, the UK, Hong Kong and Luxembourg. Malaysia, Singapore, Abu Dhabi and the US have all acted to prosecute the culprits, imposing hefty fines for the banks, jail time and lifetime bans for the individuals and asset confiscation. Yet, the UK and Switzerland have remained almost absolutely silent, despite all the well-established facts. It was in London and Geneva that the crimes of 1MDB were largely hatched and executed, and also where British and Swiss banks were the main facilitators.
Our point is, Western media had, is and will always be weaponised to use against the rest of the world. This is a fact. It is the reason why the non-Western world cannot afford to allow media and therefore, mindset, values and beliefs to be shaped and controlled by these Western interests.
— Box Article Ends —
The Malaysian Portfolio gained 1.7% last week, outperforming the benchmark FBM KLCI, which was up 1.5%. Leading the top gainers were Singapore banks DBS Group Holdings (+4.8%) and Oversea-Chinese Banking Corporation (+3.9%), as well as Mapletree Pan Asia Commercial (+2.8%) and UOA Development (+2.2%). The sole loser was Frasers Logistics & Commercial Trust BUOU (-1.3%).
We disposed of the balance of our shares in REDtone Digital at RM1.06 apiece. We suspect the stock’s rally will take a breather after its strong run-up. We made gains totalling RM55,863 from the stock, or about 58.6% on our investment in just over two months. Total portfolio returns now stand at 211.6% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 15.2%, by a long, long way.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
