Welcome to a speculator’s market

COMMENT
By THEAN LEE CHENG

SINCE the last quarter of 2009, property prices have not gone up incrementally. They have escalated, especially for landed units. In certain locations, prices may be unsustainable.

Up to the first quarter of this year, intermediate two-storey houses in a popular part of Petaling Jaya were transacting at about RM650,000.

Yesterday morning, an agent said the company had sold several houses facing T-junctions (which are not popular units among buyers) in the same township. These were 2 1/2-storey houses. One was sold for slightly more than RM1mil, among the highest he has ever seen in that location for a house located opposite a T-junction while another was sold for RM950,000, the lowest among the three.

Even at RM950,000, he felt that it was rather high. He is also rather concerned about valuations these days. “I like this property business. I want it to grow. But not this way!” he said.

In certain locations, especially in gated and guarded communities, it has come to a point where valuers are reluctant to put a value on a property.

How do you pin a value on a house when next month the price will be different? Prices are simply moving too fast.

Due to pressure, the valuer may have to value it. If the previous transaction was RM1.6mil, he may then reluctantly value the next one at RM1.63mil. The result is that the price of houses in that gated and guarded development becomes increasingly higher. It eventually becomes a speculator’s market, not a buy-to-stay market.

While valuers play their role by succumbing to pressure to put a value to properties, banks do the same when they promote various kinds of creative financing. When banks advertise free legal fees, it is not truly free. That amount is already packaged into the scheme.

Banks too play a part in today’s increasing property prices. As banks consider the buoyant property market, and as competition among banks heats up, mortgages seem to be a good way to increase their loans business.
So they create all sorts of attractive schemes.

Last year, banks were promoting lending rates at base lending rate less 2.2%. Earlier this year, it was base lending rate less 1.9%. Today, a foreign bank is promoting base lending rate less 2.3%.

It is this which encourages people to sign up for several loans.

Over in the condominium sector, prices are driven by various factors. In a matter of weeks, a serviced apartment project will be delivering units to buyers. When it was launched several years ago, it was priced at about RM160,000 to RM170,000 for a 400-sq-ft unit.

Even before the keys are handed to buyers, prices of RM250,000 and RM260,000 are being bandied about today.

In the next 12 months, barring any contagion effect from their souvereign debt situation in Europe, developers will be having more launches. They are aggressively gearing up to launch their projects today.

So ultimately it looks like the resounding performance of our residential properties today is due to a lack of other better investment alternatives, including the volatile equity market.

So from buyers who are at a loss where to put their money, to the banking sector eager to give out more loans, to valuers pressure to put a value on a property, to agents eager to get their commission, and developers, at every level, all are part of the market forces at play.


Back to that house at the T-junction, here is some food for thought: Whether it is RM650,000 or RM1mil, the rental remains at RM1,500 a month.

·The writer remembers the US subprime crisis and how it pulled down the global financial system. There needs to be some prudence in our property market too.

Investment valuation using price/earnings ratio

WE have used the P/E ratios more often than we know in our lives concerning purchases and investments. Few realise how important this financial ratio is. At present, this ratio is primarily used for shares or company valuation.

In simple terms, a P/E ratio is the ratio of the price of an investment divided by its earnings. A more technical definition for a company or share valuation would put it as valuation ratio of a company’s current share price compared to its earnings per share (EPS). Let’s say Venecio Bhd shares are trading at RM20 and the recently concluded financial year, resulted in net earnings of RM125mil with 50mil shares issued. Therefore, the EPS is RM2.50 per share (RM125mil/50mil), and that gives a P/E ratio of eight (RM20/RM2.5).

This means that for every ringgit the company makes, investors are willing to pay RM8 for it. There are long debates on the applications of P/E ratio for shares, but we shall not delve into this, rather I’d like to touch on P/E ratios for personal investment evaluations.

Calculation of P/E ratio for a property investment evaluation is pretty straight forward. For a house that yields a rental income of RM1,000 per month, that works out to be RM12,000 per year. With the house valued at RM240,000 that derives to a P/E ratio of 20 times. Based on my experience, this rate seems to be the valuation point of landed properties in the Klang Valley. To be more accurate, some would deduct direct expenses to derive at the net rental income less expense. Rates lower than these could either entail a bargain or a low valuation placed by investors, while rates above would translate as either a premium, or over valuation by investors.

We can also calculate the annual Return on Investment (ROI), simply by dividing the annual rental against the investment value, and this derives to 5%. This is actually the inverse of the P/E ratio, whereby 1 divided by 20 gives 0.05 or 5%.

What this means is that at 5% annual ROI, it will take 20 years (at current rate excluding inflation and other factors) to recoup the investment.

The P/E ratio can also be used if you are evaluating to sell your property (besides having a market price evaluation). For instance, if you had purchased a RM240,000 property, and three years down the road the rental has increased to RM18,000 per annum. Assuming the property P/E ratio remains, then the property should have a valuation of RM360,000 (RM18,000 X 20). This represents a three year cumulative average growth rate (CAGR) of 22.5% which can form a benchmark.

Based on the tables on a few tabulations for properties around the Klang Valley for comparison purposes, a few deductions can be made from the information gathered, as follows :-

● Landed properties generally has higher P/E ratios, as compared to condominiums.
● Condominiums on the other hand, generates better ROIs as compared to landed properties.
● Well established areas calls for higher P/E than new townships, and generate lower ROIs. This can be interpreted as higher investment return potential for new township properties.
● Lower P/E condominiums seem to generate higher ROIs.

A high P/E ratio can mean an over-valued property or a property in which the market places a premium therefore “approved” by market forces. Likewise, a lower P/E can translate as under-valued with a potential to increase. The tabulation has also not considered the maintenance fee that usually entails condominiums, and if this is lessened from the rental, the ROI may reduce to approximate the landed properties.

Depending on your budget and purpose of purchase, you can fit your requirements within this ambit of selection process. There are other considerations as well which should not be excluded. These would include, freehold land or leasehold, built-up, land area, maintenance fee, close approximate to shops, schools, facilities, etc.

The P/E ratio and ROI can be a valuable tool in your property decision making process as shown above. While some of the findings may defer with a bigger sample or new locations, it’s a start to a whole new definition to your house hunting process. You can also track P/E ratios over time, to build a trend in which a growing trend would denote appreciating value.

P/E ratios can also be used to evaluate other investment options, so long as the parameters required for the decision making process can be ascertained.

COMMENT
By RAYMOND ROY TIRUCHELVAM

● The writer, a business planner with Sabic Group of Companies, is “doing more homework today, to make up for those he missed in school.

Family-friendly game attempts to unlock creativity

 
CO-OPERATIVE: The PS3, 360, PC and Mac versions of Create allow level sharing via the Internet.

 

EA's UK outpost have revealed their pet project, Create, promising to provide a digital playpen in which families can club together to beat each challenge.

With a strong DIY aesthetic, players pick from a toolbox of props and objects, altering levels in order to clear a path for buggys, barrels, bikes and dodgem cars.

In some challenges, the chosen vehicle must make its way towards an obstructed destination - like the ooze in Pipe Mania or the cliff-loving mammals of Lemmings - and players work out how to avoid or use the items in its way.

In others, objects must be ferried safely to their destination by tweaking a makeshift transport.

Though popular web browser titles such as Wake The Royalty, Cargo Bridge and Transformice have already shown that games can integrate physics and engineering without losing a sense of fun, Create balances its challenge mode with a level creation suite that allows the construction and decoration of more domestic scenes.


A passing resemblance to two other well recent console titles that came with integrated level-editors, LittleBigPlanet and Joe Danger, may not be entirely co-incidental as EA Bright Light are located in the same city as LittleBigPlanet studio Media Molecule and Joe Danger makers Hello Games.

One key difference is that unlike those two PlayStation3 exclusives, Create is multi-platform, coming out on Wii, PS3, Xbox 360 as well as PC and Mac.

The PlayStation3 version also has Move functionality so that those with the console's new motion controllers can point and click just as on the Wii. Like LittleBigPlanet 2, it's targeting a mid-November release. - Relaxnews

Source: http://www.techcentral.my/news/story.aspx?file=/2010/8/4/it_news/20100804161125&sec=it_news