It was the lure of fast and easy money, lots of it, that made James Lam jump at the chance to be a Malaysia property speculator or property flipping. That was two years ago and he immediately signed up for a series of training when his friend told him about it. The thought of buying properties and selling them quick for a good profit excited him.
“I was greedy,” says the 53-year-old who is in the top management of a multinational company. He already has a well-paying job, but the opportunity was too good to resist. In the Malaysia property speculation training, he was taught how to look for good bargains in the secondary residential property and different ways of beating the system. “I managed to sell a couple of houses and made a decent amount of money,” Mr Lam tells The Establishment Post.
One way of beating the system is to secure loans for several properties from as many banks all at the same time. If done all at once, the banks will also do the checks all at once and find that he is creditworthy. In 2010, the central bank Bank Negara Malaysia introduced pre-emptive measures to limit the number of outstanding housing loans so as to cool the Malaysia property market. Once Mr Lam gets the bank loans, he has to make sure he sells the properties quickly and at a higher price before the loan repayment commences. He has a small window period of a few months to get this done.
But this did not happen for the two properties in a prime area in Kuala Lumpur that he now has. “I cannot get a buyer. Not even a tenant (to rent). I have to start paying the banks for the loans with my own money.” He also realises that the property market is slowing down and his chances of selling these properties off is getting slimmer by the day. With Real Property Gains Tax made steeper in 2014 at 30 per cent for properties sold within three years, he would need to have a huge profit margin to offset the tax.
The mighty flippers may flop
Situations like this are nothing new to Siva Shanker. He has seen loads of such cases and he does not see a rosy end to this tale. His 34 years of experience as a real estate agent tells him that Mr Lam will either start cutting down his expenses so he has spare money to service the banks loans until a buyer comes along. “Or he will start borrowing from relatives or, worst still, from loan sharks.”
The number of property speculators, or flippers, caught between a rock and a hard place are likely to increase as the market slows, says the chief executive officer of the Agency of PPC International Sdn Bhd. PPC International is a 24-year-old company that handles a wide range of services from valuation to estate agency, property management, research and consultancy.
“A sharp rise in value (of properties) creates the flipping culture,” he tells The Establishment Post. “In 2010, 2011 and 2012, thousands of properties were sold to flippers. These are people who neither need the property nor can afford to buy it. They buy it purely on speculation,” adds Mr Shanker, the immediate past president of the Malaysian Institute of Estate Agents.
Getting the DIBS on Malaysia Property Flipping
One of the reasons for a huge rise in flippers is the Developer Interest-Bearing Scheme (Dibs) where a house buyer need not pay down payment upon signing of the sale and purchase agreement. The developer will also bear the other expenses like stamp duty, legal fees and also interest on finance during the project construction period until the handing over of the keys. This is when the buyer will have to come up with the remaining payment. In essence, the buyer only pays for 90 per cent of the property value. In Malaysia, down payment for properties is at 10 per cent.
It may appear to be a win-win situation for all. The buyer thinks he is paying less for a property, and the developer has a marketing tool to sell properties quick. But speculators do not realise is that the value of properties sold under Dibs are actually marked up. This artificially hikes the property value and has caused the property market to rise unnaturally. Dibs was scrapped in Malaysia Budget 2014. Bank Negara was forced to take this measure when household debt soared to 86.8 percent of gross domestic product in 2013.
But the worst is not over. The effect of Malaysia property flipping is going to hit the property market in a bad way, according to Mr Shanker. “We will see a new category in property transactions – properties from flippers.” Presently, all property transactions involve the primary market, which are the newly built units, and the secondary market, which are the houses built and bought long ago that have now been sold.
He feels this category of property transactions will constitute a sizeable “5 to 10 per cent of new stock”. Flippers may be forced to sell their properties at much reduced, or even lower than the purchase price, so not to be saddled with a property they cannot afford to hold. So when a sizeable number of properties are made available in the market at much reduced prices, it is not going to be pretty for property investors and owners.
Iskandar under flipper attack
When talking about the economic region in the southern state of Johor, Iskandar Malaysia, Mr Shanker says that Iskandar is a case of a great development project that is overbuilt in one sector, namely housing. “Everything else is still blue chip.”
He says Iskandar has everything working for it: a state government that is committed towards supporting this region by building good infrastructure; supporting industries and incentives for businesses to start and develop; supported by world-class health and education sectors. It is all that Singapore would need to accommodate its growth.
“But the idea got hijacked. Flippers rushed in and one sector is grossly overbuilt. We should give Iskandar a chance to grow,” he adds.
Elsewhere, property flipping is losing its appeal
Property flipping is fast becoming a thing of the past in the West. “China, Singapore, Malaysia, Hong Kong are now where the West have been and gone through,” Vijay Manavalan, a property negotiator in Malaysia involved in promoting properties in UK for investment.
“To get value out of property investment, it is best to get slow income, and not flip. There will not be many more markets around the world to flip. Investors need to look at the rental income that can be generated,” he tells The Establishment Post.
He says that many Malaysians and Singaporeans are starting to see the wisdom in this and are buying properties in the provinces in the United Kingdom. Generally, in places where they had done their tertiary education like Birmingham and Brighton.
“A property in London is like a trophy asset, not purely investment but trophy-led. Yields from rental are not as high as the yields in provinces outside London,” he says. “London experienced the flipping from 2001-2014. Cooling measures have been put in place last year. We’re not predicting too much growth in London.”
With a combination of government measures and diminishing opportunities, Malaysia property flipping may just be a thing of the past and Malaysian property market can be allowed to grow naturally and at a steady pace. - By The Establishment Post