Contributed by Mary Lau
The coronavirus Covid-19 has burrowed us into a tunnel, and there have been many casualties. In a relatively short period, we went from normalcy to uncharted waters.
There has been a slew of news on the state of our property industry, and they have a similar outlook: Gloomy. The ones made by Real Estate and Housing Developer’s Association president Datuk Soam Heng Choon, among others, have struck a chord.
In recent reports, Soam indicated that prices in general would come down given the current scenario. Whether a developer would reduce prices depends on how desperate the developer is.
However, it is not yet known how far the price will slide for the primary market. For the secondary market, it is also seeing uncertainty after the six-month moratorium period.
Tan Sri Eddy Chen, chairman of 1Malaysia People's Housing Program (PR1MA), pointed out that during the 1997/98 Asian Financial Crisis, some developers had to reduce their prices by as much as 30% to 40%.
While we are far from these figures, the market is facing a sombre period. For property owners who need to cash in on their investments, this is a trying time. Getting the best possible deal without having to go through a lengthy trial and error period or second guess their decisions repeatedly would be a high priority.
How much should I sell?
Nothing is certain but death and taxes, but before you put the final seal on the sale, it helps to have peace of mind that you have gotten a good offer.
Back in 1990, when I was in England, we had access to a tool that performed regression analysis. It was a sophisticated statistical method that could work out the prices of properties in set locations.
The system depended on the input of a large amount of data, with built-in variables such as prices and details of properties. With a tap of the finger, the computer would simulate and produce a result after the required data is entered.
This system works best under stable market conditions as property prices do not solely depend on their physical attributes. What the computer lacks is the human ability to analyse macro factors such as the state of the economy, demographics, interest rates and government policies.
The development of such a system or similar would not replace the role of professionals as it only acts as a tool. The information would need to be accurate and readily available.
In changing market conditions, there is a risk of asking for prices that are too high and not get any offers or letting go at too low if one is not careful.
One head-banging experience that sent many owners reeling, including me, was a project, which was expected to be the next big thing, at the time of launch. The market was buoyant and people queued up to pay.
Purchasers were presented with an optimistic yield which seemed very realistic at that time. But when it was completed, the market had turned.
Due to set expectations, poor demand and problems intrinsic to the development, most owners couldn’t get tenants. It has been several years, and many units are still empty. Moreover, the rentals of some units are not even half the indicated rate.
We thought this impressive product would definitely be able to achieve a decent yield. If we had been diligent to do comprehensive research, we would have accepted the rates recommended by professional agents from the start.
We didn’t pay enough attention to this investment. Many owners adopted a ‘wait-and-see’ approach as the situation kept changing, and no one could be certain what a good enough rate was. Poorly substantiated news, ineffective campaigns and unfulfilled promises gave owners false hope. Being hopeful is not always a good thing; it can cost us time, and time lost is money.
Success paid off in another project. Market conditions were better and there was sufficient demand. We can’t compare apples and oranges but what helped, in this case, was the developer’s collaboration with real estate professionals to set a range of prices and rentals for every component. Those rates were displayed at the project handover office.
To a certain extent, this dealt away with prospects offering less as they had the parameters as a guide. We could command a rental with certainty, and many owners were able to secure tenants within months of taking vacant possession.
What determines market value?
Market value is a figure that a valuer gives a property after conducting an appraisal. This process can be tedious and complex. Understanding its meaning may help owners decide on what price or rental to ask.
Factors such as location, demand, supply, state of the economy, layout, age, design, finishes and furnishing play a role in assessing market value- and for strata properties, how well the development is maintained and what it has to offer would be additional considerations.
The market value definition is set out in the Malaysian Valuation Standards. The definition and some of its concepts are adopted from the International Valuation Standards.
“Market value is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”
The amount is an estimate rather than the property’s actual sale price or a predetermined amount. The transaction that takes place can be used as a basis, which will then influence the market value of future sales.
There are several methods of valuation depending on the type of property. Usually, a valuer uses the comparison method for the run-of-the-mill properties and relies on recent transactions of properties with similar characteristics as comparable evidence.
A transaction would not be ideal if the price was inflated or deflated due to special circumstances. For example, a willing buyer or seller who is over-eager or compelled to buy or sell. Transactions need to have occurred at arms-length, meaning parties involved do not have a special relationship, and there needs to be sufficient marketing. In a foreclosure situation, if the property has sufficient exposure before the sale happens, the transaction can be considered a reliable comparable.
If there are not enough good comparables, the less useful data can be analysed and weighted to determine a realistic level of the market.
If a property is sold at a lesser price because the owner is in distress, that data would normally be given less weight as it does not fit the requirement of willingness to sell. If your neighbours sell at lower prices, you would need to know why before relying on the data.
If prices in a project are lowered because the developer can’t afford to hold, these data would not be the best evidence as these sales would have been made under financial hardship. It should not be assumed that the project is inferior.
Selling in a declining market
If we are heading towards a declining market, there may not be many sales evidence to use as comparables. One has to be careful not to rely too much on historical data nor make unwarranted assumptions about the future market.
Inevitably, some transactions would be made out of duress or conditions that do not reflect the definition of a willing seller. But if there are many such pieces of evidence, how should these data be treated?
They may not be the right pieces of evidence to assess market value. Transactions that are out of the median range would need careful scrutiny, and each available data needs to be judged to see if they meet the criteria of market value definition, then weighted accordingly. An incorrect analysis could mean letting go at a lesser price. A valuer is trained to perform these tasks.
If you have tried selling in a down cycle, you would likely have experienced the difficulties of an imperfect process or one that is not constant.
Lack of prospects can push a price down. Some locations may be affected more than others, and some sectors may hold better. The government may change its policies or introduce subsidies.
The global economic situation may become unstable and affect the local climate. If the virus surges again, there could be another Movement Control Order, making the situation even more uncertain. If this is too much to process, getting the right professional assistance could make a difference. It might help you sell with greater confidence and achieve your objective in a shorter time.
Mary Lau is an ordinary citizen who has a passion for strata matters. She holds a BSc in Land Management from the University of Reading, UK (1991) and is a licensed valuer with the Board of Valuers, Appraisers, Estate Agents and Property Managers Malaysia. Her early career was mainly in valuation and feasibility studies. She handled numerous disputes for owners affected by compulsory acquisition and was appointed high court assessor in Sarawak for compensation cases. In 2007, she began her own work in real estate and other ventures. In her free time, she likes to write and share her experiences with others.
This article is intended to convey general information only. It does not constitute advice for your specific needs. This article cannot disclose all of the risks and other factors necessary to evaluate a particular situation.
Any interested party should study each situation carefully. You should seek and obtain independent professional advice for your specific needs and situation.