Q.
I have read your Part I on IPI - Inter-Property-Index, but it is about how good one property is able to generate return in rental versus another similar property. How about growth in its own value, or capital gain?
A.
To a investor, there are generally two major parameters of property appraisal. One is on the return of use (rental return) and the other return upon transfer of ownership (capital gain). The terminology used here is generic, as I have not fully completed the subject on 'Property Valuation'.
The IPI method is rental return per unit of investment on a property at a designated location. So, similar properties with 2.0/05.15/KUL in the same area should generate similar yield. However, they may be slightly different in capital appreciation.
Take for example, a double storey landed property would have different appreciation value if compared to a town house, or a condominium. Some locality with demand for matured population would prefer landed property. On the other hand, an old Taman may have demand for modern looking condo despite abundance of double storey old houses nearby.
Why?
Because of nearby amenities, like hospital, schools or colleges, shopping complexes, offices or tourist attractions.
Take for instance, houses nearby a referral hospital can be used for rental. Demand for room rental or home stay by hospital staff is a common occurrence. Similarly, when there is college or university in the vicinity, the demand for rental is high. All these factors induce better IPI. However, imagine if you are a junior doctor who has no time to take care of an old house, you would prefer an apartment over say, an old bungalow. If your were a college student, you would opt for a condo anytime because of security and easy maintenance. Parents would ensure security by even spot-checking on these properties as they can't trust their kids living independently in a far away land.
Therefore, some properties will have higher demand for long term rental return. In fact, in countries like Korea and Taiwan, town buildings like shoplots are converted to apartments for rental to office workers. Due to consistent demand, these buildings will generate return on yield in subsequent transfers. Of course, from face value, the return on rental (IPI) is obviously better too, immediately outfront.
This new Index is called "TRIPI" or "Transfer Return - Inter Property Index".
A sale of property with IPI of 2.0|05.15|KUL at 100% appreciation over 5 years would be written as : 100/5|2.0|05.15|KUL. This property is like a condo which was RM280k five years ago, and now has appreciated to RM560k.
A similar price property of double storey landed house would have fetched RM350k five years ago, so the TRIPI for this property is 560/350 = 60%; ie 60/5|2.0|05.15|KUL.
Comparing these two properties, it would be more profitable to invest in the condo rather than the double storey landed house. Of course, the return of rental (2.0) did not make any immediate difference. However, the value for sale is much higher.
These numbers would indicate that such properties have appreciation value at equivalent Rental Return Value.
By collecting these data throughout the region, investors will have a grap of how much risk and return in putting their money on a property.
Of course, certain factors would still make the indexes vulnerable to risks, for example general economic trends, saturation point (e.g. the condo appreciated to 560K and the upside is limited), loan availability, new competitors and government regulations. Nevertheless, the Indexes would give a comparative picture of property prices with less influence of psychological sentiments or hypes by the gimmicks played by media or property agents and developers.
Summary
In the myriad of properties, how can an investor make a judgmental decision? This is the aim of this article and the earlier one on IPI here.
It is my hope that with IPI and TRIPI, decision tree of property investment can be made simpler and more objective. The mind could focus on common factors to consider and thereafter compare and contrast. If it is less influenced by emotions, the decision arrived hopefully can be less speculative and bias. Therefore, paving a direction towards a more transparent property market where investor can make informed decisions.
Ref:
Own account.
12.Jul.2015.
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