Dynamics of Time and Property

Q.
I have been following this project! The developer is not putting in promo into getting big brands to come to this commercial centre! So, I am not going to buy any property here, it is such a sloppy project! What do you think?

A.
About the time of Chinese New Year, someone close to me came to view my new place, and commented on the project nearby.

Notably, he was right! There has been minimum effort shown by the developer to promote this place. The developer is however, left only with some units unsold in this project anyway. In this article, I try to analyse the whole scenario with the recent knowledge learned from a friend who is running shopping mall in Kota Kinabalu.

Okie, the whole story should date back to 1997. Around that time, the developer launched a mega project - a new township in a fringe of Kuching City. This mega project eventually took many years to complete. In fact, at the time of writing, there are many phases of the master plan yet to be completed.

What is strong about this developer is that it is a conglomerate from West Malaysia, and is very much a long term player in the field of property development. It however, had a different strategy with this project in Kuching.

Why do I say so?

Most developers are players with cash flow in mind. So, they would choose to build residential housing (smaller units) which are basic needs of the population at large. This will take some time to complete. Hence, the element of time - the title of this article is at play. They will wait for the time the concentration of population has matured, so as to launch the commercial property at a higher price for profit taking. This is the game that the element of time is to their advantage!

Therefore, it would not be a surprise that the prime spot of land in the whole master plan is drawn with the end in mind. The steps would be first building the smaller units of residential houses, then, the higher end Semi-D, or Terrace houses. Subsequently, the bigger units of bungalows and then the Shoplots and Shopping malls.

The strategy is to leave the best location for the most profitable launch at the end. What we say in choosing durian - let the best durian belongs to the highest bidder!

Then, there is the element of time! The whole evolution of the best piece of jewel would only be realized with passage of time! And, it will surely take longer time to mature if only the residential sector be completed first before the commercial sector. So, instead of a step-wise manner, the project did a concurrent launch approach to save time.

They launched the commercial shops similar with the residential sector, without giving time for the completion of the residential housing. Probably because they have cheap land bank and were resource ready - using the concept that it was similar per unit cost to build shoplots as residential houses*, they went side-by-side.

In this manner, the shops were able to sell at much lower price compared to similar shops in the vicinity of Kuching - as low as RM250,000 for a ground floor strate unit of around 1,000 square feet!

This strategy got the shops quickly sold! The cash flow was healthy as the materials need to build the 3 walls and a ceiling was probably very little then (20 years ago). Be reminded - this is a mere 3 walls and a ceiling, nothing more! The 1st, 2nd and 3rd floor units were also sold below market price. So, the entire project of more than few hundred units were sold in a short time.

In fact, I know of some taxi driver whose father without looking at the site, bought 2 units of ground floor shops in a blink of an eye!

Years later, I was told his two shops were not even rented out! Why? Because too many shops were built at the same time, and there was no economic activities around that area - the crowd has not move in yet! Population - urbanization in Kuching is much slower compared to townships in West Malaysia! The developer probably learned this the long hard way!

The same project in West Malaysia might have an uptake 10 times faster than in Kuching! Population size and exodus of people to city for employment were significantly more acute in West Malaysia than Kuching.

To come back to the issue of the question. This developer builds and sells, NOT manages property like mall or office buildings. Developers are seldom Property Managers. In fact, you need to be a registered Valuer to be a Property Manager! Most developers are businessman-politician, they are seldom professionals. Professionals make money too slow!

So, most developers' core business is not a shopping mall operator. Thus, it is not its prime objective to run the shops to woo crowd in for any brands.

But to the investor, it is 100% his prime objective to rent or sell his property in the future! Inevitably, he seeks developers who can deliver such promises. Yet, the mis-match is this mentality in Kuching.

People looks for property which is good and cheap! Is there such property?

May be you are just lucky! In real life, if you are 10 years in real estate business  probably you will know some desperate sellers by coincidence. Or else, it is probably once in a life time occasion! And, it might not be that good price after all. Indeed, you may have learned the truth later on!

The developer who is build-to-sell does not have objective in securing the best tenant, but may offer the best value-buy for its property. After all, they have to get rid of the stock!

The developer who is build-to-rent would look after its own profit by securing the best tenant but sell the property at an inflated price with the promises tied-in. Of course, if the developer promises you to bring in best tenants and yet selling off 90% of the property - you know it is a scam!

Why?

Because keeping tenant is never his priority, and hence it is a blank promise! Ask yourself, would you pay attention to after-sale service if you don't actually use the product? You only do so if you are the quality assurance or research guy. Even that, it might be just lip service to public.

In fact, you might not be interested in making good the product! You just replace it with a new one!

Due to market competition and demand by investors, this service becomes too important a sales pitch.

Therefore, current property developers have to incorporate such tactics - lease back and manage in getting big brands for your investment! Or else, nobody is going to buy the shop lots!

But then, the predicament is that the older shops were sold at much lower price compared to the recent launches. These older retail space competes with the new ones! The potential tenant is worried that going to the new shops would be too expensive to operate (for the same biz - e.g. food outlet) compared to the old shops. Thus, would prefer a cheaper rental than the higher rental of the new shops.

On the other hand, the newer shops cannot offer the lower rental competing with the old shops due to higher cost of building material, labour and maintenance. So, it has become victim of time and money as investment return can drag on for year!

Hence, it is timing which commands respect. However, how you see the future is very much a perspective of individual choice. I try to be more positive at this development so, I chose to invest! But, I may be wrong!

Well, no risk no gain!

* Assumption is mine. In actual fact, it costs less to build an empty shop lot than a full size semi-D house.

Reflection

The best deal syndrome - is never ending issue in property investment. Everyone looks for the cheapest and hottest property and expect it to be served in a sliver platter.

This is expectation gap that slows you down rather than speeds you up.

The timing issue is a bigger picture, not a today, next week thing. It may be a limiting factor - as stock depletes over time and things get appreciated or depreciated over the long term. Property usually has an advantage with passage of time. But, good advice might not!

So, what is the dynamics of time in property?

The straight forward answer is whether it is economically suitable time to invest? Rather than what property to invest. Because what property to invest very much depends on your risk appetite and your pocket size.

Lastly, no action talk only - NATO is waste of time!

As simple as that!