Is it location? 

 

Let’s take a look at a few well-established locations namely, Mont Kiara, Bandar Utama, and Sunway. Are these places established because of their location? For me, I beg to differ. If we look back in history, we would find that Mont Kiara was formerly an enclave of rubber estates, Bandar Utama formerly palm oil estates, and Sunway a tin mine wasteland. In the past, they may not be viewed as ‘good locations’ by most people. 

 

Instead, I learnt that it is the people residing within a location that brings actual real sustainable value to its location. Think about it. 

 

If today, you want to invest in a property priced at RM 500,000 as you believe it will appreciate to RM 1,000,000 in 10 years time, wouldn’t be logical for you to first assess whether or not, the people residing in the place where the property is located can afford to buy over your property at RM 1,000,000 in 10 years? 

 

As such, I think the people factor which considers the affordability levels of real estate within a location is the key factor to achieving faster capital appreciation in property investing. 

 

Let me explain: 

 

How Capital Appreciation is Achieved in Real Estate Investing? 

Let’s say, you intend to invest in a property for capital appreciation. You found a nice condominium in a nice location, where the residents in general are earning around RM 10,000 in monthly income. The condominium you are considering is offered at RM 500,000. 

 

Hence, if you made the purchase and assuming that it is your first property, you will, more or less, be incurring the following: 

 

 

The questions that you may ask are: 

 

1. Would it be easy for the residents in the location save up RM 75,000 or more to buy real estate within the vicinity? 

If the local residents earn RM 10,000 a month and let’s say, they can save up to 30% of their income or RM 3,000 a month, they would be able to save as much as RM 75,000 in 2+ years time. As such, it is possible for the locals to be able to afford a property in that location. 

 

2. What is the debt-service ratio (DSR) of a resident after buying a property? 

For instance, let’s say, local banks set a maximum amount of debt instalment where the DSR is 60% or 60% of an individual’s monthly income. Thus, if local residents are making RM 10,000 in monthly income, their maximum allowable amount of debt instalment would be around RM 6,000 a month. Based on the above table where the mortgage instalment of a property is RM 2,060, I would say the local population is able to afford a property in that vicinity. 

 

 

10 Years Later … 

Conservatively, let’s say, the income level of the general public has risen by 50% to RM 15,000 a month. You wish to sell your property for RM 1,000,000. Here is our next question: ‘Is it easy to find potential buyers who can afford and willing to buy over your property for RM 1,000,000?’ 

 

If a buyer is willing and assuming that it is his first property, he would incur the following: 

 

 

Once again, we may ask ourselves the same questions above: 

 

1. Would it be easy for the residents in the location save up RM 150,000 or more to buy real estate within the vicinity? 

If the local residents earn RM 15,000 per month and are saving about 30% of their income or RM 4,500 a month, they would be able to save as much as RM 150,000 in just under 3 years time. Hence, it is still possible for the locals to be able to afford your property if it is offered at RM 1,000,000. 



2. What is the debt-service ratio (DSR) of a resident after buying a property?

Based on DSR of 60%, if local residents are making RM 15,000 per month, their maximum allowable amount of debt instalment is RM 9,000 a month. Based on the mortgage instalment of RM 4,121, it is still possible for the local population to afford to buy over your property at RM 1,000,000.

 

 

Conclusion: Income Growth to Boost Capital Appreciation

Today, if you intend to invest in properties for capital appreciation, I believe it is helpful that you question your assumptions made on why the property said will appreciate in prices for the long-term before investing into your next property. I find the quickest method to assess this is by asking the two questions that were stated above. So, please give it a try. 

All in all, I believe it is only logical for one to have long-term growth in property prices if the people residing within its vicinity are experiencing long-term rise in their monthly income. Hence, faster growth in income leads to faster growth in property prices for the long-term. 

 


Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 450+ Financial Articles featured in KCLau.com in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with KCLau.com. Co-Founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

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