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Issues To Consider Before Investing In Iskandar And Danga Bay
By: Lynda Loo
The project for Iskandar in Johor commenced years ago. And now it has become a big topic for property investors in Singapore.
This is hardly surprising as properties are the preferred investment vehicle in Singapore and Singapore properties have become unaffordable to many people.
Considering that Singapore property prices are at least 100% higher than those in Iskandar without yet taking into account the currency exchange rate, elation is the natural reaction of a rookie property investor who just learned about the comparatively cheaper real estate prices across the causeway.
But jumping around like a happy bunny is not going to put positive cash flow into your pockets.
We live in Singapore and are accustomed to the great investment vehicle that is real estate.
It is very easy to assume that properties are the best investments anywhere in the world. And these projects we are talking about across the causeway are so close to us. How bad an investment can they really be?
Despite the proximity, the property environment in Johor can be as contrasting as apple and orange to seasoned investors. Huge differences in prices are seldom a factor to them.
The theory is “Why put your money elsewhere when the proven market is right here?”
It is like in the retail business. The more you pay for rental, the better location you can expect. Better location means better traffic, which leads to success. Being a miser for rental space will often lead to failure as little to no traffic comes with low rental.
So what exactly are the risks involved before investing in Iskandar?
1) Who is going to buy from you?
Thousands of apartments are being launched for sale just like what we are observing in Singapore. And those who are buying are buying units first hand.
Sure the property values may rise over the years. But if you are unable to find a buyer willing pay market price, you are only sitting on the paper gains like a 50 year old wine you kept in the display cabinet.
It may be worth a lot but it does nothing for you except boosting you personal pride when there is no buyer.
If you think there might be a spill over effect from Singapore, think again.
Almost half of Singapore’s population are foreigners. This is a huge factor that is driving the beast that is the Singapore property market.
Do you think a professional banker from the UK will come to work here and buy a property in Johor for accommodation?
It’s not impossible, just highly improbable.
Do you think you will find locals interested to rent or buy from you? Stop dreaming.
2) SGD to MYR currency exchange rate
This is a risk that does not get enough attention.
Most people are blinded by the strength of the SGD to MYR. A strong Singapore dollar makes the investment look like peanuts when you look at the prices of properties here.
But the key to making an investment decision is profitability, not affordability or convenience.
If the first thought of owning an investment property is that you can boast to your friends on your investment, you should really take a step back and review what you are doing exactly.
To maximize your returns, you will want the SGD to depreciate against the MYR over time. Preferably by the time you sell off your apartment in Malaysia.
And since the Singapore dollar is managed by MAS, currency exchange rate movements are really something that nobody can really predict
Over the last 10 years, MYR has been slowly depreciating against the SGD. This will be good news for those who are looking to buy. But is bad news for those who are looking to sell.
If this trend continues, your only source of getting your money back is through rental. And the demand for rental properties heavily depends on the success of the Iskandar project itself.
3) Political risks
Political risks is a key consideration for an international investor.
In the Malaysian general election of 2008, UMNO the ruling political party garnered just a little over 50% of the popular votes.
Should a new government come into power, a different direction might be set for Iskandar. This is something you can do nothing about.
And it can be rosy now with the door wide open ever so inviting for foreign buyers.
But don’t forget that we live in a dynamic world. New barriers could pop up anytime that affects your entry or exit strategy.
With the area already becoming a foreigners hotspot, the authorities could be pressured to take action by implementing market measures to appease or benefit the local community.
4) Unproven rental market.
If you are diving into Iskandar with a view for the long term, you have to admit that there is no other choice.
Iskandar and Danga Bay is not Kuala Lumpur. It is a fairly new development.
There are long term plans in place for it to be successful. But you cannot expect to buy your apartment penthouse and rent it out immediately at $5000.
If it indeed develops into a huge commercial hub, rental demand will be good.
But there really is no telling how it may turn out. During the initial years you have to be prepared to rent out your apartments at a low price or even leave it vacant.
There are no historical rental data to analyze. So the return on rental is like dipping your hand in the cookie jar and find out what you get.
With such a huge supply of apartments in the area, you could be looking at a lot of competition for tenants.
Despite elaborating on the risks of investing in a property in Iskandar, you have to realise that these risks are applicable to all international real estate investments.
I am personally looking at units in Danga Bay as well. It is a way to diversify my investment portfolio.
The biggest mistake that investors of overseas properties make is that they assume that overseas property environments are just as robust as that in Singapore.
And that properties are the crown jewel of investments just like in Singapore.
If there is one point that you must process in your mind, it is that this is not so.
It is just an illusion in your mind.
There are enough reports all over the world of how real estate markets are suffering.
The mindset of “This is not going to happen so close to home” is very naive. Do your own research before taking the plunge.
Lynda Loo is a Director for a Logistics company for over 20 years. She spends her free time looking at more properties to invest her excess cash in.