Investing in a Penang Property? Read This First

With Singapore property prices hitting stratospheric levels, many are inclined to look at the wider South East Asian region. After all, we do have a pretty strong Singapore dollar right now, and many Singaporeans are flush with cash.

Right now, residential properties in Makati, Manilla (Philippines), and the Iskandar region of Johor Bahru (Malaysia) appear to be the hottest ones in the market. Those who prefer to venture further afield are also considering properties in the white hot Melbourne and Sydney markets or even properties in the UK.

What about the island of Penang? Are Penang properties still worth investing in? Let us take a closer look.

Pearl of the Orient and UNESCO World Heritage Site

Romanticised as the "Pearl of the Orient", the island of Penang is about half the size of Singapore (295 sq km) with a population of 750,000. Ethnically speaking, about 41.7% of residents are Chinese, 41.3% Malays, with the remaining 9.8% Indians. With a density of 2,372 people per square kilometre, Penang island (Pulau Pinang) has the highest human density in Malaysia. However, it is only a 3rd of Singapore's population density (at 7,669 people/km2).

Economically speaking, Penang is the state with the highest GDP per capita in Malaysia. Manufacturing accounts for 49% of its GDP in 2012, followed by the services sector at about 46.4% which is mainly dominated by tourism (see article here). The size of Penang’s labour force grew by 11% between 2009 and 2012 and unemployment remained low at about 2%.

Geographically speaking, Penang island has a hilly interior largely protected by the state government. Thus, like Hong Kong, only a limited amount of land is available for development, much of which is concentrated on the North East in the George Town area. Weather wise, Penang is as hot and humid as tropical Singapore.

Penang's recent claim to fame is probably having its capital city George Town inscribed as a UNESCO World Heritage site in 2008. This global accolade acknowledges the unique architectural and cultural townscape of George Town, with its rich multi-ethnic heritage, food, art and culture. George Town has also been recognised as the most liveable city in Malaysia and the 8th most liveable city in Asia. Incidentally, Singapore was the first in the same rankings. :)

Buying Penang Properties - Things To Consider

In deciding whether to you should invest in Penang properties, there are several things to consider:
  1. Your long-term objectives. Are you buying to stay or looking to generate passive income? 
  2. Your cultural/emotional affinity to the island. Many Singaporeans have invested in Penang homes due to its similarity to Singapore's multi-ethnic culture, heritage and environment. 
  3. Your financial situation. With the Penang property boom over the last decade or so, prices have risen significantly. 
  4. Your age. Generally speaking, Gen X and Baby Boomers may have a greater emotional attachment to the island due to nostalgia. However, this could vary too.
To address the four points above, I will share my layman's views on the financial returns of Penang properties, living like a Penangite, and other considerations.

How Much Do Penang Properties Cost?

The million ringgit question (foreigners must invest a minimum of RM 1 million in Malaysian properties) is this: Can you make money from Penang residential properties?

Well, it depends on your time horizon. Are you looking to generate rental returns or hoping for capital appreciation? More importantly, can you afford to wait?

While certainly cheaper than Singapore, Penang properties do cost quite a bit...
  1. For a luxury freehold condominium like Andaman facing the sea at the newly reclaimed Quayside area (next to Gurney Drive), RM 1.4 million (approx S$550,000) can fetch you a one bedroom apartment of approx 900 to 1,000 sq ft in size. Three bedroom units (about 2,000 odd sq ft) would cost over RM 3 million or more (approx S$1.2 million and above).

  2. A condo unit located right in the heart of George Town like Sandilands could cost about RM 1.4 million for a 1,968 sq ft (183 sq m) unit - about S$550,000. This works out to approximately RM716 per square foot (S$280 psf).

  3. Further away from George Town, the cost of a freehold condo unit at Grace Residence (Jalan Jelutong near the Penang bridge) ranges from RM 1.4 to 1.6 million (S$550,000 to S$630,000) for a 1,646 sq ft apartment with four bedrooms.
Other than the sales price of the units, you need to also budget for the following:
  1. With effect from 1 March 2014, all foreigners must invest in a minimum of RM 1 million (S$387,000) in Malaysian properties, up from the previous RM 500,000.
  2. Legal fees for sales and purchase agreements, which ranges in scale from 1% to 0.40% depending on the value of your property.
  3. Stamp Duty for transfer of property, which ranges from 1% to 3% depending again on the property value.
  4. An "anti-flipping" tax (similar to Singapore) called the Real Property Gain Tax which applies for properties sold within 5 years or less. For foreigners, the rates are 30% of the property gain for disposal in the 5th year or earlier, and 5% for disposal in the 6th and subsequent years.
(Like us here in Singapore, the Malaysian government is hoping to stop speculative investments which could lead to a property bubble in Penang. Thus, it looks like you can't really flip Penang properties unlike those in the Philippines.)

What About Rental Yields of Penang Condos?

OK, so you've managed to scrimp and save to invest in a dream property in George Town, Penang. The next question on everybody's lips is this: How much rental can I collect each month? After all, the key thing about properties (ala "Rich Dad Poor Dad") is to generate passive income so that we can achieve financial freedom right?

Unfortunately, rental yields are not that good here. On average, we are looking at about RM 1,800 to RM 2,500 per month or so. This works out to approximately 2.5% to 4% rental yield (you can check out this website to learn how to work this out).

One final point. If you do need to take up a housing loan from a bank in Malaysia, the interest rates range from 2.9% to 4.4% (see article here). Accordingly, you can loan up to between 70% and 80% of the value of your property.

Any Potential for Capital Appreciation?

Well, the jury is out on this. From what I could gather, the halcyon days of 20% to 40% gains in property prices in Penang are over. There is also a seeming oversupply of higher end residential properties which could possibly lead to a price correction.

Having said that, the limited land in Penang island probably means that property prices would eventually go up. After all, population on the island is rising with domestic migration. Moreover, there are several niches that could be profitable - one of which is the purchase of converted heritage buildings. However, this is likely to be a more nuanced and moderated growth as the government puts in measures to curb inflationary forces.

Wait There's More...

Before I forget, there is one more thing. The Malaysian government is actively promoting a 10 year Social Visit Pass under the Malaysia My Second Home (MM2H) programme. The pass is automatically renewed (unless you commit a crime or other social sin!) and allows you to purchase a new car tax free plus other benefits. You can also bring your spouse, kids and other dependents along with you.

To qualify for the MM2H programme, you need to have liquid assets in Malaysia worth a minimum of RM 500,000 (RM 350,000 if you're above 50), and have off shore income of at least RM 10,000 per month. New applicants who have purchased properties worth at least RM 1 million qualify to place a lower fixed deposit amount upon approval (RM 300,000 for those below 50 and RM 150,000 for those 50 and above). More details are found in the link here.  

Verdict: Consider Long-Term Horizons and Lifestyle Choices

As you can see, investing in Penang properties isn't for short-term speculators. Rentals are slowing down and yields are fairly modest. You probably need to consider the long-term possibilities for capital appreciation given the scarcity of land parcels available for development on the island.

Having said that, a Penang property may be a good bet for those who plan to retire, live or work there. Other than its wonderful hawker fare, the island boasts of many interesting and unique heritage attractions, an emerging local art scene, and the rise of hipster F&B outlets. Comparatively speaking, it may also be more attractive as a home for Singaporeans relative to other Malaysian cities like JB or KL.

What are your thoughts on investing in Penang properties? I'd love to hear your views.

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