It has been common practice lately for property developers in Malaysia to offer DIBS as part of their sales package in order to incentify prospective buyers to purchase new developments still under construction. What is DIBS, though? I couldn't really find any decent sources of information on this, so I decided to write my own understanding in hopes that it might benefit others considering to purchase new property.
DISCLAIMER: Before I continue, please note and understand that I am NOT an expert on property or bank loans or anything related. I am just a simple family guy who did a lot of research and asked a lot of questions to those who know what they're talking about (hopefully).
What is DIBS?
DIBS stands for "Developer Interest Bearing Scheme". It is a sales tool for making the purchasing of a new development still under construction more attractive to prospective buyers. It is a loan scheme that is especially attractive to "flippers", or short-term investors, who want to make a quick profit by selling off property they purchase while the development is still under construction immediately after construction is complete.
How does DIBS work?
When you purchase property, you often have to make an immediate down payment of at least 10% of the overall selling price. After that, you get a loan from a bank for the remaining 90% (or however much you didn't pay). Usually, the installments for the loan will start immediately after your loan has been approved, even though the construction of the development hasn't been completed. This seems a bit unfair, since you're paying a loan for a property that you can't sell, rent, or live in yet. Plus, this is Malaysia. Who knows when the damn thing will be finished?
In comes the DIBS scheme. DIBS is essentially an agreement between the buyer, developer, and bank providing the loan that until the construction of the development is complete (and, in most cases, the keys are handed over), the bank won't charge you anything, and instead, charge the developer interest.
Now, this sounds pretty wonderful, but once you understand the details, things aren't so pretty anymore.
When you pay your installments for a loan, you are paying a portion of your principal plus the interest calculated based on the interest rate at which the loan was granted to you. If during the DIBS period, the bank was charging the developer the actual interest of your installments, it would be a steal for you. Everyone would love DIBS and even wish that the construction would last forever. The truth is, though, the interest that the bank charges the developer is based on the down payment that was made.
Here's where it gets worse. Not only is the developer not actually paying off the interest on your actual loan, they're not paying off any of your principal. Since interest is calculated based on how much principal you have remaining with the bank, you still end up paying all of the interest for your loan, which means you're not benefiting from DIBS in any way. In fact, because the DIBS delays when you start paying back on the principal and shortens your loan tenure, you end up paying MORE in interest.
So why do people like/want DIBS?
As I stated in the beginning, DIBS is good for those who want to "flip" the property for a quick profit. If I purchase a property with DIBS, all I pay during the construction period is the 10% down payment. If I sold my property as soon as construction is completed, as long as I sell it for more than what the original price was I bought it for, I make a profit, since I can just take the money I sold it for and settle my bank loan entirely without paying any interest at all, since my installments haven't started yet thanks to DIBS.
If the developer gave rebates or discounts on the property, I profit even more! If say the developer provided a 10% rebate, that means I didn't have to pay anything for down payment since the rebate offsets it, and I don't pay anything on the loan because of DIBS. So this means it's actually possible for me to own and sell property without spending a single cent, given that my timing is right.
What are the risks of DIBS?
Plenty. First, in order for DIBS to work, you must first secure a bank loan. If you do not qualify for the loan or the bank rejects your loan application for whatever reasons, DIBS doesn't work. Since you must commit to a loan in order for DIBS to work, you are responsible for the loan regardless of what happens to the property you purchase. If you are unable to sell it, you will have to pay the installments yourself (with higher interest, remember).
There is also quite a bit of speculation that in order for developers to be able to provide the DIBS scheme, they price the property at a higher price than the market rate. This means you're committing to a loan for an amount that you assume can be covered through appreciation (or inflation or both) during the time of construction. You also assume that there are willing buyers for the property at a price for you to make profit at the perfect timing so that you can settle the loan before the first installment. If the property doesn't appreciate, you lose. If you don't find willing buyers at the right timing, you lose.
Then there's always project abandonment. If the development is abandoned before completion due to a lack of funding or whatever other reasons, you are still stuck with the loan. In many cases, since loans are given out in disbursements, you won't be stuck with the entire loan amount, but for the disbursements already given out to the developer, you are still responsible for payment, regardless of whether the property was delivered to you as promised or not!! Remember that there are 3 parties involved here, and paying money back to the bank is between you and the bank while whether you get what you bought is between you and the developer. You can take legal actions against the developer to get reimbursed, but what you committed to the bank and what the bank has already given out is still your responsibility, NOT the developer's.
Let's recap with an example.
Say that a developer, Dodgy Properties Berhad, has started a new development project, and the first phase of sales has already begun. You decide to buy a 1,000 square foot condo for RM500k and think you can flip it for a 20% profit.
You pay 10% (RM50k) as down payment (perhaps rebated by the developer later), and you borrow RM450k from the bank at 4.5% interest using DIBS. The project is not expected to be complete for another 2 years, which means you don't have to pay anything on your loan for the next 24 months.
The developer pays the bank the interest on the down payment you paid for the next 24 months, but you haven't actually paid back a single cent to the bank on your loan because no payment is being made on the principal, and you still owe the bank RM450k (plus the interest calculated based on it).
You start to look for prospective buyers for this property you bought, hoping to find someone willing to pay RM600k for it as well as accept a handover time of 2 years from now. This way, you make an easy (if you consider this as easy) RM100k in profit.
A few things can happen from here.
The Ideal Scenario
You find a buyer who is fine with your terms, you sell the property for RM600k before your loan installments begin, and you settle your loan of RM450k without paying any interest. If the 10% was rebated by the developer, you made RM150k!
The Better Than Nothing Scenario
You're only able to find a buyer who is willing to pay RM500k for the property, you settle your loan before installments begin, and you make RM50k if the initial 10% was rebated. If it wasn't, you gain and lose nothing for the price of going through some hassle.
Or, you're only able to find a buyer who is willing to buy the property for RM600k a year after your loan installments have started. You immediately settle the loan, but you've already paid a year of principal and interest, taking about RM30k off the profit you make (on top of the pain it caused you to have to pay RM3k every month until you found a buyer).
The Fail Scenario
Property value plummets during the DIBS period and no one wants to buy your property. Even if you sold it, you'd actually lose money, so you're forced to either give up and take your losses while they're small, or move in yourself and pay the remainder of the loan (25 or 30 years or whatever) with higher interest.
The Completely Screwed Scenario
Dodgy Properties Berhad goes bankrupt and cannot finish the construction even though they've been funded by the sales of all the units. RM100k has already been disbursed to the developer by the bank, so you end up having to pay the bank back RM100k plus the interest for it, and have nothing to show for it. It's like you just threw money into the trash.
I hope this gives you a better idea of what DIBS is all about and that it provides you with some insight for when you're property hunting.
And again, please remember I am NOT an expert on the subject matter and it is entirely possible that not everything I wrote is accurate.
HAPPY INVESTING!!
Monday, December 16, 2013
Wednesday, December 11, 2013
The Metropolitan Conspiracy
So here's my suspicion on what's going to happen with the capital area of Malaysia.
NO PLAN TO PLANNED
Kuala Lumpur was a city built with no planning. It was also developed during a time when technology, experience, and skills were all lacking. On top of that, the city was built according to the population and necessities from several decades ago, randomly adding on necessary infrastructure and developments as the population grew. This makes it an extremely badly designed city. That's why we get all these horrible traffic jams and inexplicable road structures. I mean, if they could do it all over according to today's population and needs with today's technology, there wouldn't be any roundabouts or 6 billion (slightly exaggerated) flyovers.
Everyone's moving to Klang Valley, and yet, because it's too late to try to restructure the entire area, the only feasible option is to move the population to less densely populated areas. If you can't provide the infrastructure for the population, bring the population to where you can, kan?
The government, as well as all the Dato and Tan Sri power players, have all sunk billions into building Putrajaya and Cyberjaya. Although it's taken much longer than it should have, it's finally about time to really promote, market, and sell these areas. For one, the major areas of Klang Valley are really running out of decent space, especially with the reserved areas for greenery. Second, prices are running so high that it's just simply not viable for younger generations to live in the current residential areas any longer. I mean, if instead of spending money that you don't have on rebuilding or renovating, you could sell your Dad's 30 year old house and land to buy brand new property in a clean, safe, and new environment, why wouldn't you?
To move a large enough population to the less dense areas, though, would take a lot of effort and money, as well as an extremely large-scale, well planned, and well funded project that revolves around moving the city center entirely. That's what the Metropolitan Conspiracy is all about.
BECOMING AN ADVANCED CITY
Think about all the major cities in the world and what they've been through. Cities like New York, Chicago, Tokyo, Paris, and London have all started small but eventually grew larger due to growing population and the demand for better housing, infrastructure, and transportation. The city center starts off getting more expensive, forcing newer arrivals to move to the outskirts. Then the outskirts become more expensive, moving even newer arrivals to the suburbs. Then suddenly, you've got this massive metropolitan area in which commuting 90 minutes one way is the norm.
That's definitely where KL is heading.
THE METROPOLITAN CONSPIRACY
If we consider the trend in which the different areas are developing in Klang Valley, we can see that the viable areas furthest out from KLCC would be Rawang to the north and Seremban to the south. If we were to accept an average commute time of 60 to 90 minutes one way and assume KLCC to be the center, it would make Rawang easily within the metropolis, but not Seremban; yet, it's hard to imagine developments reaching any further north than Rawang.
But wait... What if we move the center from KLCC to Putrajaya? Well, I'll be damned. There's your metropolis of the future.
Imagine a metropolis that covers Rawang from the north to Seremban to the south with Putrajaya as the center. Klang to the west and Semenyih to the east. It all makes sense! No wonder prices have been rising drastically in Cyberjaya and even a good jump in average property cost can be seen in Kota Kemuning, Semenyih, and even Nilai!
Sure, nobody's gonna give a shit for the next few years, but this is a 10 year, 20 year, 30 year master plan, and the keen investors and future readers have already caught on! People still talk about whether Cyberjaya will grow and become a feasible investment. If you're thinking that, you're not one of the keen investors or future readers. Besides, where else are you gonna go? Mont Kiara? Desa ParkCity? Yeah, only if you made a couple million a year, maybe!
By the time you're too old to get a 30 year loan (which is 35 for most banks, fyi), all the dust has settled from the construction rush, Mont Kiara, Desa ParkCity, and all those great exclusive townships will be traffic death traps that'll take you just as long to commute to PJ as it does from Cyberjaya. AND it'll cost you twice as much to invest.
Honestly speaking, it's already too late to invest in areas like Cyberjaya and Kota Kemuning at the time of this blog post, because property there already costs more than what Mont Kiara cost just 3 years ago. But at least now you have some insight to the trend, and hopefully, it'll be enough to guide you through this shitty mess we live in.
DISCALIMER: I am NOT an expert on property, investing, or economics. I'm just a normal family guy who did tons of research and footwork to find out as much information as possible about real estate in Klang Valley and then came up with his own theory. DO NOT base your investments purely on my opinions. I won't take any responsibility for your investment losses. I'll take some donations if you make money, though.
NO PLAN TO PLANNED
Kuala Lumpur was a city built with no planning. It was also developed during a time when technology, experience, and skills were all lacking. On top of that, the city was built according to the population and necessities from several decades ago, randomly adding on necessary infrastructure and developments as the population grew. This makes it an extremely badly designed city. That's why we get all these horrible traffic jams and inexplicable road structures. I mean, if they could do it all over according to today's population and needs with today's technology, there wouldn't be any roundabouts or 6 billion (slightly exaggerated) flyovers.
Everyone's moving to Klang Valley, and yet, because it's too late to try to restructure the entire area, the only feasible option is to move the population to less densely populated areas. If you can't provide the infrastructure for the population, bring the population to where you can, kan?
The government, as well as all the Dato and Tan Sri power players, have all sunk billions into building Putrajaya and Cyberjaya. Although it's taken much longer than it should have, it's finally about time to really promote, market, and sell these areas. For one, the major areas of Klang Valley are really running out of decent space, especially with the reserved areas for greenery. Second, prices are running so high that it's just simply not viable for younger generations to live in the current residential areas any longer. I mean, if instead of spending money that you don't have on rebuilding or renovating, you could sell your Dad's 30 year old house and land to buy brand new property in a clean, safe, and new environment, why wouldn't you?
To move a large enough population to the less dense areas, though, would take a lot of effort and money, as well as an extremely large-scale, well planned, and well funded project that revolves around moving the city center entirely. That's what the Metropolitan Conspiracy is all about.
BECOMING AN ADVANCED CITY
Think about all the major cities in the world and what they've been through. Cities like New York, Chicago, Tokyo, Paris, and London have all started small but eventually grew larger due to growing population and the demand for better housing, infrastructure, and transportation. The city center starts off getting more expensive, forcing newer arrivals to move to the outskirts. Then the outskirts become more expensive, moving even newer arrivals to the suburbs. Then suddenly, you've got this massive metropolitan area in which commuting 90 minutes one way is the norm.
That's definitely where KL is heading.
THE METROPOLITAN CONSPIRACY
If we consider the trend in which the different areas are developing in Klang Valley, we can see that the viable areas furthest out from KLCC would be Rawang to the north and Seremban to the south. If we were to accept an average commute time of 60 to 90 minutes one way and assume KLCC to be the center, it would make Rawang easily within the metropolis, but not Seremban; yet, it's hard to imagine developments reaching any further north than Rawang.
But wait... What if we move the center from KLCC to Putrajaya? Well, I'll be damned. There's your metropolis of the future.
Imagine a metropolis that covers Rawang from the north to Seremban to the south with Putrajaya as the center. Klang to the west and Semenyih to the east. It all makes sense! No wonder prices have been rising drastically in Cyberjaya and even a good jump in average property cost can be seen in Kota Kemuning, Semenyih, and even Nilai!
Sure, nobody's gonna give a shit for the next few years, but this is a 10 year, 20 year, 30 year master plan, and the keen investors and future readers have already caught on! People still talk about whether Cyberjaya will grow and become a feasible investment. If you're thinking that, you're not one of the keen investors or future readers. Besides, where else are you gonna go? Mont Kiara? Desa ParkCity? Yeah, only if you made a couple million a year, maybe!
By the time you're too old to get a 30 year loan (which is 35 for most banks, fyi), all the dust has settled from the construction rush, Mont Kiara, Desa ParkCity, and all those great exclusive townships will be traffic death traps that'll take you just as long to commute to PJ as it does from Cyberjaya. AND it'll cost you twice as much to invest.
Honestly speaking, it's already too late to invest in areas like Cyberjaya and Kota Kemuning at the time of this blog post, because property there already costs more than what Mont Kiara cost just 3 years ago. But at least now you have some insight to the trend, and hopefully, it'll be enough to guide you through this shitty mess we live in.
DISCALIMER: I am NOT an expert on property, investing, or economics. I'm just a normal family guy who did tons of research and footwork to find out as much information as possible about real estate in Klang Valley and then came up with his own theory. DO NOT base your investments purely on my opinions. I won't take any responsibility for your investment losses. I'll take some donations if you make money, though.
Monday, December 9, 2013
The Property Death Spiral of Malaysia
Looking to buy property? Wonder if you should buy a condo or a house? Want to learn about the different specs of property such as built-up sizes and GFA?
Well, you've come to the right blog post, because I'm going to explain it all to you. Actually, I'm not. Because, you see, it's all too complicated, and even if you learned all of it, it wouldn't really do you any good. Not in Malaysia, at least.
The real estate scene in Malaysia is currently in an absurd state which I like to call the "property death spiral". Property, including condos, terraced houses, and detached houses, are all at an unreasonably high price within the KL and Selangor area. How do I define unreasonable? Unaffordable by the average Malaysian, that's how.
We all know that prices have been going up while income has not increased, and the government is starting to impose taxes and reduce subsidies. The question then, is if the economy is bad and the government has no money, why is property unaffordable? Shouldn't the prices be dropping if no one can afford them?
Well, let's consider who are the people buying property, especially new developments, in Klang Valley. First, the very small percentage of extremely rich and well connected people. These guys are buying up more property than you could shake a stick at. In fact, collectively, they probably own a quarter of all the new developments that we as common folks can only ejaculate at.
Then there are foreign investors, who buy up most of the remaining 3 quarters. Why would they buy property in Malaysia? To make money, of course! You think a million ringgit is expensive for a house? Let's take a look at how much houses cost in Shanghai, Taiwan, or Hong Kong nowadays.
Taiwan: Condo, 2131 square feet, 3 bedrooms, 2 baths, 13 million RM.
Shanghai: Condo, 1421 square feet, 2 bedrooms, 2 baths, 15 million RM.
Hong Kong: Condo, 2158 square feet, 3 bedrooms, 2 baths, 40 million RM (that's roughly RM20k per square foot!!).
These aren't even luxurious places I'm talking about. They're just average apartments.
So you see, Malaysia is still cheap to the folks living in these areas, and since Malaysia is not yet a fully developed country, there is still chance that prices will rise, and hence, to them, it's still a viable investment.
So we have these rich locals and foreign investors pushing the prices up on our property. And that's what the government wants. You see, it's more important for the government to gather foreign investments than it is for them to ensure the citizens have adequate opportunities to buy houses, because it makes them much more money that way.
Once these rich folks who only buy property for investment and not live in have bought the property, they then look for opportunities to sell them to...you guessed it! To other rich locals and foreign investors. Obviously they want to make money, so they sell it for more than they bought it to others who want to invest and are willing to wait longer than they are. So the prices keep going up, and keep exchanging hands between the same people.
Yes. The Property Death Spiral.
5 years ago, a 3000 square feet built-up terraced house in Puchong cost around RM350k. Just 5 years from then, the same thing now costs a million RM. That's roughly TRIPLE the cost. Have our income gone up TRIPLE in the last 5 years. If yours has, please let me know.
Without focusing on foreign investments, though, the government is unable to generate enough revenue for the country to grow at an ideal pace. So basically, we're being sacrificed in return for money.
Does that even make sense? The growth of the country should be for its people. If to facilitate that growth means making daily living worse for the people, is there even meaning to the growth? To put it in another way, why do we want to grow as a country at all if it doesn't mean better living for the people?
If the government uses all the profit generated from these investments to create benefits for the people, it would make sense. Instead, though, they build useless palaces and envision public transportation that's poorly designed, poorly executed, and is never going to make it in time to help the majority of the people.
I think that there is another master plan. In fact, it's inevitable that they'd have to have an alternate plan to "fix" things, because there is no way that KL will be able to prosper the way things are going.
Stay tuned to my next blog post when I talk about what I think the future plan for Malaysia's capital is going to be. Until then, take care and be kind to others.
Well, you've come to the right blog post, because I'm going to explain it all to you. Actually, I'm not. Because, you see, it's all too complicated, and even if you learned all of it, it wouldn't really do you any good. Not in Malaysia, at least.
The real estate scene in Malaysia is currently in an absurd state which I like to call the "property death spiral". Property, including condos, terraced houses, and detached houses, are all at an unreasonably high price within the KL and Selangor area. How do I define unreasonable? Unaffordable by the average Malaysian, that's how.
We all know that prices have been going up while income has not increased, and the government is starting to impose taxes and reduce subsidies. The question then, is if the economy is bad and the government has no money, why is property unaffordable? Shouldn't the prices be dropping if no one can afford them?
Well, let's consider who are the people buying property, especially new developments, in Klang Valley. First, the very small percentage of extremely rich and well connected people. These guys are buying up more property than you could shake a stick at. In fact, collectively, they probably own a quarter of all the new developments that we as common folks can only ejaculate at.
Then there are foreign investors, who buy up most of the remaining 3 quarters. Why would they buy property in Malaysia? To make money, of course! You think a million ringgit is expensive for a house? Let's take a look at how much houses cost in Shanghai, Taiwan, or Hong Kong nowadays.
Taiwan: Condo, 2131 square feet, 3 bedrooms, 2 baths, 13 million RM.
Shanghai: Condo, 1421 square feet, 2 bedrooms, 2 baths, 15 million RM.
Hong Kong: Condo, 2158 square feet, 3 bedrooms, 2 baths, 40 million RM (that's roughly RM20k per square foot!!).
These aren't even luxurious places I'm talking about. They're just average apartments.
So you see, Malaysia is still cheap to the folks living in these areas, and since Malaysia is not yet a fully developed country, there is still chance that prices will rise, and hence, to them, it's still a viable investment.
So we have these rich locals and foreign investors pushing the prices up on our property. And that's what the government wants. You see, it's more important for the government to gather foreign investments than it is for them to ensure the citizens have adequate opportunities to buy houses, because it makes them much more money that way.
Once these rich folks who only buy property for investment and not live in have bought the property, they then look for opportunities to sell them to...you guessed it! To other rich locals and foreign investors. Obviously they want to make money, so they sell it for more than they bought it to others who want to invest and are willing to wait longer than they are. So the prices keep going up, and keep exchanging hands between the same people.
Yes. The Property Death Spiral.
5 years ago, a 3000 square feet built-up terraced house in Puchong cost around RM350k. Just 5 years from then, the same thing now costs a million RM. That's roughly TRIPLE the cost. Have our income gone up TRIPLE in the last 5 years. If yours has, please let me know.
Without focusing on foreign investments, though, the government is unable to generate enough revenue for the country to grow at an ideal pace. So basically, we're being sacrificed in return for money.
Does that even make sense? The growth of the country should be for its people. If to facilitate that growth means making daily living worse for the people, is there even meaning to the growth? To put it in another way, why do we want to grow as a country at all if it doesn't mean better living for the people?
If the government uses all the profit generated from these investments to create benefits for the people, it would make sense. Instead, though, they build useless palaces and envision public transportation that's poorly designed, poorly executed, and is never going to make it in time to help the majority of the people.
I think that there is another master plan. In fact, it's inevitable that they'd have to have an alternate plan to "fix" things, because there is no way that KL will be able to prosper the way things are going.
Stay tuned to my next blog post when I talk about what I think the future plan for Malaysia's capital is going to be. Until then, take care and be kind to others.
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