The 10 Year Cycle

I’m a firm believer in the 10-year cycle. I’d be the first to admit that it isn’t the most scientific but it’s hard to ignore.

I was a spectator of the 1987 crash, participated in the 1997 Asian Financial Crisis and took advantage of the 2008 Global Recession. If the trend continues the next one will be around 2017-2019. My personal belief is that the epicentre would be the decade’s star, China. Given China’s political framework it could be more than just a financial crisis, possibly a game changer.

My game plan is to build up a war chest by selling down all investment properties and equities by 2016. If you get the timing of a major crisis right you can sit pretty for the rest of the cycle. As with the drops post crisis surges are as unbelievable. 

KLCC Properties

There’s organic growth and there’s transformational growth. I believe that the KLCC area will experience transformational growth when affluent Malaysians finally view the KLCC area as a desirable place to live. City living is still a relatively new concept in KL, consequently it is the only major city centre where there is minimal to no premium for city living. This is especially surprising given KL’s notorious traffic jams and weak public transportation system.

Prior to the completion of the Petronas Twin Towers in 1998 KL was a fragmented city without a focal point. The 1997 Asian Financial Crisis delayed the development of the area but from 2003 to 2008 there was a speculative boom with thousands of units launched and prices reaching record levels. However, there wasn’t a corresponding real demand. There weren’t enough expatriate tenants and affluent locals weren’t interested in living in the city. Coupled with the 2008 Global Recession, KLCC property prices plunged. We are currently at levels where KLCC property prices are similar to those in affluent residential suburbs, Bangsar, Damansara Heights, etc.

	Size	Price	Psf
KLCC Properties
Oval	3,750 sf	RM4.5m	RM1.2k psf
Avare	3,800 sf	RM3.8m	RM1.0k psf
One KL	3,285 sf	RM3.9m	RM1.2k psf
Park 7	3,083 sf	RM3.7m	RM1.2k psf
Bangsar/DH
One Menerung	4,385 sf	RM5.3m	RM1.2k psf
Bangsar Peak	2,950 sf	RM3.0m	RM1.0k psf
Twins Damansara	1,480 sf	RM1.4m	RM950 psf

My view is that things will change dramatically. For a start, with the completion of the first phase of KLCC condos the area does not feel like a construction zone anymore. The reality is that there will be some 4-6k families living within walking distance of the Twin Towers. Granted it may take time as owners face the reality of slashing rents to get tenants. However, with such a high concentration of affluent families the lifestyle services will follow. Café’s and restaurants, child enrichment centres for the many families, speciality grocers, etc. Interconnectivity has already improved with the completion of the air-conditioned walkway linking the area to Pavilion.  The development of Lot 185 and 167 (towards KLCC mosque) will further improve interconnectivity and expand the lifestyle offerings of Suria Mall, and Platinum Park will add an extra dimension.

When the lifestyle components come online and the walking culture catches on affluent Malaysians will finally appreciate the appeal of city living. This will be turning the point, expatriates have been the early adopters but their numbers are not sufficient. If all that happens is that KLCC prices regain their pre-2008 peaks prices would increase by 50-100%.

Education in Malaysia (Part 2)

International Schools

There are a slew of international schools ranging from RM11.4k per year (Tenby, Setia Alam) to over RM60k per year (Mont Kiara International School) for Year 1. We eliminated Mont Kiara International School because of the astronomical fees. Some like Australian International School were eliminated because of location with no convincing reputation.

Garden International School

Our first stop was Garden International School. It’s on the higher end of the scale at RM31k per year but it has been around long enough that we tended to associate international schools with either Garden School or ISKL (International School Kuala Lumpur). GIS’ campus was nice enough and the admissions personnel impressed us enough. There were so many hoops to jump through to get a spot we were almost convinced that we had to have it. We took all the forms noted the deadlines and assessment requirements, and reflected on it. What did we really remember about GIS students when we were students? They certainly new how to have a good time, drinking, smoking and “other things”, but we really didn’t remember anything about them academically. We moved on.

Cempaka

Cempaka has a strong academic reputation. We heard that the Damansara Heights campus had just switched to full international. We were surprised that while they had switched the curriculum and increased the fees, nothing else had changed. The campus had not been upgraded (or even maintained well) and they just retrained their existing teachers. We really didn’t like the campus and although it may be partly psychological we felt like we were being taken for a ride. Basically, switch the syllabus from local to international, keep everything else the same but charge more (much more).

We couldn’t shake the reputation of Cempaka and decided to check out the Cheras campus that has been teaching the international syllabus for a long time. Cempaka is a hybrid of what you’d expect from an academic centric Asian school and a more liberal Western school. The fact that the Year 1 classrooms are arranged in rows facing the teacher rather than a group set up speaks volumes. The students trudge along with vacation size pulley bags. They openly profess that they teach their students ahead of their years and academic performance trumps everything else. The Cheras campus is beautiful but the location (unless you live in Cheras) is horrible. During non-peak hours it took us 30-40 minutes from Mont Kiara. If we did send our kids there we either had to move or be willing to live in the car. There was one thing that stuck with me. I asked them what was the difference between the local curriculum teachers and international curriculum teachers – nothing! The only difference is the subsequent training. I would have expected some difference given the much higher fees.  We liked the campus (not the location), we liked the academic results of the students and the pricing (about RM26k per year). But we decided against it ironically because we didn’t like the extents that the students had to go to achieve those results. We want out kids to have a well-rounded education and we don’t want our Year 1 kid to be taught Year 3 Maths. We also couldn’t get past the daily travel time that our kids would have to endure.

Tenby

Tenby is very popular because it is the cheapest international school. At RM11k per year it is 1/6^th the price of Mont Kiara International School (the most expensive) and even lower than certain private local schools. The immediate concern is how can a school compete for talent at such low rates? The simple answer is that it can’t.

Tenby is rumoured to suffer from a very high teacher turnover leading to poor teacher quality. Tenby is far, not as bad as Cempaka Cheras but still far. The campus was under renovation so it is hard to get an accurate feel for the place but there was a general sense of unruliness. We were touring during the morning break and the kids were just running rampant. In the young students block one of the kids actually ran into me on his tricycle. The admissions staff didn’t impress me. They were evasive about teacher turnover without revealing details. They weren’t willing to share their minimum teacher qualifications and most worrying they weren’t even willing to show us any sample teacher credentials stating that it was confidential! Teacher quality is something we weren’t willing to compromise. Tenby is popular because it is cheap.

International School @ Park City

International School @ Park City is brand new and at RM33k per year it is one of the more expensive. The grounds could have been more expansive but we were generally impressed with the facilities. The thing that we really liked was the calibre of teachers and the headmaster having recently read about the Green School, Bali. Unlike the “other” school the background and qualifications of all the teachers were publically displayed. In a way we also liked it coz it was a fresh start and as pioneer parents we could play a part in shaping the school.

Education in Malaysia (Part 1)

Our kids’ education is going to be our single largest expense investment.

To put it bluntly, we no longer believe in the national education system. Clearly we are not alone as education is booming business in Malaysia. There are a myriad of choices dictated by how much you can afford. At the higher end of the scale it would cost RM1-1.5 million to take a child through to a basic undergraduate degree. At these levels your child would completely avoid the Malaysian education system.

There are of course many combinations. Some parents opt for a foundation at Chinese Independent schools to master Mandarin. There is also the option of private local curriculum schools that are one up on government schools without the astronomical costs. There are also many twinning programs that allow you to save costs by completing much of undergraduate degree in Malaysia.

We are considering a few different combinations, with cost being a big part of the decision process.

		Total	High School	Pre-U & U
		RM	RM	RM
Pure International(1)	International all the way	1.1m	450k	650k
Chinese Foundation(2)	Chinese primary then International	850k	200k	650k
Hybrid(3)	Private primary then International	930k	280k	650k

Assumptions:

(1)  Based on International School @ Park City

(2)  Based on primary at Kuen Cheng High School

(3)  Based on primary at Sri KDU

The underlying assumption is that A-Levels is at an international School in Malaysia followed by a basic undergraduate degree at an Australian University. At RM500k University accounts for most of the cost.  We recognize that we could save a lot if we took advantage of twinning programs but if possible we would like our kids to enjoy the full University experience. Hopefully our kids would be able to obtain some form of financial aid.

High School

My wife speaks no Chinese and my Cantonese is basic, Mandarin? only enough to impress my wife (remember she speaks no Chinese).  It would be a huge advantage if my kids were fluent in Mandarin since the Chinese and Muslims are going to rule the world (or at least the votes). Since they aren’t likely to be Muslim Chinese (my wife is Catholic) being a Chinese from a Muslim country would be the next best thing.

The downside, Chinese schools in Malaysia seem to operate in a different era. There are a multitude of horror stories, the kid who gets whacked for sweating too much (he is somewhat over weight), having to spend the day with your poor results pinned to your back, etc. Even the teacher admitted that the first weeks are always tough as the teachers establish respect and position. When it comes down to it I can’t imagine putting my three girls through it. At home we encourage independence, decision-making, discussion, etc. The philosophy of Chinese schools clashes with the way we want to bring up our kids.

Private Local Curriculum School. This would have been the compromise option. Good facilities and better teachers but without the crazy costs. Schools like Sri KDU are in the region of RM1,300 per month. I actually explored Sri Cempaka and Sri KDU. You would think they would flourish but the opposite is actually happening. Private local syllabus schools are shifting their business model. Sri Garden and Sri Cempaka Damansara Heights have moved to an international curriculum. Sri KDU has introduced an international syllabus option for secondary and I’m guessing would probably do so for primary in time (if not already).

There isn’t an official reason but I’m guessing, as with all businesses, it’s due to demand. Many parents aren’t happy with the move to teach Math and Science back to Malay. I expressed the same concern, their solution? In addition to teaching their students Maths and Science in Malay they would also teach their students Maths and Science in English he said proudly - one for passing exams and one for the real world. This is nuts and I’m not going to be a part of it!

(To be continued, International Schools!)

Investing in Properties in Malaysia

General Principle

Investing in properties in Malaysia is the simplest form of investment. Unlike equities, there are definite and obvious periods of peaks and troughs. Granted it is impossible to predict the highest and lowest point but you know when it is generally a good or bad period. Similarly, unlike equities, properties can’t go bankrupt or suffer from poor corporate governance.

For most it is a matter of discipline, resisting the pull when markets peak, and poor debt planning. If you stick to the simple rule of buying with appropriate leverage only when markets are obviously weak and selling when markets are obviously high, you will make a reasonable return.

BUY Phase 1

If a reputable developer is developing a large development with multiple phases over an extended period, buy Phase 1. It is in the developer’s interest that Phase 1 is a resounding success as those are the statistics they are going to use to sell the subsequent phases. It isn’t uncommon for developers to price Phase 1 close to cost. Buying from a reputable developer lessens the risk of abandonment, poor finishing, etc.

Agents Are NOT Your Friend

Real estate agents are interested in closing a deal, as opposed to getting you the best deal. If the agent is helping you with the purchase or rental of a property, their commission is a percentage of transaction value. Put simply, the higher the price you pay the more commission they get.

Even when your interests are technically aligned (i.e. when they represent you as the seller or landlord) the difference in the commission they get is not significant enough to fight for the best price for you. For example, for the sale of a RM1 million property, RM50k more equates to a commission of RM21k as opposed to RM20k. Most agents would rather secure the deal and move on than to fight for an additional RM1k commission. However, as a landlord the difference could be a lot more significant. Assuming you had put down 20% or RM200k equity for the property, RM50k more is an additional 25% to you.

The point, take your agent’s advice with a pinch of salt.

Your Home is NOT an Investment

It is a misconception to view your home as an investment. Yes, it will probably increase in value but unless you’re willing to downgrade your lifestyle it isn’t an investment that you will ever monetize.  When buying a new home people often buy as much as they can afford convincing themselves that properties will appreciate. What they should do is buy a home that meets their needs and use the savings to purchase an investment property.

There’s obviously much more in depth analysis one can do on macro elements like housing supply and affordability, or analysis on specific areas to determine whether an area is fairly valued. These are real basics that are easy to put into practice.