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Wednesday, October 23rd, 2019

Heritage property mismatch

by October 15, 2016 General

Penang heritage property value surges, but not in tandem with rental yield

THE value of heritage properties in George Town has surged substantially since 2008, but the same cannot be said for rental yield, which is what drives most entrepreneurs to invest.

Depending on the location, size and condition of the heritage properties, the present pricing on a per sq ft (psf) basis ranges from RM550 psf to over RM2,000 psf, compared to between RM400 psf and RM700 psf in 2008.

The quantum of appreciation is between 37% and 200% due to investments made by foreigners and locals.

According to a National Property Information Centre report, the most expensive transaction in George Town this year was for RM2,400 psf for a 831 sq ft pre-war property in Bishop Street.

The other pre-war properties, with built-up of 800 sq ft and 950 sq ft, sold this year in Beach Street and King Street, near Bishop Street, fetched between RM2,100 psf and RM2,300 psf.

However, there isn’t a similar leap in rental yield.

“While prices of heritage properties have increased compared to 2008, the same cannot be said for rental yields,” Raine & Horne Malaysia senior partner Michael Geh says.

In 2008, the rental of heritage properties, depending on the location, size, and their condition, was between RM1,000 and RM3,000, compared to the rental today which is between RM3,000 and RM8,000.

Calculated on a yearly basis, the rental yield is not attractive.

“Today the yield is 4.8% per year, compared to 4.5% in 2008.

“That the value has appreciated faster than the rental shows that there is very little demand to rent properties in the state. Rental yield should be higher at 5%-6% to be attractive.

“Otherwise, investors would put their money somewhere else,” Geh adds.

The rental yield is the net rental over a 12-month period divided by the market value of the property.

“If the yield stays at this level for the long term, there will come a time when investors would not want to invest in pre-war properties in Penang due to unattractive return on investments (ROI).

“Should that scenario happen, the value of heritage properties would be stagnant, driving potential investors, foreign and local, away from investing in heritage properties in George Town.

“Who would then conserve the heritage properties in George Town so that we can hold on to the Unesco World Heritage Site status?” asks Geh.

There is always a difference between the rental demanded and the actual rental paid, Geh says.

“If you were to buy a heritage property in a prime area for RM1.8mil, taking an 80% loan for the amount, the monthly interest to service is about RM10,000.

“However, given the present economic climate, it is difficult, albeit not impossible, to obtain a RM10,000 rental to cover the instalment.

“In Penang, the demanded rental would usually be negotiated and the actual rental paid would be between RM3,000 and RM8,000, depending on the location, size and condition of the pre-war property.

Old to new: Renovated pre-war buildings converted into a hotel.

Old to new: Renovated pre-war buildings converted into a hotel.

“What is demanded by the landlord is not what is actually paid as rental.

“And the landlord in order to rent out the property to subsidise the interest for the loan has to eventually compromise on the amount of the actual rental. Always remember that there are choices of renovated pre-war properties in the market,” Geh adds.

Market forces

Jonathan Foo, a Singaporean with Penang roots, who is restoring the Majestic Theatre, a heritage landmark in George Town, says that as the cost of buying a heritage property is high and the renovation cost is also high, it is only natural that the landlord would want higher rental.

“Restoration cost is high due to the stringent heritage guidelines and requirements for authentic materials to be used. We have to import some of the tiles and construction materials from Vietnam, as they could not be sourced locally.

“We have spent in excess of RM10mil to conserve our heritage properties in George Town. If we cannot recover the capital spent, then how are we to launch future heritage conservation projects?

“Who would invest to conserve heritage properties in George Town? When it comes to rental, landlords can set a price, and if tenants are willing, so be it.

“If no one wants to pay a certain price, the rental would naturally come down. Let the market forces decide,” Foo said.

KPMG partner Ooi Kok Seng says some of the foreign and local investors buying up heritage properties in George Town are aware that the present rental yield is not that attractive.

“But they are not unduly concerned as they are heritage property collectors and are aware that there is a limited supply of such in George Town and, for that matter, in South-East Asia.

“They are acquiring because anything that is short in supply will eventually see its value appreciate.

“They therefore expect to realise the returns in the medium to long term,” Kok Seng says.

Return to majesty: The interior of the Majestic Theatre.

Return to majesty: The interior of the Majestic Theatre.

As the ringgit has weakened, the price of heritage properties in George Town has become very attractive in the region.

“In Singapore, the pricing of heritage properties average around S$3,000 (RM9,000) psf due to shortage in the market, which makes the price many times more expensive than Penang’s.

“There are 37 heritage sites in South-East Asia, and very few of them are cities with a large number of heritage properties.

“That is why the heritage properties in George Town attract investors,” Kok Seng says.

According to George Town World Heritage Inc, there are 3,771 heritage properties in George Town belonging to category II. Category II properties are those residences and business premises that have existed for generations.

They were built to support the traditional beliefs of the inhabitants and users.

In the George Town’s World Heritage Site (WHS), there are 82 buildings, gateways, cemeteries, and sites categorised as Category 1.

Category 1 buildings and monuments are important because they reflect the authenticity of the cultural landscape and therefore the outstanding universal values of the WHS.

High restoration cost

The Malaysian Institute of Architects (PAM, Northern Chapter) past chairman Datuk Lawrence Lim says the cost of restoring heritage properties has increased by about 40% since 2008, due to the stringent requirement by the local authorities to use authentic construction materials.

According to Lim, construction materials close to the design of the originals have to be used in particular for the windows and roofs.

“Today the cost to restore such houses ranged between RM150,000 and RM500,000 per unit.

“A simple restoration for a heritage property with a 2,000 sq ft built-up area can cost about RM150,000.

“It cost just RM50,000 to change the roof of a heritage house to comply with the local guideline,” he says.

Despite the increase in heritage restoration cost, there are still local and foreign investors initiating such projects.

Lim, who is also East Design managing director, says the company is now undertaking restoration projects for heritage houses in Hong Kong Street and Magazine Road.

“We are restoring the Kun Kee office building at Hong Kong Street, the manufacturer of Penang’s famous white coffee.

“The other project involves the restoration of 10 pre-war units in Magazine Road for commercial use,” Lim says.

The high restoration cost prevents local owners from restoring and renovating their heritage properties.

“Since they are not able to undertake such projects, they sell to investors who have the funds.

“To encourage more local owners to restore the pre-war houses, the local authorities could look into introducing friendlier restoration guidelines and allow alternative raw materials to be used for restoration projects,” Lim adds.

There is also a hefty fee to change the use of heritage residential premises for commercial purposes. “The rate is RM100 per sq m which works out to about RM19,000 for a pre-war property of about 2,000 sq ft in built-up.

“This is another reason why there is a preference to sell heritage homes to foreign or local entrepreneurs, since the local owner could not afford to convert the premises for commercial use,” Lim says.

The hefty conversion rates have also put off some foreign investors from acquiring heritage properties in George Town.

“Our Lim Association owns several heritage properties in prime areas of George Town which had attracted the attention of foreign investors.

“But when these investors found out about the cost to convert and renovate the properties, their view is that it would take a long time to recoup their investment.

“From their perspective, it does not make sense to invest hundreds of thousands just to convert the property for commercial use even before they start doing business, which may or may not be profitable.

“Maybe the state government could look into lowering the conversion charges for pre-war houses, so that locals could also renovate the properties for commercial use,” Lim adds.

On the high cost of restoration, George Town World Heritage Inc (GTWI) general manager Dr Ang Ming Chee says GTWI is working with the local authorities to introduce friendly and sustainable restoration guidelines to make restoring heritage projects affordable.

GTWI is also mediating between the tenants and the landlords to obtain for the former a role to play in the restoration.

“We are also planning a series of seminars on sustainable heritage restoration for the benefit of landlords and tenants,” she says.

Datuk Finn Choong, a fifth-generation member of the Choong Cheng Kean family, says the family used to own about 10% of the 3,000 odd pre-war properties in George Town, of which the bulk are located in the core heritage zone.

“As some of these properties have been sold over the years, our market share is now less than 10%.

“Currently, these properties are being rented out at market rate.

“As businessmen, we are always opened to fresh opportunities to further develop our pre-war properties to generate long-term recurring income,” says Choong.

On overseas interest in local pre-war properties, Choong says their investments help to create jobs for the renovation and construction material supply business.

“Unlike the bond and stock market, property investment is a long-term commitment,” he adds.

Rent Control Act

Datuk Ooi Sian Hian, who is Ghee Hiang executive chairman, says if the state government reintroduces the Rent Control Act, the value of heritage properties would plunge.

“There won’t be proper maintenance for the heritage buildings, which would be left to deteriorate, and nothing left to conserve eventually,” Sian Hian says.

The last rent control act in Malaysia was the Rent Control Act 1966.

Under this act, the owners of houses built before 1948, commonly known as pre-war buildings, were not allowed to increase rents indiscriminately.

About 12,000 houses were under rent control.

“Instead of renovating the pre-war properties for food and beverage or hospitality businesses, local investors should also look into renovating the premises for own use.

“Otherwise there would be a glut of food and beverage and hospitality outlets housed in heritage properties,” he says.

According to Sian Hian, to encourage a variety of business in the core heritage area, the local authorities should impose strict control to discourage similar businesses from operating within a few feet of each other.

“There should also be concessions for quit rent, property assessment, and planning requirements for those involved in restoring heritage properties,” Sian Hian says.

Sian Hian is planning to restore the heritage property of his family’s maternal grandparents at 123 Macalister Road.

The 3,600 sq ft property, sitting on a 30,000 sq ft site, was built in the 19th century, and came under the ownership of Ooi’s maternal grandparents in the 1950s.

Sian Hian’s family has 10 properties at Prangin Lane, nine of which he will restore at a later date for commercial re-use.