This article is worth to read though it was written in 2018.
There are some lessons to learn on property investment with GRR.
With the two-year guaranteed rental returns having expired in February 2017, investors in the Iskandar Malaysia project say their returns are now close to zero. Their plight highlights some of the real risks of investing overseas, even if it is just across the Causeway.
Singaporean Victor Ng remembers the first time he cast his eyes on a potential investment in Iskandar Malaysia: It was Somerset Puteri Harbour in Iskandar Puteri (formerly known as Nusajaya) at a weekend preview in early February 2012. It was not an impulse purchase, he says. Before the purchase, he had visited the site and other projects launched in the area. “I felt that Puteri Harbour was an up-and-coming area,” Ng tells EdgeProp Singapore in a recent interview.
About 120 out of 132 units offered for sale under a sale-and-leaseback scheme were snapped up at roadshows in Singapore and Kuala Lumpur over a fortnight, according to a report by The Edge Financial Daily in Feb 24, 2012. The rest were purchased after that. A majority of the buyers (about 80%) were said to be Singaporeans.
Somerset Puteri Harbour is a 204-unit serviced apartment project located on the waterfront at Puteri Harbour in Iskandar Malaysia. Units ranged from studios, and one- to three-bedroom apartments measuring 762 to 1,496 sq ft, to penthouses from 3,650 sq ft. Prices of units sold ranged from RM720,000 to RM4.5 million, or an average of RM900 psf. Upon completion, these apartments would be managed by The Ascott — the serviced residence arm of Singapore-listed CapitaLand — for the first 10 years. Under the leaseback agreement, investors were offered a guaranteed rental return (GRR) of 5% for the first two years after completion.
Ng paid RM982,669 for a 1,178 sq ft, two-bedroom serviced apartment at Somerset Puteri Harbour, which he purchased off-plan. Another investor who purchased a unit at launch was Singaporean Peter Lim. “I was attracted by the Somerset brand and the reputation of the developer, UMLand [United Malayan Land], he adds. “I also liked the harbourfront locale, which is very niche, and very scarce.”
Somerset is one of the brands under Ascott Ltd, the serviced residence arm of Singapore-listed property group, CapitaLand. Ascott has a third-party management contract with UMLand to manage the operations of Somerset Puteri Harbour. “For third-party management contracts, our scope is confined to managing the operations of the properties on behalf of the property developers,” says an Ascott spokesperson in an email response.
Other than the 132 units offered for sale and leaseback, another 72 units facing the marina at Somerset Puteri Harbour were sold as condominium units without a leaseback agreement. The project was marketed by Nusajaya Consolidated, a 50:50 joint venture between UMLand and UEM Sunrise. Clear Dynamic is a subsidiary of Nusajaya Consolidated, and was set up for the purpose of the leaseback administration. Many of the buyers of Somerset Puteri Harbour purchased their units from marketing agent Norman Sia of NS Global, which has since closed its Singapore office.
Back then, many of the investors of Somerset Puteri Harbour went to NS Global’s office in Singapore to sign the sale-and-purchase agreement. It was only when they did so that they were given the leaseback agreement to sign as well. “There were three big chunks of documents,” says Ng. “Obviously, we didn’t have time to run through the entire three sets of documentation there and then. It caught us by surprise and we didn’t want to risk losing our option money.”
Puteri Harbour full of promise then
In hindsight, 2012/13 was the peak of the property market in Iskandar Malaysia. Puteri Harbour was perceived to hold the most promise: Positioned as an integrated waterfront and marina development by master developer UEM Sunrise, it spans 688 acres (275ha) in the 24,000 Nusajaya precinct, which has since been renamed Iskandar Puteri.
Puteri Harbour appealed to many Singaporean investors and developers then, as it was a waterfront residential enclave that has many of the attributes of Sentosa Cove, but at a fraction of the land and property prices. The properties there are freehold, unlike those in Sentosa Cove, which are 99-year leasehold.
The location of Somerset Puteri Harbour is ideal, as it is just a stone’s throw away from Legoland and an indoor theme park featuring popular children’s cartoon characters such as Hello Kitty, Thomas and Friends, Barney and Bob the Builder. It is within a 20-minute drive of the Second Link and a 25-minute drive of Johor’s Senai International Airport.
“Puteri Harbour was meant to be an area of intense development and strong growth,” says Dennis Ng, group managing director of UMLand. “We believe the Puteri Harbour area will continue to improve as more residents move in. With the availability of Grade-A office space and other facilities in Medini, which is just a 10-minute drive away, more businesses will also move there.”
Banking on RTS Link
From 2011 to 2013, there was a lot of excitement about greater connectivity between Singapore and Malaysia. For instance, the Singapore- Johor Baru Rapid Transit System (RTS Link) was announced in 2010 and, in January this year, Singapore Prime Minister Lee Hsien Loong witnessed the signing of a legally binding bilateral agreement for the RTS Link, together with then Malaysian Prime Minister Najib Razak at the Istana.
The Singapore terminus for the RTS Link is to be located at Woodlands North station on the Thomson-East Coast Line, while the Johor Baru terminus will be at Bukit Chagar near JB Sentral, connecting with the Keretapi Tanah Melayu (KTM) station. The RTS Link is expected to ease congestion at the Causeway by 15%.
“To me, the biggest change is the RTS Link, which will reduce congestion in the two existing areas — the Causeway and Second Link,” says UMLand’s Ng. “The dream of living in Iskandar and working in Singapore is viable again. There are a lot of residents who moved in because of the schools, but you still need businesses and supporting facilities to come in before more people move in.”
In 2013, the buzz was the high-speed rail (HSR) between Singapore and Kuala Lumpur, which would offer a 90-minute travelling time. The designated Singapore terminus for the HSR was in Jurong East. Another proposal to ease traffic congestion was a ferry service from Singapore’s HarbourFront Centre to Puteri Harbour, where there are already customs checkpoints in place. However, the HSR has since been deferred and the ferry service, a moot point.
Ups and downs
Somerset Puteri Harbour rode the ups and downs in Iskandar Malaysia. The project was completed in November 2014, more than a year after the scheduled completion in 2013. The GRR commenced in March 2015. Typically, hotels take two to three years for their operations to stabilise. The GRR was designed “to help smooth out the cash flow during the initial years”, adds UMLand’s Ng.
During the two-year GRR period, the 5% returns were promptly paid. For a typical unit, it was RM7,552 bimonthly, or RM3,776 a month. The last payment of RM7,552 was received in January 2017 for December and January.
When the GRR period ended in February 2017, the investors did not hear from Clear Dynamic or UM Land. “For the first six months after the GRR, they just stopped paying us, but they didn’t tell us why,” says Simon Poh, one of the investors who spoke to EdgeProp Singapore. “They just didn’t communicate with us. We were left in the cold as to what was happening until a few of us contacted them and arranged for a meeting to find out what was going on.”
Poh and a business partner had made a joint purchase of a one-bedroom unit at Somerset Puteri Harbour for about RM906,000. “It’s been one year and nine months since the end of the GRR period,” he says.
A summary of bimonthly net rent paid to an owner over the 18-month period from March/ April 2017 to July/August 2018 came to a total of RM8,472.87 received. Based on the purchase price of the unit of RM982,669, the annualised return over one year is 0.57%.
On months when the rents are negative, the losses accrued are deferred to the future when profits are made.
Investors lead the charge
Investors of Somerset Puteri Harbour who purchased units under the leaseback scheme decided to call for a meeting with representatives of UMLand, Clear Dynamic and Ascott to discuss how the returns post-GRR could be improved. The first meeting was held on July 19, 2017. A second meeting was held on Oct 24, 2017. In late December 2017, the owners set up the Leaseback Owners Committee (LOC) to liaise with representatives of UMLand and Clear Dynamic. Since February this year, a bimonthly meeting has been held at Somerset Puteri Harbour with representatives of UMLand and Clear Dynamic, along with an Ascott representative.
“I requested for that,” says one Mr Chan, an investor in Somerset Puteri Harbour. “Fortunately, the managing director of UMLand, Daniel Chan, is a forthcoming and reasonable man. At these bimonthly meetings, at least there is communication. There is usually a group of four or five of us who actively participate in these meetings.”
According to an email dated Oct 29 from Clear Dynamic to investors, Somerset Puteri Harbour had “gone through a bad time” in 1Q2018 and 2Q2018. As gross operating profits were low, not all the owners’ expenses could be covered, resulting in “no distribution” to investors.
Cumulative losses after taking into consideration owners’ expenses amounted to RM603,367.92. The losses would then be deducted progressively — at RM100,000 a month from October 2018 to June 2019, where the final deduction of RM103,367.92 would be made.
Eco-system still being fleshed out
“We are trying our best, and we have gone to the extent of subsidising the returns for now to make it easier for the investors,” says UMLand’s Ng. “Even the operating expense is advanced by us, and we won’t claim it back until times are better. We know the property could be performing better if external factors improve. Puteri Harbour is a beautifully master planned area that is still in the process of being fleshed out.”
For instance, a Khazanah-linked company owns three blocks of retail, shopping arcade and F&B space at Somerset Puteri Harbour. It has remained hoarded up. “We have been trying for years to get them to open,” says Ng.
Nearby, Pan Pacific Serviced Suites at the Puteri Cove mixed-use development is scheduled to open in 2Q2019. It will have 205 studios and one- and two-bedroom serviced suites in the third tower of Puteri Cove, developed jointly by Pacific Star Development and DB2. The Puteri Cove project also comprises two other 32-storey residential towers with a total of 658 units; four low-rise SOHO blocks; and a lifestyle retail centre fronting the marina. The two residential towers have already obtained Certificate of Completion and Compliance, and is about 80% sold.
The retail centre at Puteri Cove is expected to open in 2Q2019, with the Pasar gourmet market as an anchor tenant. The One°15 marina operator at Sentosa Cove, SUTL Group, will be opening its sales gallery for its marina operations in Puteri Harbour: the private marina in Puteri Cove and a third marina for super yachts.
Some projects in Puteri Harbour have been delayed, says Edmund Tie & Co (ET&Co) CEO Ong Choon Fah. “The postponement of the HSR project has indirectly affected some of the projects located near the proposed station in Iskandar Puteri. For now, the lack of clearer policies from the new government has left uncertainties in mega developments such as Forest City. However, properties that are located in mature areas or near public transport still offer good investment in the long term.”
Ong adds that Puteri Harbour has a great waterfront lifestyle offering for residents, complete with hotels and indoor theme parks. It is also an ideal place for families with children. “However, more needs to be done — public spaces to encourage place-making — to generate higher visitor traffic and more business for the precinct. Similar to the Business Improvement District in Singapore, a special body can be set up where owners, developers and other stakeholders work together to increase the vibrancy in Puteri Harbour.”
Competitive hospitality environment
From 2015 to 2017, the number of hotel rooms in Johor Baru grew 15% to 12,300. Most of the existing hotel supply is in the mid-scale segment with 66% share, says HVS in a report on July 3.
Based on data published by Tourism Malaysia, hotels in Johor had an average occupancy rate of 57% from January to March. Meanwhile, the occupancy rate for five-star hotels was 40% from April to June; 45% for four-star hotels; and 68% for three-star hotels, according to ET&Co.
“Some hotels do enjoy high occupancy rates during weekends, as Singaporeans always fancy a weekend getaway across the Causeway,” says Ong. “The occupancy rate is also contributed by locals who visit family or friends in Singapore but prefer to stay at hotels in Johor because of the cheaper room rates.” Location and accessibility to amenities like public transport, eateries, and shopping centres is important. For example, Amari Johor Bahru and Suasana Suites Johor Bahru enjoy good occupancy rates because they are easily accessible via public transport and surrounded by shopping malls and F&B outlets, observes Ong.
Nevertheless, with the increasing competition from Airbnb catering to large groups of family or friends, it could affect both hotel room and occupancy rates, concedes Ong. For a group of six that would like to stay in Johor Baru city centre over the weekend, Airbnb offers a list of apartments or condominiums in the range of RM200 to RM500 a night, while a serviced apartment by an operator can be priced at more than RM700 a night.
On weekdays, however, hotel occupancy rates in Puteri Harbour are a little more challenging. “The hotels and serviced apartments in Puteri Harbour also face competition from condominium owners who put their homes up for short-term stays on Airbnb and other similar platforms,” says Chee Hok Yean, regional president of HVS Asia Pacific. “For long-term stays, there’s competition from houses near the area.”
‘Reasonable returns’
GRR schemes are offered to attract investors from Singapore and other countries to help increase the take-up rate in these projects. “Few projects offering GRR have been very successful, though,” says ET&Co’s Ong (see table).
“Generally, the schemes are applicable for investment properties for recurring income such as hotel or resort properties, serviced apartments, SOHO and student accommodation.
“Cautious steps have to be taken by buyers, especially in the signing of the agreements. The sale and purchase agreement is covered by the Housing Development (Control & Licensing) Act, but the GRR schemes are not governed by the Act. There are some cases where buyers sued the developers for not giving their promised rental return.”
Peter Lim, an investor of Somerset Puteri Harbour, is well aware that such leaseback schemes have lower rental returns after the GRR period. “But I am only expecting reasonable returns, for instance, 2.5% to 3% after the initial two-year GRR period,” he says. “This is less than the 4.7% mortgage interest I’m currently servicing.”
He estimates his returns to be 0.5%, a far cry from the 5% during the GRR period. Other investors are also frustrated by the returns. As such, they have grouped together to engage law firm Shearn Delamore & Co in Malaysia to issue a letter of demand to Clear Dynamic on Oct 8. According to the letter of demand, “the rental returns after the guarantee period were unreasonably and inconceivably negligible”. The owners wanted Clear Dynamic to get Ascott to “promote and market the serviced residences and deliver reasonable returns”. They have also requested for a net return of at least 2.8% a year on their investment, stipulating that it be made within three months.
Clear Dynamic, through its lawyer Soh Hayati & Co, replied on Nov 1 that they “strongly deny” the allegations made. They also point out that the investors had agreed to accept the conditions of the S&P agreement and those spelt out in the leaseback agreement “on a willing buyer, willing seller basis”. Through its lawyer, Clear Dynamic also added that the minimum net return of 2.8% “is without any justification”, and that it is not obliged to deliver those returns within the stipulated timeframe.
The investors’ lawyer responded on Nov 12 with another letter, in which it stated that, given the returns, Clear Dynamic was “expected to review the management agreement and take necessary steps to remedy the situation, and explore the possibility of a replacement service provider if necessary”.
Beyond a brand
Many of the investors at Somerset Puteri Harbour say a major factor in their decision to purchase was the brand.
“While Somerset is a trusted and established brand, investors need to look at factors beyond that,” says ET&Co’s Ong. “These are some of the risks that investors have to consider; there’s no guarantee of profits and returns.” When buying overseas, one has to consider currency risks as well, adds Ong. “If you buy in a foreign country, you will be treated differently. When investing, you have to think of the exit strategy.”
UMLand’s Ng believes things are starting to look more positive in Iskandar Malaysia. A new attraction, Sea Life Aquarium, will open at Legoland Malaysia in Medini, which should boost tourism, he adds. Although there was a lull after the shooting of two seasons of Marco Polo, the Netflix television series, more movies and television series will be shot at Pinewood Iskandar Malaysia Studios in the coming year. “This will be positive for hotel rooms in the Puteri Harbour area, but the returns will be visible only further down the road.”
