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How to determine a property’s value when making an offer? [28-02-2013]  
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Q: In the course of your property investment activities, it must be very useful to know the movements of prices. How do you find out about, say, previously transacted prices or data on prices? Or do you go on gut feel for what you think a property is worth? For example, how do we really know if prices are going up or going down?

A: In property investment, it is almost impossible to know the details of all property price movements.

When you are focused in a particular territory or type of property, you will know the property price movements in your area over a period of time.

In the course of my property investment, I check property market prices in my focus area regularly from signboards, property agents, the newspapers and websites. I get to know transacted prices from my property agent, valuer and banker contacts.

Property prices are affected by depreciation/appreciation of money (Ringgit). When the real value of money (Ringgit) depreciates, the property price will increase and when the real value of money (Ringgit) appreciates, the property price will decrease.

The price of a property is also affected by economic GDP growth, employment rates, interest rates, liquidity in the financial system and sentiments.

I do not use gut feeling on a property’s worth but reasoning and a calculator. I calculate a property’s potential capital gain and rental yield.

The property’s potential capital gain is affected by the timing of entry/exit, location and usefulness of the land.

Rental yield of a building depends of its rental income and purchase price.

Rental Yield = [(Monthly rental) x 12 divided by purchase price] x 100%.

Rental yield is preferably twice the cost of financing. The higher the purchase price, the lower is the value.

Nobody can forecast future property prices accurately but we can anticipate and estimate the probability of future prices based on the current situation. If the property was bought in a crisis market, the chances of capital gain is broad based and high. If the property was bought below market price in a highly populated area, you are almost certain in making capital gain.

If you buy a ready-built matured property which is way below the brand-new high priced property nearby, you have almost certainly made money.

On the other hand, if you buy property in an over supplied high-rise residential property, you are almost certain of future capital depreciation. If you buy an over supplied high-end landed residential property in a middle and lower income area, you are almost certain of capital depreciation.

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