Heritage property: Limited units mean limitless price per sq ft?

When I was still in Penang many years ago, an agent told me that one Singaporean company had just bought one whole row of old shophouses for RM200,000 per unit. These units were dilapidated and in need of huge repairs before it’s usable for any purpose. Today, even I would be willing to buy if there are such deals of RM200,000 per unit. Sadly, such units no longer exists. For those owners who bought earlier, they are now smiling happily. Reported in a local daily, my good friend, Raine & Horne Malaysia senior partner Michael Geh said that, “The most expensive pre-war property, with a 1,363q ft land area and located in Chulia Street, was sold for over RM2,000 psf.” Do note that this price does not yet include the restoration and renovation costs.

With the value of heritage properties continue rising, Michael’s advice to Penangites is that they should start paying attention to the potential capital appreciation. This isn investment not to be missed because the supply of heritage properties is limited. As per Georgetown World Heritage Inc, there are only 3,853 units of such properties in George Town’s heritage core and buffer areas. Thus, potential for the prices to rise is higher than for it to fall. The areas that investors should pay attention to would be the Prangin Market or Sia Boey area. This is the area that has been earmarked for the location of the central LRT station on the island. On a longer term basis, this will boost the value of properties in the area.

calculator heritageSo, the question is how much higher that the price could rise or should rise? The first thing that comes into my mind for the best utilisation of these heritage buildings would be for a hotel. Have you noticed how much they charge per night? Yes, some are priced even higher than a 5-star hotel. However, if the prices continue to increase, I couldn’t think of many businesses that would be able to survive. A very brief example. If a fully restored 2,000 sq ft heritage building costs RM2 million to buy and RM500,000 to restore and the buyer was able to obtain a 90 percent loan for it, the total loan repayment per month would be as per image. It’s a mortgage calculator by calculator.com.my Some assumptions made.

RM12,000 is only for the rental per month. This has yet to include the salaries, utilities and all other miscellaneous expenses. Let’s assume all these expenses come to just RM6,000 per month. The shop owner wants to only earn a net profit of RM5,000 per month. This shop has to get a total net profit of RM23,000 per month. Assuming it’s a noodle house with a RM3 profit margin per bowl, the shop would have to sell a minimum number of 7,667 bowls just to net the owner RM5,000 in net profit. This is 256 bowls per day or 22 bowls per hour. Doable? Yeah, still possible assuming the owner wants just RM5,000 in net profits per month.

From this calculation however, the type of business is extremely important and not every business could be done as soon as the prices hit a certain level. Please understand that when people started to buy a few years ago, the entry price was lower. Happy thinking about heritage properties as long as we buy with our eyes wide open and not buying because the number of such units are limited. Cheers.

written on 6 Apr 2016

Next suggested article: Penang: Visitors do not visit you just because you are cheap

 

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