High Density Condo! Bad for Investment? (Bangsar South)

I recently reconnected with a friend whom I've not seen for quite a while. She told me she was looking to buy a place for her own stay, with a view that the property can appreciate over time as well. Her preferred locations include Taman Desa in Old Klang Road and Bukit Ceylon.

I suggested to her that she should consider some other areas like Bangsar South since she is working in KL Sentral. I attempted to propose to her this particular project there, a service residence, which has a total density of about 700 units. She responded by saying 700 units is too high of a density and because of that she doesn't see it as something that is great from the investment standpoint.

While I accepted the fact that she is more or less decided that Bangsar South is not the place she would consider for her own stay, I couldn't help but to offer her a different perspective with regards on how she should not merely evaluate the investment potential of a property just by the sheer number of units that she deemed was too many to her liking.

The Density Debate   

Although it is generally true that a high rise residential property with a higher density would likely mean lower potential for the property's capital appreciation, there is an even more important factor one should consider before dismissing the property altogether

This is how I would look at it. I don't think one should look at a project and disregard it just because it has 700 units or even more than 1000 units. The more important question one should ask is this: What is the ratio of commercial units to residential units in the area? 

Looking at the entire Bangsar South masterplan, I would say the ratio is easily at least 6 to 4. There are a total of 22 blocks of Horizon 1 and Horizon 2 towers. Add in Vertical 1 and 2 and the upcoming 2 blocks of Vertical 3 towers into the mix, you have like a total of 26 office towers there. (I have not included KL Gateway office towers and three 4 stars hotels, with one hotel currently in the pipeline) Compare that to the total number of residential units in Bangsar South, which is definitely less than 4000 units. (I've included all current and upcoming developments as well: KL Gateway, SouthView, Novum and The Estate.) While I do not know the exact total number of office units in Bangsar South, I do know that these offices can accommodate up to 45,000 employees. Anyway you can see from the masterplan that the number of office towers far outnumber the residential blocks. A source told me that The Horizons are about 90% fully occupied while Verticals is like close to 60% occupied. Let's just be very conservative and say the number of employees are currently at 20k. Estimated current number of 20k employees VS less than future total of 4000 residential units. From this alone we can deduce that there is more than enough demand to supply to not just to that 700 units service residence alone but to the rest of the current and upcoming residential units in Bangsar South too!

The "Bangsar South" Factor! 

Having loads of Grade A great looking offices doesn't mean anything if there are no tenants, especially quality ones. Mind you all these offices are all Grade A GBI certified buildings and Bangsar South is an MSC status Cybercenter. Many MNCs and GLCs has moved into Bangsar in recent years because office rental rates here are comparatively lower than those in KL Sentral and also KLCC (both also MSC cybercenters) You may say that I-City and Cyberjaya are also MSC status townships and rental rates there are even lower than Bangsar South but they are quite a distance away from the city center whereas Bangsar South is still within striking distance from the city center, literally speaking. I'm sure many employees would prefer to work in Bangsar South than other cyber cities like I-City and Cyberjaya. Hence many employers would prefer Bangsar South as an office location for the sake of their employees' convenience, thus striking just the right balance between rental costs and connectivity. 

Quality Tenants!!!

Some of the corporate tenants that have moved into Bangsar South include GLCs such as CTOS (who just moved in early 2016), MEPS, PNS, Touch n Go, Takaful Ihklas, IT Division of Petronas and MNCs such as British Telecom (BT), F-secure, Xerox, Brandt International and PropertyGuru etc. Even more astounding is the fact that these offices are pretty much within walking from virtually all of the condos and upcoming services residences in the area. There are myriads of FnB outlets, chic cafes, banks, 2 LRT stations and also an AEON Big supermarket nearby, no driving is required as well, a fantastic proposition for the young and ambitious corporate professionals who are always pressed for time. Hence, Bangsar South is designed to be so pedestrian-friendly in such a way that it allows you to leave your car at home, encouraging cost effectiveness by less use of petrol & a stress-free lifestyle.

All these simply translates into not only increased working population within Bangsar South but more importantly higher quality tenants for the residential units there too. Another advantage is that the rental rates psf wise for residential units in Bangsar South in general is also cheaper than KL Sentral and KLCC area too. As such, Bangsar South's residential captive tenants is not limited to just the working population in Bangsar South but KL Sentral, KLCC and the future KL Eco City/Midvalley City as well! They can opt to stay in Bangsar South and yet are just 3 LRT stations away from their offices in KL Sentral and a couple more from the KLCC LRT Station. In the future when KL Eco City and the link bridge connecting to Gardens and Midvalley are completed, Bangsar South would become an even more attractive place to stay due its unparalleled connectivity and convenience. (The Hukum Abdullah station which will serve the KL Eco City/Mid Valley City hub is just one station away from Bangsar South Kerinchi station!) Also it's 90% confirm that MRT3 Circle Line will have an interchange station in KL Eco City. When this is materialized, you can go to A LOT of places in Klang Valley from most of these condos/service residences in Bangsar South just by foot! Because of this, I think the area has fantastic Airbnb/short term rental potential too! Many expatriates I know prefer walking than driving! So Bangsar South is ideal for them in that sense, and there is already a thriving expats community in Bangsar South and it is definitely still growing too, for reasons which I mentioned above! 

Therefore, it's no surprise why Bangsar South have shot up from less than RM300psf back in 2005 to about RM1k psf today in 2016. Despite that, I'm pretty bullish that its psf rates will continue to appreciate much further down the years and even decades to come.

In short, MNCs and GLCs moving in > increased job opportunities > highly skilled labour force > increased number of quality tenants > higher rental yields > value of your property increase!

Oversupply Concerns

         

There maybe concerns of oversupply of office and residential units in the longer term with the upcoming KL Ecocity, (which will also consists of primarily grade A office buildings), Bandar Malaysia and TRX. However, KL Eco City is definitely going to be more premiumly priced than Bangsar South. Viia Residences which is the 2nd service residence launched in KL Eco City was launched at RM16xx psf just about 2 months back. None of the current or completed residential projects in Bangsar South is anywhere near this level psf wise. Would you bet Bandar Malaysia and TRX to be priced lower than Bangsar South when they launch their phase 1 projects? Do you see where I'm getting at?

On a more macro level, the upcoming mega developments such as HSR, Bandar Malaysia, TRX, KL118, plus all the way down to Malaysia's Vision Valley in Seremban/Nilai/Port Dickson are definitely as a whole going to be pulling the center of gravity of KLCC area more to the south as these developments come into being and become mature the next 2 to 3 decades. It's no secret that the southern corridor of Greater KL is heating up, with Bangsar South as one of the first major beneficiaries alongside areas such as Old Klang Road/Taman Desa.

Perhaps you may still not agree with me that a service residence with a density of more than 700 units in Bangsar South is a good choice for investment and you may prefer to park and grow money somewhere else. After all, there is no absolute right or wrong in such scenario. However, what we do have is some data, facts and figures that can help to mitigate risks as much as possible when it comes making the right investment decision.

Anyhow, this post is meant to stimulate discussion as to how we should not run into quick conclusions when evaluating the investment potential of a so called high density residential project. We need to consider other elements that could be even more critical when determining the upside (or downside) of a new development. 

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Chris Seah is a real estate consultant who helps buyers and sellers in and around Kuala Lumpur, Malaysia. He is also very much involved in new projects in Klang Valley where he markets new developments ranging from public listed developers to smaller but branded boutique developers. He can be contacted at 019 781 8878.