LPP, the mother of capital appreciation

LPP, the mother of capital appreciation

LPP, the mother of capital appreciation

4 Comments on LPP, the mother of capital appreciation
LPP, the mother of capital appreciation

When I came to Kuala Lumpur in 2008, I came because I fell in love with it and felt it was a great place for me and my family to live.

 

Property investment here was picking up, and year after year it was clear that the city was evolving. You can confidently say that Kuala Lumpur has what it takes to become a New Dubai.

 

The new projects that are being established in KLCC area (Tun Razak Exchange, Warisan Tower, Bukit Bintang City Center, etc.) are not only taking Kuala Lumpur to a World Class standard, but they are also filling up the land gaps. These land gaps here have isolated KL from a worldwide phenomenon, or a global trend if you prefer:

Over time, the price of property within urban centers of developed cities will continue to appreciate in value above and beyond the relative pace of the economy or the increase in household income.

 

What is the reason behind this? In simple terms: Land is a constant, a finite set area, while cities and populations are growing. The more a city and its population grows, the more demand pressure it puts on the same amount of land that it is centered on, creating a natural shift in price to go up. I call this Land-shortage Price Pressure effect, or the LPP effect.

 

The saying goes: “Always buy land, they don’t make it anymore,” stands true. It is the reason why prices have become so high in London, Manhattan, Hong Kong, Singapore, Tokyo, and downtown Dubai.

 

Kuala Lumpur was always attractive to foreign buyers because prices are comparatively lower, and the reason for those lower prices was largely because Kuala Lumpur had this peculiar layout where neighborhoods would be built with a lot of land space in between.

 

Everytime a premium project is launched and gets marketed at a hundred ringgits per square foot more than the neighborhood, another savvy developer comes out with a competitive launch right next to it and forces prices down.
Right now though the gaps of empty land between towers in KLCC and other close-by areas are getting smaller and smaller and quickly disappearing. That big empty space around MidValley and Kerinchi is quickly filling up with KL Eco City and Bangsar South towers. The developers have grabbed up all these empty spaces and are building fence to fence now.

Soon there will be none, and LPP effect will begin showing you higher rates.

 

This is not actually bad; it can be very good for property development as an industry. You see the higher prices means that investors will get a good return on their investment, and that allows developers can afford to get creative and build better and higher quality property to match the higher prices this stronger demand is creating.

 

Will people suffer from higher prices? Experience says they generally won’t, not really. Just like in all major cities like Tokyo, New York, London and others, people who cannot afford this price hike will adapt to moving to the suburbs and less central areas. In sea-locked cities like Singapore and Hong Kong however it does inconvenience a large sector of the population, however it is a natural effect of a free economy and battling with enforced price regulation will ruin the industry so governments avoid it.

 

The thing about LPP effect is, once it hits an area, it becomes pretty permenant. Infrastructure development in an area like a badly needed MRT station or a good shopping center increases the value of surrounding property at a higher rate for a year or two but then it returns to normal rates of capital appreciation. LPP is ongoing, it doesn’t let up, and because of that, people who can spot the area with this effect when it is just starting out, can secure themselves an ongoing higher rate of capital appreciation for decades to come. The area can suffer some level of deterioration of its livability and amenities without losing that (New York has some great examples of old buildings in tired neighborhoods that are still very expensive).

 

Right now however, majority of local property investors in Malaysia are unaware of this effect because they haven’t witnessed it before. Awareness however will start growing very soon thanks to the ongoing urban development, and savvy investors will (and should) be keeping their eyes open for some golden opportunities.

About the author:

Sam Helmy has been helping property investors make high amounts of money out of property with the least amount of effort and capital investment for years.

4 Comments

  1. Patrick Chew  - October 4, 2014 - 3:04 pm
    Reply /

    Thank you for sharing. Quite an interesting concept.

    Do you think that KLCC then will be affected positively soon? Even with all the multi-million dollar condo units?

    • Sam Helmy  - October 4, 2014 - 4:11 pm
      Reply /

      Hi Patrick,

      I assume you’re talking about all the luxury towers coming up around Ampang Park, and whether the over-supply will dampen the prices.

      There does seem to be an abundance of ultra-high-end condo units in that area and there are more coming, and yes indeed for a few years I would expect the competition for tenancy and resale offers to keep the prices from growing. However the central heart of KL city is not all about the ultra-high-end towers of KLCC, and therefore that abundance will not tag the entirity of the market.

      Furthermore the LPP effect is long term. You need to think in the scale of 10 years from today: Whatever little bumps on the road, whatever oversupply does to lower prices, demand will keep on growing and there will be no more room for new units, resulting in stifled supply that demand will soon outpace. The prices will start going higher based on that. So yes, on the short-term you might not see an opportunity, but on the long-term the effect is definite and will start taking hold.

  2. Jay  - October 24, 2014 - 4:41 pm
    Reply /

    tnx for info!!

  3. Gosaer  - November 19, 2014 - 9:50 pm
    Reply /

    wow, awesome article. looking forward to read more.

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