Terrace House Investments in Kuala Lumpur: Doubling Prices in Ten Years?

Terrace homes in Kuala Lumpur have been a favoured option for investors because of their potential for high capital growth. Back in 2007, I had the chance to buy a freehold non-strata terrace house in Taman Tun Dr Ismail (TTDI) for RM450,000. The house was an older middle unit with a design that resembled those from the 1980s. I chose not to go through with the purchase and have regretted that decision. Nowadays, a similar type of house in the same area is being offered for sale at an astonishing RM1,600,000.

Recent transactions for freehold intermediate terrace houses in TTDI range from RM1,300,000 to RM1,700,000. Notably, one corner lot was sold for as high as RM2,700,000. I missed out on the opportunity to earn a return of 350% over 16 years, with an average growth rate of about 22% per year. The question is, can we expect this growth rate to continue? Keep reading to find out.

How to examine growth rates

Applying the overall growth rate of a city or country’s property sector as a benchmark to all properties in that sector is not recommended. Not all neighbourhoods offer the same potential for growth, amenities, accessibility and affordability. Different properties have unique characteristics like location, size, age and condition that directly impact their value.

Furthermore, the real estate market is influenced by a variety of factors including economic conditions, supply and demand, interest rates, inflation, government policies, population growth, urbanization and consumer preferences. These factors can vary across different areas and over time.

To gain a better understanding of the housing market in Kuala Lumpur, start by looking at the bigger picture. This will give you an idea of the overall trends and performance of the market. Once you have a general understanding, you can then investigate specific areas and assess their individual performance. Finally, you can narrow your analysis to the street level and study the growth patterns over the previous years.

Past years’ price movements can offer some insights into the historical trends and patterns of the property market but they should not be relied upon solely as accurate indicators of future value. The future value of properties depends on numerous factors that are subject to change over time.

Do keep in mind that properties have saturation points as they approach maximum price potential. Growth rates are not consistent and can differ based on several factors, as mentioned previously.

General trends in the property market

It can be challenging to interpret property market outlook and historical performances if data is not cohesive.

I witnessed the property boom of the 2010s firsthand. In 2012, potential buyers went into a bidding war for an old renovated apartment and paid a record-high price for it. Those were indeed the golden years for the property market, and things haven’t been the same since then.

Based on a report from EdgeProp in 2021, the average annual change in house prices for Kuala Lumpur was 5.6% over 20 years, from MYR 245,249 in the year 2000 to MYR 708,812 in Q1 2021 (Ref 10). This data is not specific to terrace houses. The pattern of price growth showed continuous declines in 2018, 2019, and 2020 with -4.53%, -12.76%, and -4.13%, respectively. In 2012, there was a significant yearly increase of 17.48%.

Based on the JPPH property market report for the first half of 2023, terrace houses were the most commonly launched property type. Single-storey (3,489 units) and 2-3-storey (4,795 units) properties accounted for 50.1% of the total units launched, with a sales performance of 49.1%. Condominium and apartment units comprised 31.0% of the total units launched (5,126 units), with a sales performance of 27.8%.

JPPH is the Property Valuation and Services Department under the Ministry of Finance (Ref 1).

Impressive growth at Desa ParkCity

Desa ParkCity’s Safa Terraces are a great example of how terrace houses can have exponential capital growth. They were launched at approximately RM 600,000 and were completed in 2004. The intermediate terrace houses recorded transacted prices ranging from approximately Rm2,300,000 to Rm2,700,000 in 2022 and 2023.

Last year, I visited a double-storey intermediate terrace house in Safa, which had been extended and improved. The owner listed the home for sale at RM 2,600,000. If you had bought a house in Safa, your house price would have increased by 400% over 19 years, averaging 21% per year.

In 1999, ParkCity, the same developer who developed it, acquired a 473-acre site to develop Desa ParkCity. Through strategic phased planning and ensuring that there aren’t too many properties of the same type and design, the properties there have experienced good capital appreciation. Desa Park City has become one of the most vibrant and innovative places to live in Malaysia, making it a successful model.

Increasing value through transformation

Transforming your house through renovations can significantly increase its value and help you sell it for a higher price without relying on market conditions to do the heavy lifting.

In 2017, the local council of Kuala Lumpur, DBKL, made changes to the renovation rules to allow for a higher plot ratio of 1:2:5 for terrace properties, as compared to the previous 1:1:3. This change enables homeowners to build larger, modern, multi-storey houses that can accommodate three generations of a family over a maximum of five floors. Renovated homes with larger built-up areas can command significantly higher property values (Ref 5).

Expanding your living space is especially advantageous in desirable, densely populated urban areas with scarce land. However, if the cost of renovating a house is too high, it would result in a high selling price, which could decrease demand in the mass market. When buying a home in any location, it’s advisable to check with the local council for plot ratio provisions.

This rule benefits terrace homes with individual titles (non-strata), as renovation works are restricted in a strata scheme. Approval from the Management Corporation is necessary if you want to change the facade or extend your house.

Lower restrictions for foreigners to buy in Kuala Lumpur

In Kuala Lumpur, foreigners can purchase non-strata landed houses and stratified residential properties above RM1,000,000. But in Selangor, foreigners can only purchase stratified residential properties, not non-strata landed houses, and the property must cost over RM2,000,000 in Districts of Petaling, Gombak, Hulu Langat, Sepang, Klang, Kuala Selangor and Kuala Langat. It would be easier to sell your landed home in Kuala Lumpur (Ref 4).

My thoughts on this topic

We need to look at critical elements like development plans, population growth and supply-demand dynamics when scouting a location for potential capital appreciation. That being said, it’s challenging to determine these factors as they are fluid and not resistant to change. For example, if multiple developers own land in an area and they keep building, we could end up with overbuilding and oversupply. The once-desirable place would soon lose its charm and hurt property prices.

Desa ParkCity and Taman Tun Dr. Ismail are two thriving townships in Kuala Lumpur. They are both well-planned and well-maintained areas that offer a high quality of living, a sense of community and a range of amenities and facilities for their residents. Also, houses in established areas like Bangsar, Damansara Heights, and Desa Sri Hartamas have experienced high capital growth over the past 10 to 20 years.

Without a significant change in one or more factors that affect value, it’s hard to see a doubling effect in a property’s value when it’s already near its saturation point. A major renovation, a surge in the location’s popularity, robust market conditions, low interest rates, high demand or low supply would help. These factors work together, and a combination of them could lead to a substantial increase in the value of a house.

Answering the question raised at the start of this article, I doubt that significant capital growth will continue in TTDI and other established areas, given the current market condition, unless major events occur.

Based on the success of these areas, we can conclude that their prime locations near major highways, public transportation, and commercial centres make them easily accessible and convenient for their residents. Moreover, the scenic views of the city skyline, green hills and lakes add to their charm and value.

In their early days, prices were below MYR 1,000,000, allowing more room for higher appreciation. These areas were developing, and the properties had not yet reached saturation.

Suppose emerging suburbs can match the standards established by these affluent areas in terms of low entry prices, excellent connectivity and amenities. In that case, it’s possible that prices of terrace houses may increase twofold within a decade if market conditions are favourable.

On a side note, based on my observations on the ground over the years, I have noticed that the physical characteristics of a property and the factors specific to the location can significantly affect the prices. Moreover, I have observed that poor maintenance of common areas in some strata housing developments has turned potential buyers away, thus affecting the property’s value. You might consider individual title non-strata housing schemes where the estate’s infrastructure and landscape areas are handed over to the local council for maintenance. I will explore this topic further in a future article.

If you are using property portals to track price trends, it is recommended to cross-check the information with recorded transactions from JPPH to ensure accuracy. Alternatively, you can engage a licensed property consultant to do the research.

References:

(1) Property market report H1 2023 JPPH Laporan Pasaran Harta H1 2023.pdf (jpph.gov.my)

(2) Price&RentalIndexH12022.pdf (JPPH)

(3) Residential property market performance over 20 years | EdgeProp.my

(4) Donovan & Ho Foreigners Investing in Malaysian Property

(5) Make the Most of Renovation Rules in Kuala Lumpur to Expand Your Home – Mudah Insights