All the costs involved with property investment in Malaysia

You heard your friends/relatives got rich by buying a property few years back and sold it for double the original purchase price,

You heard some of the success stories where the people who did compress loan to purchase multiple properties at once got rich in the process.

You read the book Rich Dad Poor Dad and understand that leverage could be the key to build your road to financial freedom.

There is a new launch of a property project in town and the developer is offering a discount, or you decided the market is good and start looking for the second-hand property market.

You want to start investing in a property and hoping that the rental can cover full or partially the monthly installment. But you need to know all the costs associated with property investment, which summarize as below

1. Upfront Cost 
This article from Imoney summarizes well, in general aside from the downpayment, you need to pay
- Stamp Duty for purchase and loan agreement (from 1.5% to 3.5%, depends on your purchase price)
- Legal fee for SPA & loan agreement (around 1.8 - 2.0%)

2. Renovation & maintenance cost 

To make your property tenable, you need to buy some furniture, do some repair painting, replace the electrical appliance etc. 

- Let assume for a new house you need around RM 5k to 10k to make it tenable, then spend another similar amount every 5 years. 

- And every year spend a small amount to fix those pipework/electrical issues/wear and tear. 

3. Fixed Costs per month,

Regardless whether you rent the property out or not, you still have to pay the

- Assessment Rate (around 7% of estimated rental income) and Insurance

- Management fee and sinking fund for condominium/serviced apartment 

- Depreciation charge: this is one of the cost most people often overlook. To understand this, you have to imagine a 10 years/20 years old property cannot ask for the same price as a new launch property. The building and facilities will be aged, people will need to incentivize (receive a discount) to live in an older property compared to a new one. Typically we should expect a depreciation rate of 2% (assuming the property can last 50 years) 

4.  Cost related to renting out

- Quit rent, being the lost income when you are unable to rent your property out

- Agent fee, if you hire a property agent to look for tenant (typical 1 - 1.25 months per year)

- Income Tax: Legally, you have to declare the rental income when filing for income tax, thus depending on your current last tax bracket, you could end up paying 3% - 24% of your rental income as tax.

5. Selling Cost
This article from Imoney summarizes well, in summary
- Real Estate Agent Fees (up to 3%)
- Legal fee for SPA (around 0.8% to 1.0%)
- Real Property Gain Tax (RPGT, 5% for profit when selling the property after the fifth year).

My investment record (45) December 2019

The estimated holding period return for KLCI in the  Dec-2019 is 2.02%  (with dividend included). Holding Period return for my portfolio is 1.19%. 

Trading Activities
1. Addition of HLFG (1082)
I will continue to add this as long as the P/E ratio is below 10

2. Addition of BAT (4162)

The price drop to below RM15, with an estimate EPS of around RM 1 to RM 1.2, its dividend yield becomes attractive. 

General Market Discussion

Malaysia market in 2019 is not performing well due to the following factors

- The outflow of foreign capital 

- Declining corporate earnings

- Slowing property market

- Uncertainty of US-China trade war that impacts investment sentiment

- Lower Crude Palm Oil Price

For 2020, the future outlook is mixed

+ Crude Palm Oil Price climbing back up to MYR3000 level, this will help plantation earning

+ The economy is projected to continue expansion at a rate of 4.4-4.6%, with no major downside risk. 

-  Both residential and commercial property market seem facing oversupply issue

-  BNM may proceed with another rate cut in 2020, which will hurt banks' earnings. 

Why I don't like Mutual Fund/Unit Trust

I am not a big fan of investing in mutual fund in Malaysia, the reasons are as follow:

1. Their return is misrepresenting based on the current benchmark method. Most of the funds benchmarked themselves against KLCI, with dividends excluded. I don't why they never consider the effect of the dividend in calculating the actual return of KLCI, perhaps it's due to the fact that it will complicate the calculation. But as KLCI has a dividend yield of around 3% (see here). This will greatly impact the return of KLCI presented in the long run. 

For example, the KLCI index value is around 1751 in 29th December 2014, on 27th December 2019, the index value is around 1610.61. If you calculate the KLCI return based on the index movement around, you get a value of -8.02% or annualized to be -1.66%. However, the index value is just representing the price movement of all 30 constituents stocks, and stocks pay dividends that don't show up in the index. so if we assume KLCI pay an average dividend of 3% over the past 5 years, the actual return of KLCI would be 1.34% per annum or annualized to be 6.89%. 

2. You cannot compare yourselves to the looser only, you need to benchmark against the risk-free option. KLCI was performing badly for the past five years due to a variety of reasons: Impact of Crude Oil price crash and fall in CPO price, a badly managed economy hampered by GST & SST, slow-growing banking industry profit due to increasing capital requirement, and declining profit in the telecom industry, and the exit of foreign capitals following strengthening of US Dollar. Looking from hindside, while a wise move for the investors will be not investing in KLCI at all, they always have a risk-free option at their disposal, which is investing in Fixed Deposit or Government Bond. For the record, the last 5 years the Malaysia 10Y Government Bond Yield average is around 3.8% (see here). That means an investor can invest risk-free and earn an estimated return of 20.5% over the last five years. I don't think many of the mutual funds in the market can beat that. 

3. When computing short term and middle term investment, they always omit the entry charge. 

Take Public mutual growth fund, for example, the publicized 5 years return is 13.17%. But they have a sales charge as high as 5.5%. So if you invest 1 million 5 years ago, your actual return is only 6.84%. 

4. Past performance does not guarantee the level of future returns. This is the excuse clause for lackluster fund managers. But the irony is that it is the long term past performance that the fund is advertising to the public, lure investors into investing in the fund, and justify the management expenses. In other words, a fund manager who made some good/lucky bets in the past (especially during and after the 2009 global financial crisis), can continually advertise his historical performance and justify the high management expense charged. 

Take Icapital Biz (5108), a close-end fund with inception since 2005 for example, they have a really good ride from 2005 to 2010 with annualize return close to 20%. But from 2010 onward, the fund manager decided to start hoarding more cash, perhaps in anticipation of a major crash that never happens. As a result, their performance dip. If you start investing in the fund from 2010, your 9 years annualized return estimate to be around 2.9%, which is definitely less than risk-free options (Fixed Deposit or government bond) and KLCI (with dividend included). 

5. The management expense ratio is unjustifiable for funds that cannot beat the risk-free return. 

The average management fee for the mutual fund/unit trust is 1.5%, higher than its peers in the US. And most importantly, the fund managers earn their fees and salaries almost risk-free as the management fee is based on NAV (Net Asset Value), while continuing to make an educated bet using the investors' money. 

In other words, there is more incentive for the funds to earn the management fee through recruiting activities to lure more investors in, such as using a lower benchmark, emphasize on the need to hold longer-term when short term performance is bad or advertise on short term performance when they are good. There is less incentive for the funds to focus on growing the existing capital of current investors at a rate that is above the benchmark. 

Best Credit Cards for Malaysians?

I am writing this up because there is no direct comparison of the credit cards available in Malaysia. This is due to the fact that:

• all the credit cards have different cashback/ points earning mechanisms and limitation that I  believe was designed to confuse the consumers so they are harder to choose from, 
• the credit card points earned between different banks also valued differently, 
• there is very little attempt by the credit card comparison articles/websites to compare the credit cards available based on the consumption pattern of the consumers

For example, the Ringgit Plus Website listed up to 7 credit cards for Best Travel Credit Cards for All Income Bands (here), and 5 credit cards for Air Miles Credit Card In Malaysia (here). However, both articles failed to do a holistic comparison of what the consumer stand to gain based on his/her consumption pattern, accounting for different cashback/points earning criteria and cap, the value of the rewards between cashback and treat points for different reward programs and considerations of other charges (such as foreign currency conversion fee). 

For the start, lets quickly go through a few of the general rules regarding the credit cards in Malaysia,

Rule 1: For Credit Cards focus on cashback, Credit Card that advertised a higher cashback rate usually has a stringent criterion (in the form of minimum spending) and Cap on the amount that you can earn. 

For example, Standard Charter Just One Platinum MasterCard advertises a cashback rate as high as 15% for grocery, dining and online transaction. However, you need to spend a total of RM 2,500 per month to earn 15%, and the total cashback for the three categories combined is RM60 only. The rest of the spend will only earn a meager 0.2%. Now if you spend a total of RM 2,500 per month, with RM 400 on the three categories that are entitled to 15% cashback, 
How much is your total cashback?  Estimate RM 64.2
How much is your actual cashback rate?  around 2.568%
And the drawback is, any amount you spend above the RM 2,500, will only earn you 0.2% cashback now. 

Rule 2: For Credit Cards that focus on points, usually redeeming points into Airmiles will give you better value. However, be aware of the conversion rate and cap. 

Take HSBC Visa Signature, for example, on paper, it sounds really good with high conversion rate to Airmiles, where it earns 8X rewards point for shopping in foreign currency, 5X reward point on online shopping and 5X reward point on participating malls, which can be effectively converted to Enrich miles at the rate of 18:1. 

However, there is a catch. There is a cap of 15,000 rewards points per category per month. Once you reach the cap, there is only 1X reward point for shopping in foreign currency, online shopping, and participating malls.  For example, if you spend RM 6,000 abroad, the actual reward points you get is only 21,000 points, which give you only 1167 enrich miles, a meager rate of 0.19 miles per RM spent. 

Rule 3: For overseas spend, beware of Foreign Currency Conversion Charge, 

For example, 

AMEX Card network charge is typically 2.5% (here)

For Visa Card & Master Card: Typical Typical network charge is 1.25% + Bank administrative charge of 1% (here)

So far the only two banks/financial institutions that I knew which currently don't levy bank administrative charges are public bank and Big pay. 

And according to this post, Master Card had a slightly better foreign currency conversion rate (here)

Now before we start the comparisons, there is still one important question left, how to compare credit card points earned vs cashback credit card? 

One quick way out is to use the amount of Airmiles earned as a benchmark as the Airmiles are usually of better value compared to other points redemption options. I have tried to establish the value of Enrichmiles and Krisflyermiles here. There are also few articles that discussed the value of Enrichmiles (see here) and Krisflyer miles (see here and here). For the sake of convenience lets just assume each Enrichmiles worth at least RM 0.036 and each Krisflyermiles worth at least RM 0.038. 

For AirAsia Big Points, the value is fixed around RM 0.01. 

Let's start to look at the results

Spending Pattern One (the budget guy) 

Annual Spend around RM 30,000
Monthly spending breakdown:

Petrol : RM 225

Dining: RM 1,000

Groceries: RM 225

Other Retail Purchase: RM 625

Utilities, Insurance Payment : RM 150

Other Online Transaction: RM 175
Flights Ticket (Average per month) : RM 100

No oversea spending

Assuming all flights using Airasia

The best credit card? Maybank 2 Gold Cards (Assuming you can swipe with AMEX with a total of RM 1000 during weekend).
Best alternative? Standard Chartered Just One Platinum

Spending Pattern Two (the typical family) 

Annual Spend around RM 60,000
Monthly spending breakdown:

Petrol : RM 400

Dining: RM 2,000

Groceries: RM 1000

Other Retail Purchase: RM 600

Utilities, Insurance Payment : RM 300

Other Online Transaction: RM 500
Flights Ticket (Average per month) : RM 200

No oversea spending

Assuming all flights using the specific airlines of the credit card (Like Airasia for Hong Leong Airasia Platinum)

The best credit card? Still Maybank 2 Gold Cards (Assuming you can swipe with AMEX with a total of RM 1000 during weekend).
Next alternative? Standard Chartered Just One Platinum or RHB World Master Card

Spending Pattern Three (the typical family with annual oversea trips) 

Annual Spend around RM 84,000
Monthly spending breakdown:

Petrol : RM 400

Dining: RM 2,000

Groceries: RM 1000

Other Retail Purchase: RM 600

Utilities, Insurance Payment : RM 300

Other Online Transaction: RM 500
Flights Ticket (Average per month) : RM 500
Oversea spending (Average out per month) : RM 1700

Assuming all flights using the specific airlines of the credit card (Like Airasia for Hong Leong Airasia Platinum)

The best credit card? Maybank 2 Cards Premier (Assuming you can charge all your expenses on AMEX).
Next alternative? Maybank Manchester Visa Infinite or equivalent.

Discussion & Afterthoughts:
As you may see, when your total annual spending increase, the cashback credit card starts gaining fewer values due to the cashback cap per month. And among all the Airmiles cards, Maybank's Visa Infinite or equivalent and Maybank 2 Cards Premier start to stand out among others.

It is worth noting that, as AMEX charges a higher foreign currency conversion charge compared to a visa card, hence the higher the potion of your oversea expenditure, it may be better to use Maybank Visa Infinite or equivalent instead. Plus, AMEX is actually less acceptable in overseas.

There is few special card - one of it is Public Bank Visa Signature, that offers 6% cash back on groceries, dining and online transaction without minimum spending requirement, but capped at RM 38 per month. One can actually spend on groceries, dining and online transaction till about RM 633 per month on Public Bank Visa Signature, before charging the rest of the expenditures on other cards.

Another card is Public bank quantum master/visa, which offer 5% cash back capped at RM 30 per month for online/contactless purchase.

Let me know which other cards you like to see for comparison or which other spending patterns you like to use.

How much is Enrich & Krisflyer Miles Worth?

Introduction:

For those who like to collect credit card points or airline miles, most of the joy derived from the moment we finally convert the points/Airmiles into something tangible that we can enjoy the most. Hence it is worth to know how much exactly each airline miles worth, and hence select the points/miles method that maximizes the earnings. 

Things get complicated when there are numerous ways to use Airmiles. Taking Enrich miles, for example, you can use enrich miles to redeem Lazada voucher, redeem for a stay in a hotel of your choice,  or redeem an economic / a business class flight ticket. Each of these options values the miles differently, and it is important to know the value before redemption to avoid losing out. 

For the benefit of Malaysian & Singaporean travelers, I did a quick study on the RM value of each enrich & kris flyer miles, with results as below

Discussions:

1. In-flight redemption with items are usually of the worst value as items sold (whether it is a luxury bags, watches, electronics or alcohol etc) are usually highly overpriced. Which is why I don't calculate for this redemption option. 

2. Lazada E-Voucher is one of the worst redemption options for Enrichmile, where your mile is only worth RM 0.0125

3. Redemption for a hotel stay is surprisingly quite valuable for Enrichmiles, which currently valued at RM0.034 per mile by the Enrich Hotel. For Krisflyer mile, the value is a bit worse at SGD 0.8cent per mile or RM 0.0244. 

4. The estimate redemption value for flight tickets is the average of 

- short-haul flight (KL to Singapore)

- Middle-haul flight (KL/Singapore to Tokyo) 

- Long-haul flight (KL/Singapore to London). 

The general rule of thumbs is that 

- redemption for a longer haul flight will have a higher valuation, 

- redemption for higher class flight (like business or first class) will have a higher valuation. 

The second rule is especially true for Singapore airline Krisflyer Airmiles, where their business class will require fewer miles to redeem compared to Malaysia Airlines Enrich thanks to the availability of saver package. 

All in all, you can safely assume that if redeem wisely, the value of Enrich/Krisflyer miles can reach RM 0.05 to RM 0.10

5. The best redemption option when using Krisflyer Airmiles is to redeem a business class Round The World (RTW) ticket from Star Alliance with 240,000 miles. This article summarizes well the how and the rule of booking an RTW ticket. And a quick try using the Star Alliance Website indicates that the Business Class RTW tickets can easily cost you around S$15k, which brings the redemption value of Krisflyer mile works out to be about RM .195 per mile. 

Final Thought:

There are some explanations why redeeming for the higher class long-haul flights will give you more value per mile:

1. Accumulate miles is not easy.  Especially when both the credit card points and miles have a three-year validity date. It is very hard to imagine a person/family spend enough in the few years interval to accumulate the 240,000 miles required to redeem one RTW business class ticket. Hence airlines like Singapore Airlines are not afraid of people redeeming this high-value reward, as very few people actually able to do this. 

2. Most people will not choose to fly a higher class because of the steep increase in costs. Taking the RTW mentioned just now, for example, the same route booked using economical class and accepting stopover flight costs about $3k only, or around RM 12k, which is only one-fourth of the cost when booking business class. And most people will find the extra 50-70 hours experience of flying first class not worth the extra RM 38k. 

But there is another perspective looking at it, most of the Airmiles are accumulated at very low / no cost. And instead of redeeming it at a low value (like RM0.0244 per mile for hotel stay), you can use it to an RTW Business Class ticket that gives you 8 times value at RM 0.195 per mile.  And moreover, this will be items that you won't buy in the first place. 

So, are you convinced to start to accumulate Airmiles now to redeem the RTW Business class award? Let me know if you ever redeemed one. 

Things you need to know about KLCI Composite Index

1. What is KLCI Index, from the FTSE KLCI Index Factsheet
"Malaysia’s headline index, the Kuala Lumpur Composite Index (KLCI) is now enhanced and known as FTSE Bursa Malaysia KLCI. Part of the FTSE Bursa Malaysia Index Series, the 30 stocks tradable index is representative, liquid and transparent providing domestic and international investors with an enhanced index to access the Malaysian market."

2. The five years return (average per annum, I think is dividend excluded) of KLCI is not good, with data as of 29th November, the return equal to - 3.0%.

3. The estimated dividend yield for KLCI index is 3.53% (when the index is 1572.51)
This is comparable to the best fixed-deposit rate available in the market, but not good enough.

4. The estimated P/E ratio is 20.41, calculated based on

• 26th December 2019 data
• Excluded negative outlier (such as Axiata and Sime Darby plantation that has negative return)
• the stocks past 12 months earning
• Adjusted for the stocks %weightage in KLCI, if unadjusted then the average P/E is 25.42. 

In contrast, the S&P 500 P/E ratio is about 24 now. 

5. Price earning ratio measures the ratio of stock price to the annual earnings of the companies, lower P/E is usually better, KLCI historical P/E is somewhat around 17, this means with a P/E ratio of around 20.4, KLCI is currently overpriced. 

6. There are 11 individual stocks in KLCI that have a P/E ratio below the market average, 7 of them are the banking stocks (Public Bank, Maybank, CIMB, Hong Leong Bank & Financial Group, RHB, Ambank), the rest are Petronas Chemical (5183), Genting (3182), Genting Malaysia (4715) and Sime Darby Berhad (4197). 

7. To me, personally, I think the high P/E ratio of certain stocks is unjustifiable. For example, Nestle Malaysia (4707) has a P/E ratio of close to 50. This means if you invest in Nestle now, excluding the growth potential, you need 50 years to recoup your investment through corporate earning. And you will be amazed to see the company with little long term growth potential but have high valuation such as IHH (P/E around 51), Pressmetal (P/E around 37) and Maxis (P/E around 29). 

8. For those who like to see the full lists of estimated earnings, dividend, P/B, P/E, the yield for the 30 stocks on KLCI, see table below

Source Quoted:
FTSE Bursa Malaysia KLCI Factsheet, downloadable here

My investment record (44) September - November 2019

The estimated holding period return for KLCI in the  Sep-2019 is -1.45%  (with dividend included). Holding Period return for my portfolio is -1.04%. Total holding period return for my portfolio since the inception is 18.5%, annualized to be 2.42%, this underperform KLCI total return of 22.4% (annualized, 2.89%) 

The estimated holding period return for KLCI in the  Oct-2019 is 1.20%  (with dividend included). Holding Period return for my portfolio is 2.76%. Total holding period return for my portfolio since the inception is 21.7%, annualized to be 2.78%, this underperform KLCI total return of 23.8% (annualized, 3.03%) 

The estimated holding period return for KLCI in the Nov-2019 is -1.96%  (with dividend included). Holding Period return for my portfolio is -2.74%. Total holding period return for my portfolio since the inception is 18.4%, annualized to be 2.35%, this underperform KLCI total return of 21.4% (annualized, 2.71%) 

Trading Activities
1. Disposal of CIMB (1023)

Its Q2 result is disappointing while I am optimizing my portfolio, thus sell. 

2. Addition of HLFG (1082)

3. Addition of Public Bank (1295)

To sum it up, with dividends closer to FD and P/E ratio less than 10 for HLFG and around 14 for PB Bank, these are a better bet than FD in the long run. 

4. Disposal of MFCB (3069)

With their Don Sahong Hydropower Project near completion, this is one of the good cash cows to hold, however, looking from growth perspective their growth is fairly limited compared to other stocks. Hence the disposal to optimize my portfolio

5. Addition of Takaful (6139)

Insurance company operating in a market (Takaful) with a higher potential to grow than the general insurance market.  And the current valuation (forward PE) is still around 12. Grab it while you can

6. Addition of RCE-CAP (9296)

Good dividend, low P/E ratio (around 6) and steady business (consumer loan targeting government servant).