Location is often cited as the main criterion of a residential property investment. But even before one looks at where to buy, a bigger question is what to buy. Should one invest in a condominium or a landed property? The question of which is better depends on a myriad of personal preferences. Today, a home is not simply a roof over one's head, but a total lifestyle experience best typified by condos and gated communities that offer comprehensive recreational facilities and most importantly, security.

For a real estate investor though, rather than the occupant, these qualitative factors would still rank a distant second to the most important quantitative one which provides a better return on investment? In Malaysia, condos generally provide higher yields, but lower capital appreciation. The reverse is true for landed properties, at least in the past. There is a trade-off — but which is better in the long run? And what is the "trade-off" point — how much more does a house value have to rise in order to compensate for a condo's higher yield?

We shall try to calculate this trade-off effect and the comparative returns from investing in a Sunrise Mont'Kiara condo and a 2-storey link house in Taman Tun Dr Ismail (TTDI) over a 10-year period.

Not all condos are the same
First and foremost, we have to distinguish the fact that not all condos are the same, and this analysis will not apply across the board. Location, tenant profile, maintenance and a developer's reputation and commitment to re-invest are some of the many factors that help shape capital values and rental yields.
Sunrise Mont'Kiara is suburban Kuala Lumpur's preferred condo address for the affluent and expatriates. Some 70% of the units there are tenanted, with nationals of Japan, the US and Europe forming 65% of its residents. This unique tenant profile, plus a strong track record by developer Sunrise Bhd, provide owners of Sunrise Mont'Kiara properties with superior yields and returns.

The assumption parameters
Our exercise shall compare the returns from a 1,200 sq ft condo in Sunrise Mont'Kiara costing RM480,000 (at RM400 psf, the mid-range of new projects) and a 2-storey link home in TTDI, priced at RM550,000. This is the lower end of asking secondary market prices, which range from RM550,000 to RM700,000, depending on size, age and renovations.
Why did we choose TTDI as a comparison to Sunrise Mont'Kiara? Both are preferred middle and upper-income suburban Kuala Lumpur addresses in their respective market segments — condos and landed homes. The two townships are built by leading developers and are seen as industry price setters, although TTDI is mature while Sunrise Mont'Kiara is still growing.

Rental comparison
Table 1 shows rental transactions completed in 2004 by Kiara Realty, the leading real estate agent for Sunrise Mont'Kiara properties. As we can see, rental rates can vary significantly, depending on a building's age, a unit's condition, furnishings, floor level, view and tenant profile — rates are higher for expatriates compared with local tenants.
Older developments, such as Mont'Kiara Pines, Mont'Kiara Palma and Mont'Kiara Pelangi fetched an average of RM2.30 to RM2.32 psf in rent per month. These three projects were sold by Sunrise in the early 1990s at RM175 to 230 psf, giving investors a handsome gross yield of 12% to 16%.
Mont'Kiara Sophia, launched in 1994, fetched an average of RM2.52 psf, while newer developments like Mont'Kiara Astana, Mont'Kiara Bayu and Laman Suria fetched between RM2.73 and RM3.27 psf. These three projects were launched between 1997 and 2001.
Sunrise Mont'Kiara's most exclusive and spacious development to date, Mont'Kiara Damai, boasts the highest rent, at RM3.81 psf or an average of RM11,984 per unit. The project was launched in 2001 at RM388 psf, giving purchasers a gross yield of 11.7%. The entry- level Laman Suria, sold for just RM294 psf in 2001, is yielding RM2.73 psf in rent and a gross yield of 11%.

Assumptions
Our analysis assumes a fully furnished Sunrise Mont'Kiara condo commands RM3,000 per month, or RM2.50 psf — the mid price between older and newer developments. Maintenance fees are assumed at 30 sen psf, or RM360 per month, giving a monthly net rent of RM2,640.
For TTDI houses, rental rates also vary considerably, given their wider range of sizes, phases and different levels of renovations and furnishings. Most units are asking for RM1,500 to 1,900 per month. We are assuming RM1,800 per month in our analysis.
We are assuming an 80% margin of financing for both properties, with a 10-year loan priced at 6.5% per annum on a reducing balance method. For the sake of simplicity, we are assuming yearly rather than daily rest, and ignoring time value of money. We are also assuming stable rents, although they can fluctuate depending on demand and supply.
Sunrise Mont'Kiara provides a gross yield of 7.5% or 6.6% after deducting maintenance fees. TTDI's yield is 3.9%. Return on equity (ROE) is fairly stable for Sunrise Mont'Kiara (at 5.4% to 5.9% per year) but is negative for the first four years for TTDI, as interest costs exceed rental income. Over 10 years, the average ROE for Sunrise Mont'Kiara is 5.61%, nearly twice current bank deposit rates and over four times more than TTDI's 1.33%.

The end investment cost (EIC) is the total cost of the property after taking into account cumulative rental received and interest paid after 10 years.
Compared with an initial price of RM480,000, the EIC of Sunrise Mont'Kiara works out to be RM313,419 — equivalent to a "gain" of RM166,581 or 34.7%. For TTDI, the EIC is RM506,082, equivalent to a "gain" of RM43,918 or 8% over the initial purchase price of RM550,000.
Sunrise Mont'Kiara has a large cost advantage which will significantly affect return on investments when the asset is ultimately sold.

4) Return on investment (ROI)

ROI = market value at end of 10 years / end investment cost

Our next ratio — return on investment (ROI) — is more subjective, since it involves an assessment of future property prices. History is probably not a good indicator of the future, as landed homes came from a very undervalued base after the severe 1980s recession. From this low base, prices surged strongly in the 1990s from growing affluence and a booming economy.
Condos, with lower land content, starting higher prices and maintenance issues, saw smaller capital gains. But with prices between the two converging (in terms of price for built-up space), moderating economic growth, increasing supply and poor yields for houses, we think the prospect of landed homes outperforming condos by a very wide margin is less likely in the future.
The cost advantage Sunrise Mont'Kiara enjoys over TTDI after 10 years gives it a significant edge when it comes to realising the investment. Assuming prices for both properties remain unchanged, the ROI for Sunrise Mont'Kiara stands at a hefty 53% compared with 9% for TTDI.
Table 5 lists the comparative ROI using various end value scenarios. If both properties gain 20% after 10 years, the ROI for Sunrise Mont' Kiara is 84% compared with 30% for TTDI. Even if Sunrise Mont'Kiara stays unchanged, and TTDI gains 30%, the former is still a more profitable investment, with a ROI of 53% versus 41%.

What is the 'trade-off' point?
We found that the price of TTDI has to rise 41% in order to match returns generated from Sunrise Mont'Kiara, assuming the latter's value stays unchanged. If Sunrise Mont'Kiara appreciates by 25%, TTDI will need to rise by 76% to yield similar returns. And if Sunrise Mont'Kiara rises by 50%, TTDI has to increase by a hefty 112%.

Clearly, the yield advantage lowers investment costs for a Sunrise Mont'Kiara condo substantially over time and gives investors a good start when realising the value of their property.