Studio apartments invoke mixed emotions in the context of the Malaysia market. There are those who find it preposterous to live in a small unit that makes no distinction of the bedroom and living area. And there are those that find it is the perfect solution to current lifestyle trends. Essentially, you love it or hate it.
Smart investors that have been able to separate their negative feelings from the business case for studio apartments are making money in this niche.
There’s a whole lot of opinion on investing in studio apartments but unfortunately many of these opinions are based on nothing more than sentiment. Sometimes, there’s no sense in sentiment. So let’s separate the wheat from the chaff and see if there is a strong business case for investing in a studio apartment.
Fact #1: Demographic Changes
Firstly, as in any business case, there has to be a demand for your goods and services before you can turn a profit. If you’re savvy, you’ll also look at trends. Data from the Department of Statistics (Malaysia) indicate that Malaysia is slowly becoming an aging population. This means, the number of young people are decreasing. The median age in 2000 was 23.6. In 2010, this had increased to 27.6.
There are approximately 3,284,551 people between the ages of 20 – 29 who are unmarried. This is a large significant segment and it demands housing that is small, easy to maintain and reasonably priced.
Fact #2: Lifestyle Changes
As the cost of living continues to rise, we’re seeing more career focused individuals working long hours to escape the gravity of inflation. The typical urban professional is out of home most of the time either working, stuck in traffic, or socializing.
Work and social commitments demand that she eat out most of the time. She has little time to cook or clean. Her home is one of many transit points. She needs a place that is secure, small and practical.
The individual does not socialize like a family would. In a typical family setting, it is very common to invite friends over for lunch or dinner. Most husbands and wives enjoy playing host to visitors, the kids love to have friends over. The home for the typical family is an assortment of things central to their lives.
The young urban professional on the other hand does most of her socializing outside of her home. She explores new restaurants with friends and prefers to invite them to her favorite joint for teh-tarik (tea). She does not have the time to play host to visitors and prefers to savor the quiet time at home. Add to this that marriage is not something she’s considering in the next few years, and the studio apartment becomes the perfect solution to her living needs.
Fact #3: Household Income
The average household income in Malaysia (2007) is RM 4,300. Escalating property prices in Malaysia make it very difficult for the average young professional to buy property. Landed property prices in urban areas are very much out of league for them. In a an October 2011 interview with BFM 89.9, Goh Seng Toh, Vice-President of the National House Buyers Association, stated that there is a gross mismatch between property prices and income in Malaysia.
Affordability of a home is considered in relation to household income. Generally one can safely afford a home that is up to 4 times the annual income. If a young professional earns RM 4,300 a month, her annual income is RM 51,600 and she could theoretically afford a home under RM 210,000. According to a Star Property report, 2011 housing prices in the Klang Valley have gone up as much as 11 times the average annual household income. It reports that some areas have sky rocketed to 20 times. This report is based on an average household income of RM 6,000 per month.
All trends seem to indicate that affordability of homes in urban Malaysia, especially in the Klang Valley, Johor Bahru, and Penang island areas, is a problem. Many young professionals will look at renting (instead of buying) good quality homes that meet their lifestyle demand and affordability. This presents an opportunity for investors.
If you need further convincing, there are approximately 4.1 million people in urban Malaysia between the ages of 20-29.
Based on the facts above, it would seem that the case for studio apartments is strong.
Investing in studio apartments and renting it to young professionals is a viable business model. However, investors should be realistic in their expectations and aim to provide feasible solutions to this situation. They should understand their market, and make their investments attractive to the market.
For example, many young professionals would prefer fully furnished units but this does not mean that they would be attracted to any fully furnished unit. They prefer tastefully decorated units. At the end of the day, investors stand to gain in terms of higher occupancy and rental rates when they invest in good deco.
Investors should also be sensitive to affordability and plan their financing appropriately. To illustrate, if your target market has an average household income of RM 5,000, it would be unwise to rent at prices beyond RM 2,500. You may have to increase your capital outlay when purchasing a unit for this market such that you monthly financing installments plus the monthly aggregate of your renovation costs do not exceed RM 2,500.
