From John Tan

Serviced apartments are the mainstay for most new residential property launches by developers these days.

In the Klang Valley, there will hardly be any new condominium launches as land in strategic sites is getting scarce. New launches will mainly be of serviced apartments developed on commercial land with a high plot ratio of 10. For new developments nearer to the commercial business district (CBD), developers may even apply for a higher plot ratio.

With the entry of more serviced apartments into the market and with the massive overhang of high-rise units, is it still possible for investors in serviced apartments to make money in this pandemic and overhang situation?

The answer depends on the investor entry price (or purchase price). We all know that property at a new launch of serviced apartment or condominium comes with several tier pricing.

Not every buyer is on the same level of the playing field. Rebates are common. There is available:

• early bird rebate
• associate rebate
• staff rebate
• repeat buyer rebate and
• family members’ rebate.

But buyers who enjoy the highest rebate are arguably bulk purchasers.

I received a bulk purchase rebate when I grouped several friends and acquaintances to block book 10 units of serviced apartments in Subang Jaya a few years ago and was offered an additional 5% discount for the block booking.

So while a walk-in buyer enjoys the standard 10% rebate (retail price), our group enjoyed 10% and an additional 5% rebate. Cool, isn’t it?

It also makes sense from the developer’s standpoint because they only deal with one person during the sale process instead of 10.

On an individual basis, it is difficult for an investor to continually rope in a group of buyers on their own to buy their next property in order to continually earn bulk rebates. Hence, it opens up a role for a “property guru”. With the influx of property gurus, the bulk discount practice becomes institutionalised.

How does it work?

The property guru will try to amass as many members as possible by giving free property talks.

The more high-income members that the guru can enrol, the better it will be as they are able to buy more property. Most gurus will levy a fee from a joiner as a test of their commitment to enter the group and purchase property.

So if an individual walk-in customer gets a 10% rebate in the showroom (which is quite common these days), a property guru who walks in with a block purchase of 50 units will enjoy “bulk” rebates, which can be anywhere between 10% and 20% in addition to the standard 10%.

The guru will take a cut of the rebate (say 5%) and pass the balance of the rebate to the members.

As an example:

• A walk-in customer gets a 10% rebate
• A property guru gets 10% + 15% = 25%. The property guru takes 5% as his administrative fee.
• The property guru club members get a net 20% rebate.

The property guru’s administrative fee is not transparent to his members. The members will not know what their guru earns for brokering this bulk rebate deal for them. The income must be quite lucrative as property gurus are flourishing in numbers.

In this example, members of the guru club can be termed as buying below the market value because they get a 20% rebate in comparison to an ordinary walk-in customer, who will only get 10%.

This additional rebate of 10% helps the members get a better return on investment from their rental income and in the future the members can sell their units at a lower price and still earn a profit because their initial entry price is lower than the other buyers. The additional rebate acts as a buffer for bulk purchasers.

The size of the bulk rebates will depend on how many units the property guru can amass for that project. The more units, the higher the bulk rebate.

As a qualifier, not all developers will entertain requests for bulk rebates. I am aware of project launches which have attracted massive crowds of buyers over one weekend chalking over 85% sales. Property gurus will be hard-pressed to negotiate for bulk rebates from the developer in such an instance.

Investors should make their own investigation when participating in a bulk purchase. Are these units easily rentable or sellable in the first place? Investors need to gauge their own risk appetite before embarking on the purchase.

While the days of flipping property are generally over, from the end of 2014, there is still room for an arbitrage gain if the bulk rebate is substantial and the property is located in a desirable location.

Happy investing!

John Tan is an FMT reader and a property commentator.

The views expressed are those of the writer and do not necessarily reflect those of FMT.