So what’s liquidity all about? It can be defined as “how quickly an asset can be bought or sold in the market without affecting the asset’s price”, but do people truly grasp the importance of having that?
For this topic, we’ve got LivingSpace.com.my founder and property analyst Ikhram Merican onboard to talk about it in greater detail. He’ll cover whether an increase in your property’s value will translate to real wealth, and here’s what he has to say.
How It All Began
There’s a particular episode which taught me the important lesson of fully comprehending what liquidity is. You see, many years ago, my father built his dream home in Petaling Jaya. It was a masterpiece of its time.
He hired a well-established architect from Canada, and together with my mum, raised a beautiful structure. Not so many years later, my father’s company was forced to restructure. Top management was laid off, including my father. Keeping the house became a burden. Eventually, my parents decided that they’d have to sell it.
Although they weren’t happy at the prospect of selling the house, they weren’t too worried. They knew that after they sold this house, they’d still have enough equity to buy another bungalow, with cash to spare. It was just going to be a small downsizing exercise. They were very wrong. Two years passed without a buyer in sight.
By this time, they had gotten desperate. The house was eventually sold at a loss.
Valuation Has Little Meaning
Paper gains and real gains are two completely different things in the world of investments. Many investors are not aware of this, and even if they are, it’s easily forgotten. Everyone buys property with the expectation that the value of the property will increase. Most of the time it does. But does an increase in your property value actually translate to real wealth?
I knew a person who wanted to sell his apartment unit. The market value of the property at that time was RM3.35mil, whereas he had acquired it at RM2.2mil. His gains looked great on paper. However, more than a year passed, without him being able to sell it. The property value thus meant nothing to him, as long as it remained the way it was – merely figures on a piece of paper.
Until he can sell that unit, a value of even RM5mil would mean very little to him. And if his circumstances were to suddenly take a turn for the worse and the bank forecloses on his apartment, he may not have a property anymore and still be in debt.
Avoiding Liquidity Pitfalls
You’d be forgiven for thinking that only high-end properties face liquidity problems because that couldn’t be further from the truth. Apart from the fact that it takes three months or more to complete the sales transaction, there are many other factors to be taken into consideration that will prolong the sale of any property.
For example, an RM300,000 house located in the heart of Klang Valley may be difficult to sell because it’s located right next to a sewage treatment plant. An otherwise attractive and affordable condo unit may be impossible to sell because there was a suicide case on the same floor.
Some liquidity factors may be out of your control, but with a bit of careful planning, you can make it easier for you to sell.
Some Tips for You to Take Away
- Remember that property is not very liquid: Never plan to solely rely on your capital gains for emergencies. You still need to have very liquid assets like cash, stocks or insurance as contingency reserves, not property.
- Plan your exit well: When you buy a property, remember to also plan for your exit strategy. You may want to sell it after a couple of years to upgrade or to pay for your child’s tertiary education fees. Whatever the reason may be, knowing when you want to exit is important to realise a gain.
- Look at demand factors: Conduct in-depth research so that you’re able to buy properties that have a strong potential for demand. You should consider infrastructure, connectivity, affordability, as well as the layout of the property.
- Emphasise perceived value over market value: Your property may have a market value of RM500,000 but if it’s perceived to be worthless because of its rundown condition, you’d almost certainly face a tough time finding the right buyer. By investing some cash on your property to refurbish it to more presentable levels, you’d not only be able to attract genuine customers, you might even be able to sell it at a marginally higher price!
Properties Are Not Very Liquid
While there’s no doubt that a property is one of the best forms of investment you could choose, it’s still vital for you to know how to manage the liquidity factor that comes along with it. It’s this ability to properly identify and handle it that will differentiate between a sound and a risky investment.
It’s also important to make sure that you use an accurate and reliable tool to check for your home loan eligibility before you commit to what is possibly one of your biggest financial decisions.