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LRT Project & its impact on the real estate market

What is the impact of an LRT/MRT project?

Most studies done in both developing and developed countries accept that infrastructure developments such as access to LRT/MRT system are strong positive contributors to property prices. This is due to the role they play in cutting down on commute times to a country’s Central Business District (CBD) and thus opening up areas which are further away but are now connected via the rail network for real estate development. A case in point is the Sungai Buloh–Kajang (SBK) line which connected Sungai Buloh located 25 km’s away from Kuala Lumpur’s city centre and cut commute times to approx. 30 minutes. A detailed study conducted on the entire LRT system in the Klang Valley revealed that as a result of such developments, property prices were positively impacted.

 

Who stands to gain the most from these developments?

Residential properties further away from an urban city centre which become connected via the MRT/LRT line tend to experience the most significant growth in property prices. This is due to the presence of the MRT/LRT line representing a significant value addition for the properties in the area. This was the experience of properties in Mount Kiara: an affluent suburb in Malaysia which is approx. 10 kms away from the Kuala Lumpur City Centre. As a result of the development, prices of condominiums rose by approx. 14% and 22% on a Year-on-Year Basis in the years leading up to the launch of the SBK line. Rental rates also tend to appreciate as a result of the developments, albeit to a lesser extent.

Property prices in cities adjacent to the stops along an LRT/MRT line also experience a price appreciation, albeit to a lesser extent than the overall property price increases experienced by cities/towns with a connecting node.

Commercial properties in such areas are also positively impacted as the rail link facilitates businesses to be located in the outskirts of a city centre where land and labour may be comparatively cheaper.

Do all benefit as a result of the development?

According to some studies, not everyone may benefit from this development. Properties located in the immediate vicinity of LRT/MRT stations are known to be negatively impacted due to the added congestion as well as sound pollution and other environmental concerns. A case in point is Mas Kiara Residencies TTDI- a residential apartment development in Mount Kiara, just 3 km’s away from the nearest MRT station. It experienced an approx. 36% drop in property prices in 2016 when the new SBK line was launched in the same year. However, other studies have found evidence to the contrary. A study done on the Klang Valley properties suggest that homes located within 2 km’s of a rail station can earn a 2%-5% premium on their property values compared to the city’s average home value.

However, such evidence tends to be weak and in general most studies seem to suggest that there is an ‘optimal distance’ from LRT/MRT stations where the impact on property prices is maximized.

Properties located at or near the CBD may also experience downward pressure on their property prices as the demand for such properties may weaken since the MRT/LRT open up opportunities for real estate development further afield. However, we have been unable to find conclusive evidence to confirm this claim.

At what point do prices start to rise?

Studies suggest that given the long-term nature and uncertainty surrounding such developments (particularly in developing markets), the mere announcement of an LRT project does not have a material impact on property prices. For instance, after months of uncertainty following the unexpected change in Malaysia’s government in 2018, Malaysia’s cabinet finally approved the new LRT3 project after having cut the project cost by almost half and thus curbing the scope of the project. The uncertainty over the status of the LRT and other large scale infrastructure developments led to the negativity surrounding property prices which contributed to stagnant real estate prices in 2018.

Instead, property values start to see appreciation in value only once the LRT lines begins construction or more tangible steps have been taken to initiate the projects, as it provides investors a greater sense of confidence. Not surprisingly, property prices can be adversely impacted in the event of an unexpected cancellation of a project as was the case of the shelving of Malaysia’s MRT3 line in May 2018. As a result of this, developers who bought land along the proposed line may have had to scale back on their developments which negatively impacted their performance.

What are the implications for Sri Lanka?

This blog post is part of Frontier’s ‘Real Estate Research Service’ where we provide comprehensive research on several topics including the above, in order to arrive at a view on the implications of such developments for Sri Lanka’s real estate.

To find out more about the reports available for subscription, email us at clientconnect@frontiergroup.info

References

Details of SBK Line — Link

Mass Rapid Transport corporation — official Website — Link

Najib: MRT a ‘success story’, built at reasonable cost — Link

21 million riders as Sg Buloh-Kajang MRT Line turns one- Link

MRT boon for property prices — Link

How Will MRT Affect the Property Market? — Link

Malaysia’s Cabinet approves new LRT3 project after costs cut by nearly half — Link

Goodbye MRT 3: How badly will the property market be hit? — Link

Estimating the Effects of Light Rail Transit (LRT) System on the Property Values in the Klang Valley, Malaysia — Link