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Saturday, December 8, 2007

Debunking the myth - Malaysia’s real estate and what drives it

The Cost of Living (COL) survey by ECA International is carried out twice a year, comparing a basket of 128 consumer goods and services commonly purchased by expatriates in over 300 locations worldwide. Multinational companies use the results to help compensate their internationally mobile staff. Living costs for expatriates are affected by inflation, availability of goods and exchange rates, all of which can have a significant impact on expatriate remuneration packages. They concluded the following on Asian cities:

“In Asia, Seoul maintains its position as the most expensive city in Asia for expatriates, moving from 8th to 7th in the global ranking over the past 12 months. During the same period, Tokyo, Asia's second most costly city, dropped out of the top ten for the first time moving from 10th to 13th.

A 6% overall rise in the cost of goods and services typically purchased by expatriates has meant that despite the weakening Hong Kong dollar, Hong Kong's position in the ranking has remained steady and is still the fifth most expensive location in the region and ranked 79th worldwide.

The recent rise in GST in Singapore from 5% to 7% has contributed to pushing up living costs in Singapore, which has risen 10 places in the ranking since 2006. This, together with no change in Hong Kong's position, means that the gap is closing between the two locations.”

Where does Malaysia stand?

Asia's Most Expensive Cities (Global Ranking)

1 (7) Seoul
2 (13) Tokyo
5 (79) HK
6 (94) Taipei
7 (95) Beijing
8 (100) Shanghai
9 (122) Singapore
11 (153) Jakarta
18 (168) Bangkok
24 (177) Mumbai
25 (178) New Delhi
29 (191) Manila
32 (195) Hanoi
33 (197) Kuala Lumpur
35 (203) Karachi
36 (204) Ho Chi Minh City

Should we be happy or sad that Malaysia is “cheap”?

I see three main reasons why Malaysia is cheap:

a) Subsidised products – The country provides substantial subsidies in many essential necessities, but more importantly the government subsidises a lot in oil and gas products. This helps to translate into a lower COL for all, albeit unnecessarily subsidising the profits of many manufacturers and MNCs.

Naturally, when these products' prices surge (like they have been doing for the past 2 years), the subsidy budget will become unmanageable.

The government has to look deeper into the opportunity cost of such deep subsidy plans. We also need to put in place a timeline to trim the subsidy for all companies operating in Malaysia – they must be forced to compete with fuel at normalised prices.

b) Foreign workforce – Malaysia enjoys near full employment. However the country has some 2 million official foreign workers and probably another 2 million in the country working illegally.

The foreign work force is a significant factor in depressing wages and keeping prices in check. They also free up a sizable percentage of the local workforce to other areas of employment.

c) Its in real estate (the biggest reason for low COL figure) – Malaysia has one of the cheapest real estate markets in Asia. Real estate is a huge component of overall cost structure for any businesses.

Translate that down the line for all products and services, you get an effectively lower COL for Malaysia.

Let's examine the real estate issue further. As prices of high-end properties zoomed to stratosphere in Singapore, there was some spill over into KL and Penang as well.

Below, data compiled by JLW (Jones Lang Wootton) and OSK on regional comparisons of the average price per sq ft of luxury condos:

Kuala Lumpur - RM560 (US$164)
Singapore - RM4,616 (US$1,357)
Bangkok - RM714 (US$210)
Jakarta - RM425 (US$125)
Hong Kong - RM5,563 (US$1,636)
Shanghai - RM1,225 (US$360)
Beijing - RM646 (US$190)

It would be useful to view that, against the GDP per capita figures which provides a gauge on income per person:

Malaysia - US$10,400
Singapore - US$29,700
Thailand - US$8,300
Indonesia - US$3,700
HK - US$36,800
China - US$6,200

Now let's look at GDP per capita/PSF in US$ to get some interesting ratios:

KL - 63.4x
Singapore - 21.9x
Thailand - 39.5x
Indonesia - 29.6x
HK - 22.5x
Shanghai - 17.2x
Beijing - 32.6x

The lower the ratio, the more unaffordable it would be. Obviously, KL sticks out like a sore thumb, its “cheap” and “affordable” no matter how you cut it.

What's interesting is how expensive and unaffordable the luxury condos are in “poorer nations”. It may be safe to assume then that in these poorer nations, the bulk of purchases involved foreign buying and/or speculation.

Still, why is Malaysia so cheap?
Is this the best buy story for the decade? Well the short answer is NO. The long answer is also NO.

And here's why:

KL's real estate is one of the cheapest in Asia. This also explains why 5 star hotels in Malaysia are among the cheapest in the world. It is easy to understand the fact that Malaysia's real estate values lag those of more developed nations such as Singapore, Hong Kong, Seoul or Tokyo.

We can also understand why Shanghai or Beijing is more expensive too, compared to KL and that's largely because of population, out-sourcing and investments.

But KL's real estate value also lags Indian cities, Bangkok and certain places in Jakarta.

A “poor” country can have high city real estate values. A big factor is city population. You need to cram a lot of people into a tiny space, then real estate values will soar – for example, New York, Tokyo, HK, Singapore, Bangkok, Shanghai, Shenzhen, Jakarta, Karachi and Mumbai. Many of these have a 10 to 30 million city population.

KL has about 5 million but it is also quite spread out.

Another factor is that it has to be CRAMPED – or rather business activity CBD has to be cramped.

If you want KL prices or Penang prices to shoot higher, ask the politicians to double the population of KL or Penang.

We have to have people bumping into each other all the time while walking on sidewalks, then our property prices will surge.

We have to double the time we spend travelling to work, then our property prices will surge. Good trade off?

Another factor for high real estate values is whether you are a financial centre. Is your city a crucial outpost to doing business in the region like HK, Shanghai, Singapore, Tokyo or New York? KL seems to be neither here nor there. What about Bangkok?

It certainly is not financial centre although it has a super duper population (have you seen the weekend exodus from Bangkok every Friday).

Even though it is not a financial centre, it is the centre for a country with a decent population size.

If your capital city is the centre of a country with a decent population, you can be assured of good commercial real estate values – e.g. Thailand, Taiwan, India and South Korea.

Decent population size means critical mass achieved in many areas, especially domestic demand. We need Malaysia to move quickly from 26 million to at least 60 million.

If you are not a financial centre, you can still command high rates if high-value services businesses are aplenty.

Hence Singapore's commercial real estate will have a very strong long-term uptrend as it does not depend on its reputation as a financial centre/port/MICE like HK but moves higher up the value-added curve by encouraging designers/inventors in animation, biotech, education, etc.

Does KL look like a city with good high value added industries? I can think of Islamic Finance as the one area where we could adopt the “blue ocean strategy”.

Our MSC really only achieved about 10% of what we set out to do – its a decent place for outsourcing.

Our main revenue comes from oil and gas, plantations and other soft commodities – they are not high value add industries with the exception of maybe oil and gas.

Widening the city
Good amenities and public infrastructure would not be a bad thing, look at Tokyo, HK, Singapore or even New York – but infra is not that crucial in giving higher real estate values.

If you look at the capital cities of the high GDP per capita countries such as Oslo, Stockholm, Helsinki...etc, you will find that good infra is a good thing but does not necessarily translate to stratospheric real estate prices.

Infra wise, KL is better than Bangkok, Jakarta, Mumbai ... but we still lag their real estate prices.

Lack of good quality commercial space will also spruce up real estate values. Just look at Indian cities, cities in Vietnam or even Jakarta.

We in KL, unfortunately build good buildings cheaply as land is cheap and plentiful. I mean, KL commercial just keeps getting drawn wider and wider.

First the CBD (commercial business district), then the city kind of move wider to include PJ, then it moves out to Shah Alam ... don't forget, Putrajaya.

There's too much cheap flat land. Now, we are extending into IDR as well.

The picture is so clear
Commercial real estate value in Malaysia will lag the rest of Asia, even some cities in Vietnam and it will not change until the fundamentals change.

Foreign investors and/or foreign speculation can drive real estate values up. Just consider the factors cited, Malaysia does not look like having good upside or remotely standing a chance of catching up to their neighbours, so why would foreign property investors dive in for the long haul?

Speculators have driven up prices in Macau, thanks to their success in gaming and the money kinda followed to Singapore with its brilliantly planned Integrated Resorts.

We have been seeing some spillover effect into KL and Penang high end, and that's basically that, a spillover not a dramatic shift in fundamentals.

At the end of the day, cheap real estate is not a bad thing. It improves our affordability. It helps to attract FDI in particularly for industries where land is a big cost factor, and its a big plus for tourism.

There is NO Asia average median real estate pricing where we all gravitate to. We will stay where we are in the pricing curve unless one or more of the factors above changes significantly for Malaysia.

Despite the overall low COL for Malaysia, there is one big exception. Malaysia and Singapore are probably the two most expensive places on earth to buy cars. I wonder why!

By The Star (by S Dali)

S Dali is a pseudonym. He is an ex-analyst and active blogger ( who says he is too young, too old, too sarcastic, too dark, too Cantonese.

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