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Saturday, December 1, 2007

Property - Opportunity abounds

Positive note on mid to high-end residential property segment

We expect home buyers in the mid to high-end segment (price above RM150,000) to be able to weather cost push inflation much better than the lower residential segment.

The prospect for residential properties will depend to a great degree on the location and development profile of the area. The announcement by the Government that Foreign Investment Committee (FIC) approval is no longer required for foreigners buying property and recent exemption of the real property gains tax (RPGT) has witnessed a surge in niche development and property developers with ongoing high-end residential development projects – especially in the Kuala Lumpur City Centre (KLCC) area, Sri Hartamas (Mont Kiara), and around the Golden Triangle area.

In the first half of 2007, the high-end condominium market noted a greater take up by foreign investors in the number of units sold particularly in the KLCC area. The renewed interest in high-end residential properties by locals and foreigners has led to an upward price revision of 25% by developers since 2H06.

The relaxation of rules and the seemingly low pricing of condominiums in Kuala Lumpur compared to neighbouring Singapore have enticed more foreign investors into this segment.

Competition in the high-end segment (especially around KLCC) is expected to intensify with the completed development units up for lease. Nevertheless, management execution of property sales, buyer segmentation and the right product and marketing strategies would be important factors to determine the winners. Going forward, government expenditure on development projects is expected to surge given the utilisation of the allotted amount under 9MP has only been around 25.4% as at mid-August 2007. Since 2006, in terms of annual spending, only 90% has been used while the remainder has not been utilised. Similarly, as of August 2007, merely 33% of the allocated amount for development projects has been spent leaving a large portion available for further development.

Nevertheless, the allocation in 2008 is 2.1% lower at RM40bil, while the projected construction sector GDP is 6.3%. We expect project awards and implementation by the Government to accelerate moving forward that will smooth the path for private finance initiative (PFI) projects to lift off, hence propelling sectoral growth. The property sector can expect an upswing in the construction industry should the proposed projects including private sector and PFI projects set off concurrently.

With the launch of three new shopping malls including the Sunway Pyramid extension in September, renewed optimism in retail space is expected
Good retail prospects

On the back of Visit Malaysia Year, malls like KLCC, Mid Valley Megamall and 1-Utama have experienced good retail prospects, seeing an 8%-10% growth, since the thrice yearly “Mega Sales Carnival” to boost the country’s international profile as a shopping destination.

Retail sales trended higher to 8.2% y-o-y in 1H07 compared to the same period in 2006. Overall, retail sales grew by 8.4% in 2006, the highest in six years. The strong performance of the retail segment is mainly attributed to the steady performance of the economy, urban migration, stable employment, growing population and increasing tourist arrivals. Expansion in the retail segment will augur well for the property and real estate market preceding a healthy rental growth.

Meanwhile, tourist arrivals and tourism receipts are anticipated to increase to 20.1 million and RM44.5bil respectively in 2007 vs 2006’s 17.55 million and RM36.37bil respectively. Stronger tourism activities will translate into growth in the retail segment.

In addition, with the launch of three new shopping malls – Pavilion, The Gardens at Mid Valley and the Sunway Pyramid extension in September, we expect renewed optimism in retail space. Each mall opened with occupancy rates exceeding 90% with a total of 3.1 million sq ft of retail space. Hence, the space occupancy rate is expected to improve further to 85% in 2007 from 2006’s 79%. At the same time, capital values for shopping centres are bound to rise with more developers planning to inject shopping malls into real estate investment trusts (REITs).

By that measure also, the office market outlook remains positive. Office occupancy rates remained robust at 84.7% in 2006, vs 2005’s 84%. Full-year 2007 office occupancy rates are expected at 85%. REIT-able office space, steady rental as well as a slower rise in new office supply will see sustained momentum in 2007. A glance at the office rental outlook in the region exhibits Kuala Lumpur moving towards a firmer rental cycle, along with other cosmopolitan cities like Singapore, Seoul, Bangkok and Jakarta.

In terms of occupancy cost competitiveness comparison, Malaysia ranked 45th – the most competitive level in both a regional and global context. The Kuala Lumpur office market is robust, with increasing demand for high-end offices buoyed by the expanding services sector particularly oil & gas, information technology and financial services.

Favourable economic conditions have spurred a healthy demand for offices in prime locations and modern facilities. Currently, the average occupancy for offices in the Golden Triangle area is 91% while the Central Business District recorded a lower 80%. Meanwhile, the highest stood at 92% in Damansara Heights. With the property market poised for further growth, expect foreign investments from the likes of

Singapore, Hong Kong and Australia to invest in prime offices alongside participation in office developments around the KL city through partnerships with local developers. We expect increasing demand for high-end offices to thrust capital prices to a new level supported by sustained growth in the services sector.

The relaxation of property ownership regulations has drawn strong interest from foreign investors. As a result, property developers are raising the bar of selling prices between 5% and 100% y-o-y from the launch price to maximise values and capital gains. In 2006, high-end properties were being sold at RM1,000psf around the KLCC area. Currently, the upcoming Four Seasons is priced at RM2,000 psf, a clear sign that land prices in KL city are skyrocketing due to strong foreign investor interest. We expect property prices to widen between mass market and high-end residences given the spillover effects of petrodollar inflows and stock market wealth on property demand in Malaysia as prices are relatively cheap compared to regional properties.

The strengthening of the ringgit against the US dollar provides another impetus of growth for the property sector with further appreciation expected. Prime land prices have also been fast increasing at a pace of over 30% this year following the RPGT waiver mainly around the KLCC area. We believe the current demand for high-end properties will continue to sustain supported by the political stability of the government and healthy economic conditions in Malaysia.

The upcoming general elections would further benefit the property sector. With the liberalisation of the property sector rules benefiting the high-end property segment thus far, we anticipate further incentives by the Government to spur the low-to-medium end market.

By The Star (by Kuwait Finance House)

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