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Monday, January 7, 2008

Strong fundamentals will support uptrend in 2008

Given the country's still solid footing, there's time yet to make more hay this year, despite the intermittent showers.

The rate at which new projects are being launched and building construction activities are going on, you would think that most of the real estate developers in the country are trying hard not to miss out on the property market's current up cycle.

It's not that they are oblivious to the turbulent economic and financial weather in other parts of the world, or to the notion that nothing lasts forever.

It's that market consensus has emerged that the year 2008 promises to be as buoyant for the real estate industry as 2007 was.

And the country's fundamentals offer a pretty compelling argument, given the steady economic growth path, liberal foreign property ownership laws and supportive policies to drive domestic demand for real estate, to name a few.

Jump in commercial property stock The focus of the feverish activity seems to be on the commercial sub-sector. Based on official records from the Ministry of Finance's Property Market Report for the first half of 2007, a total of 19.48 million square feet of shopping centre space were under construction during the first half of last year.

Another 18.4 million square feet of retail space have building plan approvals. Should all these new projects materialise as planned, the country's retail space will jump to 125.25 million square feet, up 43.4 per cent from the existing supply of 87.37 million square feet in a couple of years from now.

During the same period, the total office space under construction in the country amounted to 17.43 million square feet. With the additional 24 million square feet of approved office space, the nation’s total supply will add up to 199.38 million square feet, rising 26.2 per cent from its existing total of 157.96 million square feet.

Contributing further to the commercial space supply are the 3,995 shops being constructed and potentially another 6,703 shops given building plan approvals as at the end of June 2007.

The buoyant construction activity in the shops subsector stemmed from the record increases in market transactions since late 2006. Shops represented 67.3 per cent and 49.1 per cent of the total volume and value of commercial transactions respectively in the first six months of 2007!

The hotel sub-sector, which enjoyed improved occupancies, also witnessed more vibrant construction activities in 2007 compared with the year before.

In addition to the existing 149,820 hotel rooms in the country, a total of 16,177 rooms are reported to be under construction. There will be a jump in the total stock when all the 33,713 rooms with building plan approvals become a reality.

Upbeat trend to continue The positive momentum in Malaysia's real estate industry is expected to continue this year on the back of a growing economy. Bank Negara Malaysia reported the gross domestic product (GDP) for July-September 2007 has expanded at a faster rate of 6.7 per cent than the 5.7 per cent registered in the second quarter and six per cent for the same period in 2006.

Given the 5.5 per cent registered in Q1 ’07, the average growth rate for the first three quarters of last year would be 6.15 per cent despite the topsy-turvy global conditions then proving its resilience compared with the last decade.

In spite of an expected slowing down of exports, and lower estimates from private analysts, the government is confident that an average growth of six per cent is achievable in 2007, and that the past three years’ growth momentum (5.2 per cent in 2005 and 5.9 per cent in 2006) should help 2008 achieve a growth of six to 6.5 per cent.

Improving investment environment The positive outlook for Malaysia is also supported by the Japan External Trade Organisation's (Jetro) 2008 Economic Outlook for East Asia report released last December. It said the nation's economy would expand by 5.8 per cent in 2008 against a backdrop of reduced corporate taxes that will help improve the investment environment. More push is also expected from rising private and public investments projected at 7.5 per cent and 9.3 per cent respectively, while the strength of the ringgit will help in stabilising import prices.

Underpinned by strong domestic demand and the anticipated execution of the Ninth Malaysia Plan (9MP) projects, the confidence level among the business community held up well last year and is showing no sign of faltering.

The Malaysian Institute of Economic Research's (MIER) Business Conditions Index (BCI), which reflects business sentiments, was 117.5 points in Q3 '07 – up by almost 10 points from 107.8 points in Q3 '06 and 12 points from 105.5 points in Q3 '07.

On an equally bullish note are the Malaysian consumers whose sentiments have been partly buoyed by measures in Budget 2008, which include the opportunity for Employees Provident Fund (EPF) contributors to make monthly withdrawals for financing one house.

Armed with positive job market perceptions, their confidence level was recorded at 117.5 points in Q3 '07, up from 115.9 points in the previous quarter and 107.5 points in Q3 '06.

Global uncertainty mitigated The growth momentum of previous years, together with the upbeat sentiments, should provide a backdrop of "blue skies" for 2008. However, the volatility in global financial markets will continue to persist and this will cause concerns of potential spillover into the real economy.

According to the Pacific Economic Cooperation Council's (PECC) State of the Region Report 2007-2008, the Asia Pacific region’s economic outlook has never been more uncertain since the financial crisis that struck the region 10 years ago. There is the unwinding of the crisis in the United States subprime mortgage sector that is still taking place amid global inflationary pressures and emerging speculative bubbles in Asia.

However, notwithstanding these risks, there is some good news that should not be ignored: Increased stability of the region’s economies, considered by the rest of the world as "emerging markets".

On solid footing Other than the world's first tier emerging markets, China and India (which are all anyone talks about these days), the second tier ones in East Asia, such as Malaysia, have never been on more solid footing than today.

Many have built up sizeable foreign currency reserves, thus shielding themselves from attacks on their currencies. Currency risks are further minimised because they are now able to borrow in their own currencies rather than in dollars and euros. Besides their debt levels being far more manageable relative to exports, their financial systems have improved and exchange rates are set at more realistic levels this time. In short, although crises are not out of the question, they are less likely to happen.

For all you know, US economic woes could turn out to be a good thing for the region’s real estate markets: Lower interest rates as a result of repeated rate reduction by the US Federal Reserve would mean lower bank returns combined with the fact that the US real estate market is in the doldrums, it may just be enough to push global investors to look for better returns elsewhere.

And Malaysia as part of East Asia, which Jetro has forecast to grow at a brisk rate of 8.2 per cent in 2008, would be a beneficiary. Thus, amid intermittent showers, the sun should still shine brightly enough in 2008 for real estate players to make some more hay.

By New Strait Times (by Lim Lay Ying)

Lim Lay Ying is managing director of Research Inc. (Asia), a company specialising in market research and consultancy for all facets of real estate development. Access past articles and more at or call 03-2092 4966.

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