Malaysian real estate – cautious optimism

Although the Malaysian property sector was buoyant in 2007, the market is expected to be somewhat cautious this year given a high base effect from 2007, lower disposable incomes from higher inflationary pressure as well as knock-on effects from foreign buyers given the US credit crisis.

Prospect for real estate properties this year will largely depend on the location and development profile of the area.

After a period of upcycle in 2003-2006, the Malaysian residential property is expected to reach a plateau in 2008, underpinned by the aggressive launches of mid-to-high developments since 2006. On the demand side, take-up rates of new projects were not encouraging during the first nine months of 2007, with average sales performance of newly launched residential schemes at 44.3% vs 40.6% in 2006, despite higher units launched.

We expect the take-up rates this year to be lukewarm, given the wait and see attitude adopted by potential buyers and investors. The low medium and medium-cost segments will see softening this year as disposable incomes are affected by the rising cost of living given escalating inflation.

The high-end residential market is expected to witness a period of rationalisation and consolidation this year, and lose significant steam into 2009 on the back of increased supply, i.e. completion of new condominiums during the period.

Given the physical supply of high-end residentials coming onstream in 2008 and 2009, the growth in rentals and capital value is expected to ease by the end of this year. The rate of growth of occupancy levels and rentals will ultimately determine whether strong foreign interest will be sustained.

Office sector
Meanwhile, the outlook of the office sector is also highly dependant on the economy achieving its projected growth of 5.7% y-o-y this year, which would subsequently improve the performance of the services sector.

In Penang, property transactions in the state appear to have come to a standstill as investors wait and see how the state’s economic landscape will unfold, given the opposition’s victory in taking control of Kedah, Penang, Perak and Selangor in the country’s 12th general election on March 8. The wait-and-see attitude adopted by foreign investors will definitely slow down investments in the country’s real estate sector.

Factors supporting real estate growth
·We expect economic growth momentum to remain sustainable with 2008 GDP growth projection at 5.7% y-o-y, on the back of resilient domestic aggregate demand, given accommodative monetary environment, reinforced by sustained export growth. Positive consumer and business confidence, stable labour market conditions, coupled with higher household earnings and corporate sectors suggest that growth in private sector demand would remain strong.

Nonetheless, possible adverse impact of external forces on the domestic economy cannot be ignored – volatility in crude oil prices, aftermath of the US subprime crisis leading to more-than-expected slowdown in global economies, as well as excessive interest rate hikes in the region prematurely halting growth momentum.

·Given expectations of steady growth in 2008, Malaysia’s income per capita is expected to grow further from RM22,345 in 2007 to RM23,864 in 2008. The high levels of income are expected to boost consumer spending and investment. The middle class accounts for 75% of the total population, earning in excess of RM16,900 per annum. Positive wealth effects from rising equities have also contributed to rising household incomes.

Private consumption is expected to grow by 7.9% y-o-y in 2008, supported by increases in incomes, stronger prices of commodities and stable interest rates.

However, higher inflation and a sharp drop in the equity market could dampen consumption and pose a negative wealth effect to homebuyers. The volatility in the equity market has shifted sentiment and restrained the flow of more speculative foreign funds into physical property assets.

·Malaysia’s population is expected to increase from 27.17 million in 2007 to 28.96 million in 2010. The median age of Malaysians is 27.4 years. In 2007, a total of 63.4% of the total population consisted of those in the working age group of between 15 and 64. The Government expects that 63.8% of the population would be living in urban areas, resulting in a higher demand for more houses, schools and employment.

In recent years, proportion of total potential buyers grew from 36.9% in 2002 to 39.1% in 2007, underpinned by an increase in the age groups of between 40-49 and 50-59 at a 5-year CAGR of 2.7% and 5.4%, respectively, in 2007. The 40-59 age group is likely to be more affluent than the younger age groups and also more likely to buy higher-end property and own more than one property for investment purpose or for their children.

The average lending rates continue to fall to as low as 6.27% in Jan 08 as compared to 6.57% in Jan 07, suggesting that banks are still competing for quality mortgage home loans.However, if the impact of the world economy worsens, the NPL for residential property may edge upwards, in particular for properties held for investment purposes.

·In 2007, the Government introduced several bold measures to promote the domestic property/REIT sector.

Among others, they included a 50% stamp duty exemption (for transfer of purchase of residential property under RM250,000); EPF will free up RM9.6bil annually on the withdrawal of funds for home purchases and allow monthly withdrawals from Account II to settle home loan repayment; setting up of introductory fund of RM400mil to increase bumiputra property investment in Iskandar Development Region (IDR); allocation of funds worth RM100mil to promote investments in health services related projects in IDR; and foreign investors were allowed up to 70% ownership in REIT’s management companies from 49% previously.

·The 9MP has identified five growth corridors – Eastern Corridor, Northern Corridor, East Malaysia, IDR and Central Region. Infrastructure and utilities projects to be carried under the 9MP are expected to benefit the construction and construction-related players (such as property, cement and steel industries).

However, we caution that the Northern Corridor Economic Region projects, which covers the states of Perlis, Kedah, Penang and northern Perak may come under review given the opposition’s recent victory.

Residential Market
Malaysia’s residential market, which accounts for approximately 60% of total property transactions, has been the best-performing sector since 1997. 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) had 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.

However, given the high base effect witnessed over the last two years as well as rising cost of construction material, we do not expect to witness a surge in new launches for the high-end segment this year. In 2008, the prospect for residential properties will depend to a great degree on the location and development profile of the area.

The relaxation of property ownership regulation had drawn strong interest from foreign investors in 2007, which caused land prices in Kuala Lumpur city to accelerate.

The Four Seasons was priced at RM2,000 per sq ft as compared to RM1,000 per sq ft in 2006 for high-end properties around the KLCC area.

We expect property prices to widen between mass market and high-end residences given the spillover effects of petrodollar inflows on property demand in Malaysia as prices are relatively cheap compared to regional properties.

However, given the physical supply coming onstream in 2008 and 2009, we expect the growth in rentals and capital value to ease by the end of this year.

By The Star (by KFH Research)