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Monday, June 23, 2008

Signs of distress in the market

How can you tell when the property market is softening?

There are several telltale signs like developers taking a longer time to sell their properties, delaying new launches and giving away more freebies and incentives. A weakening market will also see a decrease in rental and capital values.

There are also more subtle signs like the developer keeping a low profile, the project slowing down, the development changing hands or the developer maintaining the original selling price but reducing the built-up area.

There are also instances where the developer continues to build the houses despite very slow sales but this situation is masked as “build then sell”. Some developers might earlier claim they have sold most of their units but later said they have taken back the units and selling en bloc as prices have escalated.

These ominous “signs” have mostly surfaced.

Of late the property development industry is feeling the jitters as crude oil prices continue to soar. The industry is grappling with increased cost of doing business, rising price of building materials, inflationary trends in cost of living, global economic uncertainties, rigid policies for developers and a softening market.

Property developers are also faced with eroded profit margins, higher construction costs, intense competition, and fear that rising inflation was affecting buyers' sentiment and affordability.

To make things worse, they are burdened with what Real Estate and Housing Developers' Association (Rehda) president Datuk Ng Seing Liong described as “onerous contributions and social obligations”.

Datuk Ng Seing Liong

Although he did not elaborate when speaking at the official opening of Mapex 2008 in Kuala Lumpur last week, it is clear what he meant: developers having to provide all sorts of amenities from building police stations, community halls to flyovers.

Many developers have argued that even in the best of times, these “social obligations” were “eating” into their profits, what more in the current tough market condition.

If the inflationary pressures continue, Ng warned that another “recession is very near!”

The Government has proposed various measures in the 2008 Budget to sustain economic growth and provide such incentives as 50% waiver of stamp duty for purchase of one house costing not more than RM250,000 from Sept 8, 2007 until Dec 31, 2010; exemption of real property gains tax; allowing monthly withdrawal of EPF contributions for housing purposes and a RM50mil fund to guarantee housing loans for buyers who do not have fixed income.

However, Rehda feels this is not enough and wants policy changes.

A “thorn” in their flesh is the bumiputra quota in which Rehda wants the release procedures to be standardised to reflect a more transparent and structured release mechanism.

“Bumiputra quota should not exceed 30%, based on sales regardless of the units being sold to bumiputras were the identified lots or not. Bumiputra discount should be capped at 5% and only applicable for houses priced at RM250,000 and below, excluding low-cost and low-medium cost houses,” said Ng.

Ng said it was unfair for someone who could afford a multi-million ringgit property to enjoy a bumiputra discount that differed from state to state (7% discount for Selangor, 15% for Johor and 10% for other states).

Rehda, he said, also wanted the Government to take over the provision of low-cost public housing, thus freeing the private sector developers to focus more on market driven products.

The Government should also review the price of low-cost housing from the current RM42,000 to RM60,000 to mitigate increased costs.

Rehda hopes the Government would abolish its decision to charge 10% import duty on cement importers immediately. “Instead we hope the Government will impose 10% to 20% export duty on all cement and steel materials to ensure adequate supply,” he added.

Rehda vice-president Datuk FD Iskandar said it was inevitable that house prices would go up soon as construction costs had shot up by 30%.

“Prices of raw materials from steel to cement have all gone up. It will be very challenging for the property development industry. Contractors are crying out for a revision of their contract prices and they will walk off if their demands are not met. Projects will stall,” he said, adding there was also a shortage of steel and cement whose prices have risen to RM4,000 per ton and RM18 per bag respectively.

Iskandar who is also the Rehda Selangor chairman said there were construction firms who would be too glad to get out of a contract now that prices of everything had soared. They would stand to lose, as there was no price fluctuation clause to allow for an upward revision of prices. “Some of them prefer to wait until prices have stabilised,” he said.

Unless oil prices drop drastically (which many industry players do not see it likely to happen) and the inflationary trend is checked, the economy in particular the housing and construction industry will be heading for a downturn.

By The Star - Property Talk (by S.C.Cheah)

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