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Monday, October 20, 2008

During financial “tsunami" buying property a better bet

Can the financial “tsunami” currently drowning many banks in the United States and Europe hit our shores? And, if so, how will our property market be affected?

I believe we cannot run away from the contagion effects of the credit crunch in the West and like it or not when our economy is affected, so will the property market.

However, we will pull through especially given our conservative and well-regulated banking system.

The good thing is we are not faced with a property “bubble” as in the early 1990s and also, banks have reduced their construction loans since end of last year to avoid an over-supply situation.

Fear, uncertainty and even panic have gripped many investors who have dumped their shares in the local bourse.

We must remember that it’s not the global credit crunch that is worrying but soaring inflation caused mainly by spikes in crude oil prices. Although crude oil price has dropped recently, it may go up again.

Our property market has been affected by the high construction costs, inflation and a perceived over-built situation especially of high-end homes.

An external shot of a bungalow. There are reports of some high-end projects having problems pushing off their units

However, I am confident that if one has extra money and can afford to service a loan, investing in property especially in a good location is still a safer bet and will yield better returns in the long run.

This is not to say that one should not save money in fixed deposits. It is always prudent to have sufficient savings but with fixed deposit rates hovering around 3.7% to 4.2% for 12- and 60-month tenures respectively, it is still a negative return when compared with the current inflation rate of over 7% (for many people it is more like 30%).

What about the stock market? Punters have been nibbling at some bargains in the hope of making a tidy profit in the event of an upswing in price. Trouble is many of us are unsure of when it will hit bottom and how long it will take for it to recover, not to mention a bull-run which seems unlikely in the near future.

Unlike property, which is solid brick and mortar, share prices are often determined by sentiments and, currently sentiments are very weak. Many property counters have taken a beating.

My advice for those wishing to buy their first home is to do it now. Don’t fool yourself that prices of new launches will come down because developers cannot afford to reduce prices anymore as their profit margins are already cut to the bone.

In fact many developers I talked to said they were either withholding launches or increasing prices by 20% to 30%. This is also a good time to go bargain hunting in the secondary market and snap up unsold units of upmarket residential homes before developers are forced to increase their price.

Those who can afford homes priced above RM1mil may hold back on their purchase because of the prevailing global financial and local political uncertainties. There are already reports of some high-end projects having problems pushing off their units.

Times are indeed very challenging.

Even established companies such as Sunrise Bhd has seen a 50.6% drop in property sales from RM1.182bil in 2007 to RM583mil for its financial year ended June 30, 2008.

Sunrise executive chairman Tong Kooi Ong in the latest annual report said the current environment was extremely hostile to property developers in launching new properties, even if they could secure financing.

“We face many of the same challenges as other developers. The most critical currently is the sharp rise in construction costs. With a weaker demand condition, gross margins of future projects will likely fall.

“Projects launched earlier face shrinking profits due to higher costs now. Sales will also likely be slower in the months ahead affecting cash flows and profits negatively.

“With two major future projects on the basis of build-then-sell, our gearing is expected to rise substantially and our interest expenses is likely to be much higher,” he said.

Tong said the sudden and substantial rise in costs had severely damaged the construction industry’s capacity.

“This will affect timely completion of projects and will reduce the availability of suppliers and contractors. The industry is further challenged by the increasing shortage of professionals due to the attraction of overseas markets,” he added.

He warned that construction costs for new projects were expected to rise even further in the months ahead.

“The weaker demand means developers will not be able to adjust prices upwards, leaving little, if any, profit margins,” he said, adding that problems faced by contractors, with mounting costs and shrinking cash flow, would further burden developers.

By The Star

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