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Saturday, December 20, 2008

Developers targeting the middle markets for new launches

The spreading global financial crisis has wrapped its tentacles around the domestic property market, causing loss of confidence and apprehension, and forcing developers to rethink their development plans and launches.

The indications are the property market is stable despite a downturn in some areas where prices had previously appreciated sharply, largely because of foreign buying which has slowed in more recent times.

Having staved off the challenges posed by escalating material prices that inflated construction costs by about 30%, particularly during the first half this year, developers are now faced with the softening property market.

As consumers’ purchasing power is affected by rising costs and inflationary pressures, developers have not been able to increase prices and instead, have had to absorb the cost increase and contend with lower profit margins.

Although the escalating costs have since subsided, the prices of cement and cement aggregates, sand and steel are still about 10% to 20% higher compared with the same time last year.

The protracted US financial crisis continues to have an adverse impact on the economies of many countries. In Malaysia, it has dampened sentiment in the local property scene which was more noticeable in the second half this year.

The residential property market is getting more attention from developers these days as they need to monitor the market very closely before embarking on any new project, while striving to complete ongoing projects.

The retail and office market may also be affected if the negative impact of the global financial crisis causes a drop in the occupancy and rental rates for commercial space. As for the industrial property sector, it has been quiet for the past decade as a result of an overbuilt situation.

New housing project launches saw a significant drop as developers opted to stay liquid in anticipation of a prolonged slump and to ensure their capability of moving ongoing projects when the market recovers.

Developers are adopting a wait-and-see attitude with their launches. To play it safe, they have decided to defer their projects to ensure that they are better received when they are finally ready for launch and also to avoid having to suffer any price cuts.

Those that have boldly decided to push ahead, are doing so in smaller numbers through pre-launch previews to gauge the take-up rate.

Given the prospect of further deterioration in the global economy and the uncertainties ahead, property developers are expected to remain cautious. Property sales are expected to slow further next year as the full impact of the global financial meltdown and the credit crunch is felt.

Even the main players in the property scene such as SP Setia Bhd, Sunrise Bhd and E&O Property are deferring their projects.

But it’s not all doom and gloom. According to research house ECM Libra Investment Research, property developers are in a strong financial position to withstand a downturn. It points to a financial system flush with liquidity and an all-time low average lending rate, adding that there is also no widespread mortgage default and property foreclosure to drive prices sharply lower.

“Developers are exercising greater financial prudence and have lower borrowings. The average net debt/equity ratio of developers now is around 28.1% which is about half of the 58.4% level seen in 1998,” says a senior analyst at ECM Libra.

Having said so, the slowdown and project deferments in 2008, which are expected to spill over into 2009, will likely affect the financial performance of property developers.

While the volume of residential properties transacted contracted by 35% during the last Asian financial crisis and took two years to regain ground, the analyst does not expect sales of residential units this time around to fall to such an extent. On the other hand, he expects a recovery in sales growth in 2010.

Fortunately, for many developers, their large unbilled sales from the record sales registered in 2007 and earlier this year will tide them over and contribute to their bottom lines over the next two years. Developers with recurring property investment earnings will do better than those who rely solely on property development.

As such, companies with sizeable exposure to property investment assets such as KLCC Property and Sunway City can look forward to more resilient earnings from property investment.

This is because the occupancy and rental rates for quality office and retail space in Kuala Lumpur and the Klang Valley are holding out quite well and will provide a steady stream of earnings to these companies.

Demand for luxury condominiums is on a downward spiral as this segment has been driven by speculative buying. Secondary prices for luxury condominiums in the KLCC and Mont’Kiara areas have fallen by 15% to 20% over the past six months. With more stocks coming onstream next year, coupled with the slowdown in foreign buying interest, there is a risk of further price correction come 2009.

Going forward, developers may go back to basics and launch more mass housing projects, deemed more resilient as the target market is the middle-income group who buy these properties for own occupation. Even SP Setia is looking to focus on mass housing products for the middle-income segment where demand fundamentals are still strong and less speculative.

“Those with large residential land-bank and different product range in diversified locations such as SP Setia and Mah Sing will be less affected. With their large land-bank at cheap land costs, these developers will have more flexibility to modify their planned launches to cater to the current demand during a downturn.

“Come 2009, it is all about cash conservation and minimising the risk of low take-up rates. Developers are expected to be pragmatic in terms of pricing and scale. They will also be cautious in launching projects which require substantial upfront outlay. So there won’t be many new large-scale greenfield projects to look forward to in the near term,” he adds.

With the total supply of residential properties having dropped sharply since the beginning of the year and the lower margin that developers have had to contend with, what is the way forward for home prices?

While property markets around the globe including New York, London, Singapore, Hong Kong and Sydney, have taken a severe beating with price erosions of between 20% and 50% so far, the local market has been lucky as there has been no panic selling to drive prices down.

Most developers feel that the prices of houses are expected to hold out over the next one year as local property prices have maintained fairly reasonable rates and are not over-priced as in other countries.

Glomac Bhd managing director Datuk FD Iskandar says local property prices are expected to remain stable in the next one year “as the market’s growth has always been organic without any over-pricing.”

Mah Sing Group Bhd president Datuk Seri Leong Hoy Kum expects the medium to high-end landed residential property prices to remain stable.

“The medium to high-end landed property segment will continue to yield decent long-term positive capital appreciation going forward in the foreseeable future.

“There will still be transactions, albeit at a slower pace, as this property segment has a pool of buyers who are higher income earners and they tend to hedge their wealth in such properties during uncertain times.

“These people have a wider savings to expense ratio, and generally look to invest their excess funds in properties as there are limited investment options right now,” he says.

Leong says developers need to understand what buyers want when planning products and undertake due diligence and feasibility studies to ensure that there is no product mismatch.

“Good concepts, right pricing and prime locations will still help sell our products. Any downward pressure may only be felt for undesirable locations, or when there is a surplus supply of properties on offer,” Leong adds.

Maintaining a more positive outlook that house prices will appreciate next year is Zerin Properties chief executive officer Previndran Singhe, who says demand and prices for well-located residential properties are expected to go up following the easing inflationary pressures and lower lending rates.

Whichever way the market heads, developers should adopt the best practices of ensuring due market diligence is undertaken before proceeding with a project’s launch.

Ultimately, the value of a property is dependent on supply and demand, location, quality of workmanship, design and concept, as well as the reputation and brand premium commanded by the developer.

As with most things these days, it is back to basics.

By The Star (by Angie Ng)

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