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Friday, May 8, 2009

CIMB: Local real estate deals may fall up to 50% in 2009

DESPITE the impressive rise in the Malaysian stock market in recent days, local real estate supply and demand dynamics still paint a tougher picture for the sector as the nation’s economy braces for a contraction this year.

The combined threats of weaker demand and larger supply of properties have lent credence to analysts’ anticipation that local real estate transaction and prices will fall this year.

The expected decline is, however, not across the board. More glaring examples include luxury condominiums within the Kuala Lumpur City Centre and Mont’Kiara enclaves where prices of high-rise units could tumble up to 40% from their peak.

At the same time, the spotlight also fell on office and retail space, (except hotels), whereby fresh supply could impose downward pressure on occupancy rental and room rates.

CIMB Research wrote in a note yesterday that local real estate transactions and prices could decline in 2009, in line with the projected 3% contraction in the nation’s real gross domestic product (GDP).

Transactions could fall up to 50% in the worst-case scenario, matching the performance seen during the 1997/1998 Asian financial crisis, according to CIMB’s note which was released in response to the latest updates by the Valuation and Property Services Department’s (JPPH).

"However, we believe the fall in residential property prices, particularly, for landed properties, will be less than the drop in the overall economy as property prices have lagged behind economic growth since 2001," said CIMB which rated the local sector a trading buy.

According to JPPH’s latest property market report, in 2008, the country’s transaction value rose 14.5% to RM88.34 billion from RM77.14 billion a year earlier.

The growth in the transaction volume was led by agriculture land, and commercial properties, while the rise in transaction value was spurred by development land and agriculture real estate,

Residential properties made up the bulk or 63.7% of total volume, and 46.8% of transaction value. All states registered an increase in volume except for Putrajaya, Kelantan and Melaka.

The decline in the primary market is worth noting. According to JPPH, the number of newly-launched houses fell 7.3% to 48,830 units in 2008 from 52,664 a year earlier, while residential property overhang rose 9.1% to 26,029 from 23,866.

CIMB said the rise in transaction value for development land could mean that developers were actively acquiring landbank.

Based on the historical strong correlation between property sales, and GDP growth, besides the fact that real estate sales lag GDP expansion by about three months, the market is predicting that the country’s property sales could bottom, at the earliest, in the first quarter of 2010.

Real estate, and equity prices tend to move in tandem, although, equities prices tend to reach the equilibrium faster because stocks are deemed easier to liquidate compared to properties.

According to CIMB, the fact that shares of real estate firms were heavily sold down in recent months could mean a potential upside in their prices as the broader market recovers.

"We recommend investing in selected property stocks as they provide investors a leveraged exposure to the stock market.

"We are more bullish about the stock market’s outlook for 2009 and expect the Kuala Lumpur Composite Index to end the year at 1,060 points," said CIMB.

By The EDGE Malaysia

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