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Saturday, October 31, 2009

Pressure building up in KLCC

Will the 5% real property gains tax be a deterrent?

AS the property investor goes through his checklist on why he should invest in Malaysia, that 5% real property gains tax (RPGT), to be effective Jan 1 next year, will be a bit of a blemish.

Although it is just 5%, it raises a hypothetical question. Will this 5% be raised sometime down the road?

The Government gave an exemption in April 2007 to stimulate the market when it was already quite hot. It boosted the market and coupled with the iconic location of KLCC that was then emerging at that time on the world property market scene, foreigners and locals bought into that location. The Kuala Lumpur property scene was seen as lagging in terms of prices to the regional markets. It still is.

A lawyer who declined to be named said the RPGT, with its graduating scale of 0%, if a property is sold after five years, to 30% if sold in the first two years, was never abolished.

Her remark two years ago: the Government can always bring it back, in different forms. That time has come.

With the pressure building up in the high-end condominium market in the Kuala Lumpur City Centre (KLCC) and its vicinity as more projects are completed, that re-instatement could not have come at a more inopportune time.

There is an existing supply of about 5,700 units and a further 5,800 units are expected to come onstream in the next two to three years. (See the table on KLCC projects).

The pressure is coming from two counts – prices and rental. Its effect will be felt by both owners and developers who have not sold all their units in that iconic and surrounding vicinity.

Savills Rahim & Co MD Robert Ang says the market is on the downtrend and it is clear that there will be an oversupply as the year comes to an end and 2010 rounds the corner.

“My KLCC condominium sales are not registering a boom. It is at a standstill,” he says. The situation is expected to lumber along like this for the next six months to one year.

Even at RM950 per sq ft, compared to a high of RM1,200 to RM1,500 per sq ft, it is a challenge to sell in today’s market.

An expatriate owner called to sell her condominium for between RM1,200 and RM1,400 per sq ft.

“I told her I cannot perform a miracle. She bought into that project at between RM600 and RM700 per sq ft,” he says.

As more units enter the market, and the Jan 1 deadline rounds the corner, buyers will try to bargain down further.

“This will move Malaysia a step back in terms of overall attractiveness in the regional investment market,” says Regroup Associates executive director Paul Khong.

This is another layer of tax the investor has to consider when they invest and/or decide to liquidate. Any purchaser irrespective of whether local or foreign will have to weigh this accordingly in their investment consideration.

Owners who are in the selling mode will try to beat the deadline, while buyers will try to squeeze in a further discount because of the Jan 1 deadline.

It is too early to see the impact of that 5% tax but it is a psychological barrier, particularly for those who entered that market in 2006/07 when it was at its peak.

Some of them will not be making money and they are already upset. With this flip-flop policy, they may just take their money and go elsewhere to get a better return. For those who bought in the early days at RM500 to RM600 per sq ft, that 5% is just a dent. Which is why when it comes to investing in properties, it is always a question of timing and location. About 20% to 40% of owners are foreigners.

If the project is marketed locally, the foreigner content is only about 10% to 15% and if an international roadshow is done, the percentage doubles, Khong says.

At the moment the foreigners are largely Asian investors.

“After the third quarter of 2008, buyers have been largely locals but that number is shrinking as well,” says Khong.

Generally, buyers bought into that market for rental and capital appreciation due to the uniqueness of that location and the Petronas Twin Towers.

It is liken to Hyde Park of London and Central Park, New York. Ironically, there isn’t a Petronas Twin Towers or a central park in Singapore, yet prices are chugging along over there, which takes us to the rental dynamics here, or lack of it.

Khong & Jaafar Sdn Bhd managing director Elvin Fernandez says those who bought into KLCC and its vicinity will want a net yield of between 5% and 6%.

There have been arguments that people who buy into that location do not care about rental yield. He does not buy that. People with money have alternative uses for their funds.

If a buyer bought a 2,400 sq ft unit at RM1,500 per sq ft (RM3.6mil) and rents it out at RM5 psf (which is between RM4.50 and RM5 today), he would get RM12,000 monthly rental, or RM144,000 a year. He has to less the outgoing expenses of about 75 sen psf for the quit rent, assessement and service charges, which comes up to RM21,600 a year. So he makes RM122,400 a year (3.4% net). If it were a landed property, he may be quite happy but not for a condominium.

Value in that location have been running up ahead of supportable rental, which is why as soon as the crisis came, the market shook.

If he wants to get a rental return of 5.8%, he will have to rent at RM8.50 per sq ft. That is impossible in today’s market, Fernandez says.

Malaysians will not want to pay that sort of rental, which means owners are looking at the expatriate community. But the foreigners who arrive on Malaysian shores do not command that sort of monthly rental expenses from their employers.

In Singapore, an expatriate may get a monthly rental allowance of S$30,000. That is why prices can go up so high.

Henry Butcher’s COO Tang Chee Meng says Malaysia is not attracting enough of that level of expatriates whose rental allowance average RM15,000 to RM20,000 a month, and even less of those who command between RM30,000 and RM40,000 a month.

“They send these people to Singapore and Hong Kong, the big financial centres of Asia,” says Tang.

Rental yield aside, the second weakness in that market is the sizes of the units, which are generally more than 2,000 sq ft. In Singapore today, developers are cutting it small. Agents contacted say there is interest in the smaller units. With companies around the world cutting cost and sending less manpower abroad, the larger units will be difficult to fill, and to sell. For developers who have unsold stocks, they may try to promote their projects abroad.

No story on the KLCC property outlook may be complete without a mention on Binjai On The Park, which sets the benchmark in that location.

Even in that high-end location, they are the average priced units and the super class condominium. Binjai On Park belongs to the super class.

Early this year, it was going for RM2,400 per sq ft. At its peak, prices went as high as RM3,500 per sq ft. As it nears completion, it is unlikely Malaysia’s premier company Petronas will allow that project to be shrouded in darkness, as with many of today’s projects in that iconic location when night falls. Watch that space.

By The Star (by Thean Lee Cheng)

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