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Saturday, October 15, 2011

The global effect on property

The signs of the times are here, and they are not unique to Malaysia. The concerns about the global economy are real. Whether one is an avid property watcher or a young person considering a downpayment on one's first home, there are certain things to take into account.

Says property consultant and valuer Elvin Fernandez of the Khong & Jaafar group of companies: “It is clear and becoming clearer by the day that the growth will slow down because it cannot keep up with just continuous stimulus around the world. Whether this state of affairs will continue depends on how sales fare as we complete this year and move into next. It is also clear that volatility will continue into the new year, which explains why developers are revamping their plans and changing strategies.”

Analysts have downgraded the property sector or had a negative outlook on it after they noted that average take-up rates of launches by property developers dropped from 80%-90% a year ago to a forecast 50%-65% in the second half of this year.

To understand what is going on in our current property market and to get some pointers about its future direction, we need to look back a little.

When property prices began to inch upwards in the second half of 2009, in the wake of the fall of Lehman Brothers in September 2008, there was cheer all round. But as prices continue to escalate into the first half of 2010 and then the second half, property watchers and buyers began to take note of the ballooning values in the landed property sector. The momentum shifted to high-rise, although to a lesser degree.

In response, developers fast-tracked their launch programmes. Some were quick enough to launch products in the second half of 2010, while many of the rest were able to do so this year.

Housing Buyers Association vice-president Brig-Gen (R) Datuk Goh Seng Toh said: “People bought in anticipation of higher prices later on.”

This situation of “buying before price goes up further” is evident not only in the Klang Valley but was especially so on Penang island.

Says Real Estate & Housing Developers' Association (Penang) chairman Datuk Jerry Chan: “Because of land scarcity and worries that prices will go even further, people bought. Why? Because it was anybody's guess what was the ceiling. Is it too much to pay? That was difficult to answer because prices seem to have gone beyond what people expected.”

It was this frenzy of buying in selected locations that fed the worries about a bubble, coupled with the easy credit and low interest-rate regime. This double whammy of easy credit and low interest was not just evident in Malaysia. It has also played out in China, Singapore and other countries in the region.

Banking on property

What is interesting is that the United States has gone through this situation a couple of times.

Says Fernandez: “The United States in the 1950s and 1960s were idyllic. After World War II, there was a certain amount of stability but there was this belief that a little inflation will boost the economic engine in exchange for more jobs.”

It worked and the US economy flourished. Inflation inched up and as it did so, workers demanded wage increases to keep up with higher prices, companies raised prices to compensate for the rising wages, and it became an upward spiral. Recession was the only thing that can break the cycle, and it came in the mid-1980s.

That, both Fernandez and Chan agrees, is what is happening in the United States and then Europe today. In the 1990s, the then US Fed chief Alan Greenspan also kept interest rates too low for too long, which led to a speculative bubble in real estate.

“We are ignoring the dangers of the twin combination of easy credit-low interest and a speculative property market,” warns Fernandez.

The prices of stocks and homes are every bit as vulnerable to inflation as chicken and sawi. He adds: “This notion that one will always make money on property investments is made popular by people who have speculated and gained from such activities, and their success stories are told time and again. We are now seeing in Europe, the United States and previously in Japan, that one can lose with property investment.”

He says although the property market has some distinctive factors, like any other market, it still runs on demand and supply and underlying fundamentals. “Because it is a market that has no shorting mechanism, it has a tendecy to rise rather than fall, unless the fundamentals pulling it down are strong,” Fernandez points out.

In Malaysia, this enchantment with properties the last two years has intensified because of a lack of alternative investment options, the availability of easy credit and as an hedge against inflation.

The government moves are a factor as well. Last year, the Government announced seven mega development projects to spur the economy. Two of these were mentioned in Budget 2012 the development of government-owned land around Sungai Buloh and the KL International Financial District (KLIFD). Both are expected to take off in the second half of next year. The Government has invited some developers to participate.

The finance sector has also profited from the property boom, with property loans being the main driver of growth for the banking industry, accounting for 40.6% of the overall credit expansion. The residential segment accounted for 27% of total loans. Analysts expect property loans to remain the key driver of credit expansion this year and in the near future. Although there was a slowdown in loan applications for residential mortgages after the implementation of the 70% loan-to-value cap on the third and subsequent house financing, the momentum has picked up again since March.

Making a mark in new territories

The sovereign debt problems brewing in Europe and the United States can impact consumer sentiment in property purchases, said RAM Ratings head of financial institution ratings Promod Dass. “The fact is, property is a cornerstone of any economy, and there is a property angle in just about any major venture. Even the proposed my rapid transit (MRT) system is known as “a property-and-rail play.”

Says Fernandez: “Many of the country's plans are property-dependent. We may not be able to live up to that expectation. It is like a father having too many children, and all of them want to spend his salary.”

The demand for property is driven by many factors. In today's prevailing uncertainty, demand is driven by job security, sentiment and affordability, says Tan Sri Leong Hoy Kum, managing director and group chief executive of developer Mah Sing Group Bhd.

“We have a relatively young population, which means there will be a demand for starter homes. Whether for landed units or condominiums, the demand for larger units and high-end housing will definitely be slow. So we are changing our strategy,” he adds.

“Instead of concentrating on high-end housing, we will do mid- to high-end on fast-turnaround basis. We will launch three to nine months from the day we buy the land. If semi-detached units, it will be RM1.4mil and below. If it is a landed strata, it will be priced lower, and if it is high-rise, the built-up area will be smaller. Our focus will be on affordability.

“The high-end sector will definitely soften in terms of sales in the next 12 month or so. Houses in the RM5mil and above range will be difficult to sell. The same goes for big units. The European crisis may be prolonged but we are hoping for a soft landing.”

About two weeks ago, Mah Sing announced that it has purchased 90ha in Rawang. The move to less-prime locations will be another strategy to aid affordability and to overcome land scarcity in the popular areas. The company is the second top developer to recently signal this move to less-prime locations.

SP Setia Bhd is the other; it bought 673 acres in Rinching, located mid-way between Semenyih and the Bangi old town.

As the woes in Europe and United States cast a pall over global economy, what will be ahead for locations around the iconic Petronas Twin Towers in the Kuala Lumpur City Centre, often regarded as the pinnacle of Malaysian property?

Signs of slowing?

Henry Butcher Marketing Sdn Bhd chief operating officer Tang Chee Meng says developers have noted the signs of an imminent slowing of the market. “Developers are today revamping their sizes. They are taking their projects to Singapore, China and Britain to sell. Or they work with banks to provide innovate mortgage packages. Some developers are also having friend-bring-friend commission in order to move sales.

In a buoyant market, this will not happen. The larger units completed a couple of years ago in the KLCC market may continue to remain vacant with pressure on rentals.

“Today, the majority of the sales are from developers, the primary market. In the secondary market, property agents are not getting many calls. The situation with huge leaps in prices is not as serious as last year or in the first half of this year. It is only certain type of properties in selective locations.”

“The European woes are weighing on investors. In that sense, the market is correcting itself. Developers may say these external global situations do not impact us. But there are many discerning people out there and they take note of what is going on in the US and in Europe,” says Tang.

A real estate agent specialising in properties in Mont'Kiara, another location that is closely watched, says the Sunrise MK28 has reduced its original price of about RM680 to RM700 per sq ft to RM590 to RM600 per sq ft. In Desa ParkCity, where prices of landed units have gone up by as much 300% or even more, the larger units of some of its latest launches are still available.

Comparing prices

About a decade ago, especially when the interest in KLCC-Petronas Twin Towers began, and in tandem with the proliferation of high-end landed and high-rise residentials, developers and property professionals took great pride comparing property prices in Malaysia with regional countries and concluded that the prices of Malaysian properties were far below those of China, Hong Kong, Singapore and Thailand. Projects around the Petronas Twin Towers were compared with London's Hyde Park and New York's Central Park. Today, such comparison continues to be made.

Says Fernandez: “This comparison has not stood the test of time. This suggests that our properties are not open to such comparisons and that such comparisons are not an appropriate measure. The drop in prices of between 20% and 25% soon after the 2008 crisis show that the market is mainly driven by our own governing fundamentals.

“The KLCC market, until today, has not rebounded to their original levels. The second point is that location is driven by a large expatriate community, which we do not have.”

Which is another sign of the times we are living in today.

By The Star

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