By Khairie Hisyam
In our first issue piece on the property industry, we look at the overall picture and why there has been much optimism for the industry to take off again after the recent general election. We then look at the picture beneath the optimism: the growing concerns on housing affordability, questions on PR1MA’s implementation as well as the much-discussed Klang Valley prime office space situation. With the huge amount of incoming supply against a limited take-up rate, what will happen to the market and how do we resolve the issue?
Real estate man Donald Trump once famously said: “Well, real estate is always good, as far as I’m concerned.”
That sentiment appears widespread in the Malaysian real estate industry as we move past the last general election in early May. Optimism abounds — after the shadow of uncertainty cast by the long wait for GE13 — that the industry will start moving again after a pause in the run-up to the election.
While there are those who disagree, many attribute the industry slowing down to developers adopting a wait-and-see stance over GE13, waiting to see which way the wind blows before making business commitments. Much of the caution stemmed from the strong winds of a possible regime change this time around, which would have been the first in Malaysia’s history, and the implications that came with it for the business community.
Some say the buyers were adopting the same attitude on their part, too. The result was an industry collectively holding its breath in wait.
According to the National Property Information Centre (NAPIC), activities in the property market slowed down in 2012 with 0.7% less property transactions at 427,520 compared to 430,403 in 2011. However, the cumulative transaction value for 2012 was at RM142.84 billion, up 3.6% from RM137.83 billion in 2011.
Last year also saw market activities for all property sub-sectors — except residential and development land — soften compared to 2011. The commercial, agricultural and industrial sub-sectors saw -5.9%, -5.0% and -4.7% declines respectively compared to 9.7%, 4.6% and 6.5% growth in 2011. Even residential and development land sub-sectors slowed significantly with 1.1% and 6.1% growth respectively in 2012 compared to 14.8% and 18.9% in 2011.
Now that GE13 is behind us, bullishness seems prevalent. With political certainty affirmed and status quo still intact, key policies including those for the property sector are expected to remain relatively untouched without major changes.
The day after GE13 saw the Malaysian ringgit’s biggest rally since June 2010 alongside a record rise for stocks, which was its best since November 2008. Local property and construction stocks have led the market post-election, returning to centre stage after about two years of underperformance.
“With increased foreign interest in the Malaysian stock market post-GE13, as well as the resumption in investment activity by underinvested local funds, the high-beta property sector is a prime beneficiary of such liquidity flows,” said an analyst after GE13, noting that the Malaysian property index has been a laggard compared to its emerging market peers.
Accordingly, some research houses upgraded the property sector to overweight as the return of political certainty coupled with pent-up demand is set to buoy the sector this year.
Government-initiated projects are also expected to boost the domestic real estate sector, especially large infrastructure works to be rolled out in coming years. One particular project on the lips of many has been the Kuala Lumpur–Singapore High Speed Rail project, touted to be a massive game-changer.
The year 2012 already provided a taste of such a boost with the construction sector recording a growth of 18.5% from 2011. The growth was supported by the progress of newer projects, namely the MRT and Tanjung Bin power plant, in addition to other major infrastructure projects such as the Second Penang Bridge.
It all paints a comforting picture of an industry set to soar for the next five years — until the next election arrives and we are again gripped by uncertainty, that is. Some are even calling it the golden period for property investors as Malaysia still lags behind its neighbours in terms of property prices and demand.
Yet questions remain. With the residential sub-sector dominating the industry with 63.8% of market share in 2012, housing affordability remains a sore point with many Malaysians. Some are even warning that the situation is moving towards a bubble.
The prevailing sentiment is that houses are spiralling beyond reach of the middle income group. In addition, a survey in end-May by property portal PropertyGuru showed a majority of respondents felt not enough has been done to curb rising property prices given high foreign demand for properties on offer.
Some argue that the rapid increase in property prices point to the formation of a bubble. A property bubble is generally characterised by a rapid price increase followed by a decline after reaching unsustainable levels.
With that in mind, some interpret Bank Negara’s lending restrictions last year and recent measures to curb rising household debt as having the side effect of putting the brakes on the property market. TA Securities noted that the recent curbs by Bank Negara will reduce individual affordability levels by about 5% in terms of property purchases. More restrictions are expected down the road which would further erode affordability levels.
On the other hand, others argue that a bubble is nowhere in sight, citing strong demand as well as claiming that Malaysian property prices are still among the lowest in the region and that foreigners only account for less than 2% of property purchasers.
Standard and Poor’s Rating Services noted earlier this year that several factors support borrower repayment ability, one of which is a resilient economy. Additionally, household indebtedness levels have remained constant even as property prices rose, it said.
While PR1MA (1Malaysia People’s Housing Programme — a plan to build affordable housing for Malaysians in the lower income group) is ostensibly the answer to affordable housing woes, it is not without its critics. Most recently, a federal opposition lawmaker pointed out PR1MA’s inefficiency, saying that at current speed it would take PR1MA 105 years to build its targeted 80,000 affordable homes.
There has also been much talk about the office space situation in the Klang Valley amid alarm bells over the amount of supply expected to enter the market in the coming years.
With supply of prime office space in Klang Valley hitting 104 million sq ft as at 1Q13 — both primary and secondary stock — many industry insiders are expressing concern over the potential effects of the huge supply on the office sub-sector.
While recent analysis shows that the Kuala Lumpur office market has remained resilient for the first half of this year and is expected to stay tough until year-end, the larger question is whether that resilience will hold and for how long as more and more supply enters the market amid a limited net absorption rate.
To put things in perspective, as at September 2012 the Klang Valley office market had about 23 million sq ft in vacancies whereas the annual net absorption rate will not go beyond the two million sq ft threshold. As at 1Q13, the overall vacancy rate stood at 23%. While some say the word ‘glut’ or ‘oversupply’ is too simplistic at the moment, others still expect an office space glut in the coming decade.
Additionally, there is also the question of how we reached this situation in the first place.
One major point is that the Klang Valley office market was peaking before the global financial crisis (GFC) in 2008. Rapidly rising rentals drove capital values up — capital values ran ahead of fundamental aspects such as rentals and resulted in overextension, which became evident when the GFC struck and caused rentals to retreat.
Therefore, when the GFC hit, the office market realised that it had overextended itself. In addition, euphoria over the Economic Transformation Programme (ETP) since 2010 also led to increased supply. While some insiders opine that the market is bound to correct itself eventually, they also agree that in the meantime “someone will suffer”.
Bearing that in mind, is there a solution to address the immense supply of prime office space in the Klang Valley? Some quarters feel that the only solution would be to be more aggressive in attracting multinational corporations to set-up shop in Klang Valley so as to absorb the excess supply.
Now with some time to reflect on life after GE13 for the industry in the second half of the year, KiniBiz takes a closer look at the real estate industry and examines the issues surrounding the residential, office, retail and industrial sub-sectors. We also look at what needs to be done to avoid a property bubble if there is indeed one in the making.
Tomorrow: Residential — is supply coming where the demand is?
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