Deflating the property bubble

By Khairie Hisyam

In this fifth and final part of our series on the property industry, we dive into a discussion on how to prevent the residential property sub-sector from bursting. We also look at what should — and should not — be done about the Klang Valley office space oversupply situation.

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Markets are never in a perfectly balanced state of equilibrium — and the property industry is no different.

Looking at the situation with different sub-sectors of the industry, KiniBiz concludes that while there are challenges in the retail and industrial property segments, the main issues lie in the residential sub-sector and to a certain extent, the Klang Valley office space market.

What can we do to address these issues?

We first look at the residential sub-sector, which remains the pillar of the Malaysian property industry, representing 63.8% of market activity in 2012. Then we proceed to the Klang Valley office space oversupply situation.

Of market froth, RPGT and stamp duty

The picture that has emerged following our review of the residential sub-sector is that there is no full-blown bubble — yet — but also that there is froth in the market, at least in certain areas experiencing urban migration. If left unchecked, the froth may eventually expand into a real bubble if we stay on our current course.

And, as we know, all bubbles that grow, eventually burst. How do we avoid that situation?

Speculation was named as the main driver behind surging prices in some areas. It follows that we need to step up efforts in restricting its effects.

According to Chang Kim Loong, honorary secretary-general of the National House Buyers Association (HBA), the group has suggested ten measures on curbing speculation to the Ministry of Finance and Ministry of Urban Wellbeing, Housing and Local Government. Additionally, HBA also forwarded the measures during a recent budget consultation with the prime minister in the middle of this year.

Chang adds that there are three major suggestions and the first is to bring back the old formula of real property gains tax (RPGT) which was in effect prior to its temporary exemption between April 1, 2007 to Dec 31, 2009. “It was previously known as anti-speculation tax,” noted Chang.

In comparison with current RPGT rates, HBA’s proposal does appear more stringent but there is more. “On top of that, we also suggested that a person who sells the third residential property should be charged a flat RPGT rate of 50%,” said Chang.

The second major suggestion is for a flat stamp duty rate for third house purchases, which HBA is proposing to be at 5%. At the moment, stamp duty rates are staggered at 1% for the first RM100,000, 2% for the next RM400,000 and 3% for any sum exceeding the first RM500,000.

Property lawyer and author Khairul Anuar Shaharudin agrees that RPGT rates should return to how they were pre-2007. However, he has reservations on the effectiveness of stamp duty in combating speculation.

“Stamp duty to me is not the best speculative control measure,” said Khairul Anuar, adding that those who can afford to buy three properties or more are rich enough. Therefore, even a flat rate for third property purchases onwards would not have a significant deterrent effect on these purchasers.

Instead, we should segregate according to pricing ranges, he argues. “I love the period of 2007–2010 when stamp duty was exempted across the board for houses below RM150,000.”

“We should protect those who can only afford certain prices and not punish those who can actually afford (their purchases),” said Khairul Anuar.

However, Ng Seing Liong, immediate past president of the Real Estate and Housing Developers’ Association (REHDA), feels stamp duty can play a role in improving affordability. “To encourage houses to become more affordable, say for market prices of below RM500,000 in urban areas and below RM300,000 in rural areas, we should encourage first-time housebuyers by giving free or halving stamp duty.”

Selling directly to genuine buyers?

An implication of speculation driving prices sky-high is that speculative investors are biting into the pie before genuine homebuyers do, a result of an industry environment that favours investors.

“The industry should look at how to sell directly to the homebuyers, to the upgraders, to the downsizers,” suggested Michael Geh, International Real Estate Federation (FIABCI) national committee member for the Malaysian chapter. “There must be a system to sell directly (to these groups), otherwise speculators with money will be buying first.”

Property lawyer Khairul Anuar shares the sentiment of prioritising genuine buyers, stressing that developers need to play their part, for instance perhaps by allowing only first-time buyers to certain launches.

While a direct-selling mechanism that prioritises genuine buyers sounds wonderful, can it be made to work in the Malaysian context though?

The question that arises is regulating the mechanism, said Ng of REHDA, adding that it should be the other way around.

“Trying to regulate the industry that way would have adverse effects,” said Ng, explaining that issues would arise in terms of differentiating first-time home buyers from those who are not. “I would prefer it that the bankers are the ones regulating.”

Should the banks regulate?

Ng explains that the banks should do this in terms of giving smaller loans to those who are not buying houses for own occupation or cannot prove that they are buying for the first time, which means that these purchasers would need to cough up a bigger upfront payment.

“Whereas first-time buyers should be encouraged with bigger loans, maybe even with preferential interest rates,” added Ng. “The only body that can regulate are the banks, because they are the ones giving the money — without financing, the industry is as good as dead.”

Indeed Bank Negara has acted, recently introducing curbs to counter rising household debt levels, which include capping property financing tenures to 35 years. This follows the responsible lending guidelines effective Jan 1, 2012 which, among others, changes the basis for loan approvals from gross income to net income. Additionally, the central bank also capped third house purchase financing margin to 70% in late 2010.

“I think the housing loan measures were good, but tenure is not the main issue as it will hurt first-time homebuyers with little take-home pay,” opined Khairul Anuar, adding however that he feels Bank Negara is on the right track. He suggests that third house purchase onwards perhaps need to be given even lower financing margins.

Khairul Anuar and Ng’s thoughts on lowering financing margins for third house purchases onwards are reflected in HBA’s third major suggestion for combating speculation.

According to Chang, in addition to reinstating the old RPGT formula and looking into stamp duty rates, HBA is also proposing that the loan-to-value (LTV) ratio for house purchase financing be capped at no more than 60% for the third residential property onwards.

However, while tightening up in respect of those buying more than a few properties, at the same time banks also cannot be too stringent in the sense of first-time homebuyers or those who want to upgrade, cautions Ng. “They need to support the first-time homebuyers and those who want to upgrade…those who really need houses.”

With much said about what role the banks should play and expectations of Bank Negara further restricting room for speculative activities, FIABCI’s Geh hopes that further measures will not overly shock the market. “I hope that if all Bank Negara rulings come in, it will not be a total handbrake on the property market.”

If that happens, there will be a massive drop in transactions and increase the burden on those who have bought houses at high prices as they cannot sell in the market, said Geh.

The developers’ and buyers’ mindsets

While the housing affordability situation has slowly improved with developers moving outwards in the ‘squeezed’ areas, there is still a lot more to be improved, said Dr Daniele Gambero, CEO and co-founder of strategic marketing consultancy firm REI Group of Companies. Among them is how developers operate.

“Here in Malaysia, one of the issues is that in the moment in which a developer is successfully launching a new product most of his colleagues will copy him within hours,” said the Italian, pointing to the Small Office Home Office (SoHo) and other similar breeds of developments which has become a trend over the past two years.

“My personal rule is and advice to developers is: if I see a competitor doing something great, good on him! I’ll do my best to come out with an even better idea — stop copying lah,” said Gambero. “And do not forget, build-then-sell (BTS) is soon coming in and party-time will end with its enforcement.”

The BTS scheme, set to be implemented in 2015, means developers would have to foot most of the development cost before completion. This contrasts with the current situation where buyers finance each stage of the construction process until completion.

“At that point, possibly, they will remember that there is still a huge market of ‘normal humans’ looking for normal, human-sized houses,” added Gambero.

Additionally, the public needs to be educated on what affordable housing really means, said Ng of REHDA. “The main problem with affordable housing is maintenance.”

The issue, said Ng, is that many refuse to pay maintenance fees when it comes to affordable or low-cost houses. “Without maintenance fees, how do you maintain (amenities)?”

“So people need to be educated on how to stay in these sorts of communities. It’s actually very simple — discipline,” said Ng, explaining that “the best place to learn about this type of discipline is in Singapore and Hong Kong” as they have strict maintenance rules for their affordable housing schemes.

Ng adds that we do have various rules in this sense yet implementation is lacking. “I have actually proposed many times that local authorities should help out since they have the manpower) to collect.”

With diverse views on how to tackle the root causes of spiralling housing affordability concerns, one thing is clear — there needs to be a collective will on the part of all industry stakeholders to see the froth deflated before it grows into a real bubble to be reckoned with. And the government should take the lead, as does Bank Negara.

“Both are already doing their parts but maybe the government should do more,” opines Khairul Anuar.

Klang Valley office space quandary — what can we do?

After examining the Klang Valley office space oversupply situation, what is clear is that while there is reason for concern, it is not the doom of the market and the market will eventually correct itself. In the meantime, how do we expedite the correction?

“It is difficult to take action to ‘correct’ the market, but any incentives that drive business or commercial activity (and as a result, demand for office space) will be welcome,” said Nabeel Hussain, associate director at CB Richard Ellis (CBRE) Malaysia.

Professor Dr Ting Kien Hwa, head of the Centre for Real Estate Research (CORE), Universiti Teknologi Mara (UiTM), agrees. “Government should regulate in terms of supply and demand and they can help by improving Kuala Lumpur’s appeal as a global city.”

“If the government can do this, they can then stimulate more demand for office space,” said the professor.

In addition, building usage should also be looked into, said See Kok Loong, director of real estate and property agency Metro Homes. “The government should be flexible and allow the landlord or building owner to change the usage by complying with the proper guidelines, such as converting the office building to maybe a 4-star hotel as the tourism industry is good and improving in Malaysia.”

“I have recently gotten back from Kota Kinabalu, Sabah and many boutique hotels are now occupying the older buildings and doing very successfully,” added See, saying that a lot of the supply is still in planning stage and therefore action should be taken now to ensure they are put to good use.

”For action to be taken, it will be a joint effort between Bank Negara and the Government such as the housing ministry, DBKL and the relevant developer.”

Make information accessible

Going forward, what the government can do to avoid the situation from recurring in the future is by perhaps making information more accessible, said Eddy Wong, managing director of DTZ, which is part of UGL Services, a division of UGL Ltd

“This is in the sense that it becomes more transparent and everybody knows who is doing what,” added Wong, explaining that developers can then better decide whether they should be going ahead with any particular idea. “We sort of know now (with Napic, etc) but it’s not really that transparent and I can’t say we know exactly the total stock coming on-stream and so on.”

According to Wong, this transparency would also help developers plan their developments. At present, it is not clear what quantity of supply will be coming on-stream when, and that also depends on the varying speeds of how quickly each developer can push their projects through to completion.

“So again we can see that there is a quantity of supply out there but again you cannot ascertain correctly how much is really coming on-stream or delayed etc,” said Wong. “That makes your forecasting all go haywire.”

Nabeel of CBRE agrees on the importance of information. “We strongly advise all our clients to ensure they are well-informed of market conditions and trends before making any major real estate decision.”

“While cyclical movements in the market can have a near- or medium-term impact, the act of developing an office building is something that will carry consequences for 30, 40, 50 years, or even longer, and the client needs to understand this and prepare themselves accordingly,” added Nabeel.

The way to do it, said See of Metro Homes, is by having a central database that captures all relevant information as well as having an independent committee to evaluate and report in full the actual situation of the market.

“The approval authority should use the report for the approval, then we would be able to prevent the situation happen again,” said See. “The developer is an entrepreneur and they would continue to develop and build if there is a market for them. By having a detailed report, it will be good for everyone such as investors, developers, the banks and the government.”

Banks hold the keys

Another aspect to look at is financing, i.e. the banks, said Brian Koh, executive director of Consulting & Research of DTZ.

“Maybe the banks should follow the European model,” said Koh, explaining that in Europe, banks generally would not fund a project unless there is about 30% to 40% pre-commitment from tenants. “Over here, even if you don’t have any pre-commitment, you can still get funding sometimes.”

“While the banks do tighten up (in terms of lending), they still fund projects that are being built on a speculative basis,” said Koh.

Does the government need to step in and regulate, then?

“We don’t believe so,” said CBRE’s Nabeel. “There is no guarantee the regulators will ‘get it right’, when contrasted with the development fraternity, who will have their own investment at stake.”

Wong of DTZ agrees, noting that we have generally aspired towards a free market.

Nabeel adds that while regulation comes in various forms, it is probably best in the long run to allow market participants to make their own decisions. “This is how a market matures,” Nabeel concludes.

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 Yesterday: Making sense of retail and industrial property segments