Correction anticipated in uncharted waters

Sittampalam: ‘Price growth decelerated in 2014 and is expected to further decelerate in 2015’.

THE year 2014 saw a number of government initiatives help to put the brakes on escalating property prices. While these have slowed the quantum of price increases, the cost of homes continue to be remain stubbornly high and issues on affordability persist. 

No longer are high prices associated only with properties in the Klang Valley, Penang and Johor. The trend has crept into other major towns.

In a report by Khazanah Research Institute in November, the government-linked research said “our house prices on average cost much more than three times annual median income... our houses are more expensive than those in Ireland and Singapore.” The Malaysian median income is RM3,626.

The report also said that at 21%, the profit margins of our property developers are high – almost twice those in the United States (12%), 1.2 times those of the UK (17%) and higher than Thailand (14%), although Singapore has higher margins (25%).”

The past year saw a series of government attempts to bring some form of normalcy to property prices. The most important was the banning of developers interest bearing schemes (DIBs) which, coupled with easy credit, nurtured and oiled speculation. Lending rules based on net income, instead of gross, also resulted in high loan rejections, forcing buyers to walk away. The resumption of real property gains tax (RPGT) with more teeth was another deterrent, although this was not as strong as the first two.

Property consultants say these measures have resulted in more genuine buyers and investors and fewer speculators; developers complain a slowdown has resulted. When developers complain about “a slowdown”, they are referring to “slow sales at property launches” where they sell directly to buyers. Instead of hanging a “sold out” after two weekends, they may need a longer time to sell, property consultants say. 

But the overall market does not comprise developers units. The bulk of the market, 70% to 80%, are driven by sub-sales, or the secondary market where buyers buy from owners. This market is “still active”, if hampered by financing.

An agent says “the property sector has been gambled nicely before 2014”. The days of getting 25% to 30% profit margin on disposal is over.

Agents worth their salt will not tempt buyers with a 30% profit, “not even a 10%-15% profit margin on flipping,” says one.

Poor 2015 outlook 

The Malaysian property market enjoyed a boom for five years just after the 2008 US subprime crisis from 2009 to 2013, says Association of Valuers, Property Managers, Estate Agents and Property Consultants (PEPS) president Datuk Siders Sittampalam. 

The price correction anticipated in 2008, the year Lehman Brothers fell and precipitated the Global Financial Crisis, did not materialise, he says.

“The growth in the market slowed down with the cooling measures announced in Budget 2014, unveiled in October 2013,” he says.

Thereafter, the past 12 months saw a slower price gain, “indicating the market is shifting out of rapid price escalation, (which has come about) without fundamentals,” he says, who is also PPC International Sdn Bhd managing director. 

“Price growth, in general, decelerated in 2014 and is expected to further decelerate in 2015,” says Sittampalam, highlighting several reasons. 

There were a large number of residential property launches in 2012 and 2013. These projects will be ready for occupation next year, he says.

Most of these properties were purchased on DIBs; purchasers have two choices; they either flip or they start paying mortgage payments. But even as this deluge of properties hit the streets, lending rates are expected to increase and house ownership will become less affordable along with the tighter lending, says Sittampalam. “Sentiment is expected to deteriorate from 2015 to 2016,” he says.

Adding to this conundrum is the implementation of the Goods & Services Tax (GST) with effect from April 1. Inflation is expected to increase. Inflation, measured by the Consumer Price Index, rose to 3.0% in November this year from 2.8% in October, contrary to a forecast of slower rise, says Sittampalam. 

With GST, inflation is expected to increase further next year. Although residential properties are exempted from GST, developers will not be able to reclaim GST input tax. This cost will be passed down to the buyers to some extent,” says Sittampalam. 

Oil factor

As localised issues slowed the market, a major shake-up in the world which is of some consequence to Malaysia, has entered the scene the last couple of months.

Oil price has dropped more than 40% to around US$60 a barrel since June. Besides the politics in Russia and tensions in the Middle East, the oil price plunge is the biggest shock for the global economy this year. The chaos has dampened the overall global outlook considerably. Malaysia is a net oil exporter and oil revenue funds the economy.

Says Sittampalam: “Declining oil prices will further impact national earnings. This will create pressure on asset pricing, including real estate value and rental. However, since the Malaysian property market is not very much held by foreign purchasers, global market sentiments will not have a direct impact on Malaysian property market,” Sittampalam says.

Several quarters conclude that the ringgit slide may spur foreigners to enter the market, particularly Singaporeans but this may not materialise.

“The continuous weakening of Malaysian currency, a double edged sword, may deter foreigners as sentiment turn poor,” Siders says.

Another property consultant, Khong & Jaafar group of companies managing director Elvin Fernandez, shares similar views. “Oil prices are not just going to bounce back in the next one to two years. 

While certain quarters say the there are ‘positives’, as in cheaper properties, cheaper cost of production, the repercussions may be far larger than previously anticipated.

“A weakening currency is cause for concern. How low will it go and for how long... are two major concerns. But once the currency settles and stays at a certain level, it may attract investors to come in. Any element of uncertainty is viewed unfavourably and discourages many from putting down their money.”

The falling British pound, as a result of the 2008 Global Financial Crisis, did not spur investors to buy into British properties until it hovered around RM5 to £1 in the early months of 2009 from about RM6 to £1 in 2008. 

Another aspect of a weakening ringgit is that those who have bought earlier will not be happy, says Fernandez, because they would perceive that their investments have depreciated, for eg. Singaporeans who bought in Johor earlier. 

“It is a double-edged sword,” says both Sittampalam and Fernandez.

Oil, houses and offices

Elvin concludes that the Malaysian residential sector will remain strong despite the oil price plunge because this sub-segment of the property market is held by individual households who “lend certainty and strength to the sector.” If it were held by speculators, they would want to cut losses, says Fernandez, which is why it is so important to remove excessive speculation.

Unless the oil price plunge triggers something on the scale of the 1997/98 Asian Financial Crisis, the residential market will be relatively strong, he says.

During the 1997/98 crisis, transaction volume dived 32% while value plunged 47%, data from the National Property Information Centre (Napic) shows.

The fall of investment bank Lehman Brothers in 2008 did not cause the Global Financial Crisis, but precipitated it; the unravelling of the oil price may culminate into something else, or it may not. Consultants anticipated a correction in 2008, which did not materialise. 

But there was a 20% drop in both the high end condominium market and the office market, Fernandez says.

It is a different story in the office sub-segment and retail segment, however. Already flashing red lights with the oversupply, a large part of the premium office market is supported by the oil and gas (O&G) sector, says Elvin.
Most of the prime office buildings around the Kuala Lumpur City Centre – as with the high-end condominium projects – are occupied by oil companies and their expatriates.

“Oil companies will have to cut cosst. Rent is one of them. The net effect of this situation brings (property) prices down. If rent comes down, it drags down the capital values. Yield may trend higher because the risk has increased. But there will be a time lag to this because rental is sticky on the downside because of its contractual nature,” says Fernandez. 

On the weakening ringgit, the slide would not be so much if not for the oil price drop, he says. 

Debts, debts and more debts 

Household debt, reported to be at a record at 86.8% of the economy, is still high. Tight lending rules are expected to characterise the market next year as the government is serious about cutting debt levels.

With the GST coming in, households will find it even more difficult to manage their household income. “Their spending will be crimped,” says Fernandez. This will weigh down sentiment.

On a positive note, Fernandez says the residential market is expected to remain strong but some type of properties and certain locations may undergo some form of correction.

This, says Fernandez, is not something extraordinary. “This kind of correction has been happening in the past two years except that the correction has been camouflaged by developers giving incentives and various forms of freebies,” says Fernandez. 

When developers give incentives, it is actually “a de facto discount to prices.” Therefore, that itself should be considered as a price correction, says Fernandez.

What is needed now as we enter the new year is to educate buyers. Quantify these incentives. A house buyer must ask himself: “Am I buying the house for RM800,000 or RM600,000 minus the incentives?, says Fernandez.

It is not easy for buyers to calculate the real cost of the house. If a buyer can know the true cost of what he is buying, he can compare prices with the secondary market. The objective is clarity and transparency, he says. 

Lending institutions today based their lending on the headline price, that is the house price plus the incentives.

“There is a need for lending institutions to lend based on the headline price, less the incentives. This is one way to reduce household debt of which 52% are house mortgages.

“Only when a buyer knows the real price, without the incentives, will he become a more intelligent buyer. Both purchaser and lender must know the true price of the product,” says Fernandez. Based on these factors, the market is expected to see a further price correction and consolidation next year. 

The commercial sector, office and retail space, which is undergoing an oversupply situation, will also see a correction in rentals. 

In addition, with lending cost increasing along with widening household debt ratio, the retail market is bound to see a major correction, says Sittampalam. - The Star