THE property market with all the recent cooling measures announced by Bank Negara and the Finance Minister in Budget 2014, seems to be holding its breath and assessing the likely impact. So as we move into 2014, the question is how will the nature and complexion of the market change.
Insofar as the residential market is concerned, and for the country as a whole, house prices are generally in line with important fundamentals such as household income, going neck to neck at about 5.5% increase per annum. It is only in select localities in the Klang Valley, Penang, Johor Baru and Kota Kinabalu that house prices are somewhat higher than the normal multiple of 4 to 5 times annual household income. In some instances, prices have risen to close to 15 times the average state household income.
To view this condition in a proper perspective, we need to go back in time to early 2009 when the developer interest bearing scheme (DIBS) was first introduced. It was introduced to forestall a cooling of the residential market, mainly the primary market, i.e. sales by developers, following the global financial crisis of 2008. As we moved away from 2009, a substantial number of developers adopted the DIBS and added on a range of incentives as well, reaching out to new categories of house buyers who are not necessarily the traditional first-time house buyers or upgraders.
In 2009, there was a total of 211,600 residential transactions; 25,898 or 12.24% were primary market transactions whereas 185,702 or 87.76% were secondary market transactions.
In the following year i.e. 2010, the total number of residential transactions was 226,874, out of which 29,162 or 12.85% were primary market transactions, while 197,712 or 87.15% were secondary market transactions. The important point is that primary sales made up about 12% of total transactions.
In 2011, the total number of residential transactions was 269,789, out of which 55,745 or 20.66% were primary transactions whereas 214,044 or 79.39% were secondary transactions.
Note should be taken of this percentage jump in the proportion of primary transactions versus secondary transactions. It is attributed to the DIBS and the other incentives that were given by developers, impacting the market, which in effect were luring buyers into the primary sector of the market as against the secondary sector. Their lure was also due to the fact that real estate seems to draw in investors and speculators particularly during difficult times. There are very few alternative investments that can attract a switch in savings as well as excite the outright speculators as real estate.
Looking at it from another point of view, the DIBS and the growing degree of incentives offered can also be considered as an invitation to speculate. For 2012, out of the total residential transactions of 272,669, 60,241 or 22.09% were primary market sales whereas 212,428 or 77.91% were secondary market sales. Note the drop in the proportion of secondary market sales from 214,044 in 2011 to 212,428 in 2012.
In view of rising house prices in the Klang Valley, Penang, Johor Baru and other areas, coupled with the concern that ordinary Malaysians were being crowded out of the market and the rise in household debt, the authorities introduced several cooling measures, with the culmination of a substantial dose in Budget 2014.
Transparent incentives
Like Singapore, the DIBS was also targeted as an unacceptable feature for the market, and where incentives are given by developers they are now required to be transparent. This enforces the need for the real price of houses to be clearly discernible. Lending by banks and financial institution are now constrained from being led by house prices that include incentives which mask the real house price.
Going forward, it is likely then that the runup in the primary sector of the market by about 35,000 units a year or close to 3,000 units a month could be reversed partially or fully. But then where will such “speculators” turn to in the compelling search for alternative investments? This is a question to ponder on.
Residential house prices are normally sticky on the downside and it is unlikely that prices will ease substantially. However, there could be a rediscovery of the real price of houses once the value of the DIBS and other incentives are stripped from it. The effect is a slight downward slide in prices.
The market discovery of real house prices in the hotspots could also help in more robust residential property indices, which are important for the growth and development of the industry.
In the commercial sector of the market, in the Klang Valley, there is clearly excess dedicated office space in the market as noted from the amount of unoccupied space – about 26 million sq ft. There are also a substantial amount of office space under construction (18.77 million sq ft) with an even more substantial amount of office space expected from all the mega projects as currently contemplated. Rents are under pressure and it is important to bear in mind that it is rents that drive the market.
Grade A office buildings today have rental of between RM7 and RM8 per sq ft gross and higher than this figure are only for a few special Grade A plus office buildings which also enjoy exceptional management and good location.
Rents determine capital values by way of the expected yield. Broadly, capital values less the cost of development and expected developers profit and adjusted for time value of money determine the price one should pay for land that is slated for commercial development. At current market prices of commercial lands in the KLCC area at more than RM3,000 per sq ft, it does indicate that buyers are assuminig a permissible plot ratio of 10 or more. More significantly, rents will trend upwards of RM10 per sq ft in the short to medium term. Is that a reasonable expectation, given the substantial current and future supply of office space?
For the retail sector, there are also a substantial amount of retail centres entering the market. There is pressure on some of the smaller neighbourhood shopping centres. Many of these centres in the Klang Valley are looking for a buyer. The outlook for the leading retail centres, however, ought to be helped by the fact that 2014 is a designated Visit Malaysia Year. On the other hand, one has to contend with some possible crimping of consumer spending arising from the reduction of subsidies and increase in tariffs.
Khong & Jaafar group MD Elvin Fernandez believes in the free market and timely nudging by policy makers and key market participants to iron out any, and only where needed, imperfections in the system. To do this, and over time, they need a steady stream of in-depth market knowledge and insight. - The Star
No comments:
Post a Comment