How property is priced by the market

IN a system where income levels, savings, costs, population density, demand, supply, rents, property sizes, property condition, property usage and preferences are so different, how does a property acquire “a” price that is acceptable to a buyer and subsequently acceptable to the market?

Why does a property sell at RM1.6mil when almost everyone living there can at best afford only RM800,000 or sell at RM800-RM1,000 per sq ft when up to a short while ago the maximum was only RM350 per sq ft?

Can 350 new properties in a scheme sell at the same price as one single latest transaction of an existing property in the vicinity? Can 10 developers sell 350 new properties each based on the abovesaid one single latest transaction?

Let’s take a look over the last 30 years at how properties had been priced in the market. Subang Jaya would make a good starting point.

In 1980 when I first started working, I noted that the latest phase of the new single and double-storey terrace houses in Subang Jaya were priced at between RM90,000 and RM140,000 per unit respectively, up from their previous pricing of between RM60,000 and RM90,000 in 1979. The 1980 pricing echoed the newly revised housing loan amounts of Division 2 and Division 1 government officers. All the launched units were quickly sold with the new and huge demand. In the subsequent phases, the pricing followed the momentum of the earlier fully sold sale prices with additional premiums for time, newer design and specifications and variations in the floor and land areas.

Then in the 1990s in the condominium city of Mont’Kiara, I noted the new condominiums were priced based on the price range of the existing two-storey terrace houses in Sri Hartamas/Desa Hartamas which were no longer being built due to land shortage and high land prices. The new condominiums provided an ideal alternative for the affluent younger Malaysians who were seeking a lifestyle change. The prices were also influenced by foreign buyers who preferred a new property with security and property management services at prices and rents which they could afford.

When the number and type of foreign buyers and tenants increased, the developer started to build larger units which were priced based on the price range of semi-detached and detached houses in the neighbourhood. This was well accepted by the market as it was based on actual demand for new, secure and well managed properties by foreigners especially since there were two international schools in the vicinity.

I also noted that in pricing the newly-launched terrace houses in the mid-1990s in Bandar Utama, the prices were 10% to 20% lower than the last transacted prices of existing comparable houses in the same neighbourhood such as TTDI, Damansara Jaya and Damansara Utama. Here the rationale was that the price of the newly-launched house should reflect a discount compared to an existing property, to take into consideration the 2-year waiting period during which interest has to be paid to the bank and rents have to be paid to stay in the current accommodation. It is interesting to note that this rationale is no longer followed by developers and their marketing gurus who now price the newly-launched schemes at higher prices than the highest sale price of an equivalent existing house. The basis being, “why not” when everybody wants to invest in properties and loans are easy and cheap.

Pricing trend

Another pricing trend noted was the continuous rise in the prices of shopoffices in Bangsar and Desa Hartamas, etc. Here the price rise was directly influenced by the rentals paid for the ground floor retail units which were in high demand by food and beverage outlets. This trend continues in all the new smaller shopping complexes as well, where the food and brewerage (F&B) outlets form the largest composition of tenants. The reason they can pay higher rents is because there are a large number of people/small entrepreneurs who find this sector the easiest to enter or invest in, as the payback period is only a short 3 years and there are no barriers to entry.

The other occupiers of the shopoffices and small shopping complexes have no choice but to cough up the same rent as the F&B outlets, as they set the “tone” for the rent in that particular row of shops. As the rents rise, so will the prices as they are directly related.

Similarly, properties in areas which can be converted to a different use where new demand is being created such as showrooms, bridal studios, etc can afford a higher rent. Prices rise due to the higher rents paid. Then by way of the much misused comparison method of valuation, other properties in the vicinity also rise in price, irrespective of their current use, rent and turnover.

I note that in highly popular areas where supply of a particular type of preferred property is limited, like in Damansara Heights/Bangsar etc, the number of transactions per year is very limited as no one really wants to sell since there are no other similar alternatives to move into. Then when out of the blue, a unit here is advertised for sale (usually because the owner is migrating or just wants to test the market) a “special purchaser” will come along and easily pay 20% to 30% above the last transacted price to secure the unit. This is repeated in the next sale when the second “special purchaser” pays another 20% to 30% above the last special purchaser price.

After two such transactions, the price paid by the “special purchaser” becomes the market price and extends to all other properties which are considered comparable, such that the price is now beyond the capacity of the people who have always lived or traded in that vicinity.

The price here is based more on the price which someone living or trading elsewhere is prepared to pay. This is what is happening in Singapore, London, etc. where foreign purchasers set the price. In Malaysia this is happening in Iskandar, KLCC and Penang.

Prices are also directly influenced in the following manner. Say a typical terrace house in a locality measuring 20’ by 60’ and 20 to 30 years old, is fetching prices in the range of RM350,000 per unit. A new scheme comes up in the area where the new unit measures 24’ x 80” and is of modern quality. Here the two properties are not comparable in terms of size and quality. The new unit is priced at say twice the price of the older smaller unit (based on cost, floor area and land area) and sets a new price benchmark for that locality. Then in a matter of time, all the existing properties in the vicinity (particularly all those that have been renovated) try to adopt a similar selling price per sq ft as the new property, using the location, location, location theory, never mind that upon purchasing the older property, the new buyer has to spend a hefty sum to make it livable to modern standards.

Then there is the effect of the policies of the lending institutions on the price. The policies of the lending institution in respect of loan tenure, interest rates and the loan to value ratio directly influence the pricing of a property. During a period of high confidence, sellers can quote high prices just to test the market, but as long as the purchase of the property can be financed, the buyer is prepared to pay the higher asking price as the loan is spread over 20 to 35 years and almost 90% to 100% of the purchase price can be financed.

And all it takes is for one property to be sold and financed at the newly tested price and the new price level will then be tested even higher with the next lending institution. This is particularly true for new types of properties which the buyer and lending institution cannot compare with an existing property.

The above real examples clearly indicate how properties have been priced by the market. It is noted that despite property being a long-term investment and outlay, the market’s pricing mechanism is very short term and dynamic particularly when moving upwards. The prices being set by the market in the short term may not always equate with sustainable market values. It is a strong probability that if one blindly follows the pricing set by the market during a very short-term dynamic cycle, life can become one of endless and needless debt. - The Star

> P.B. Nehru is the managing director of City Valuers and Consultants Sdn Bhd

E&O bullish about Seri Tanjung Pinang project

EASTERN & Oriental Bhd’s unit Tanjung Pinang Development Sdn Bhd can look forward to getting the go-ahead from the Penang government for its Seri Tanjung Pinang (STP) phase two project if it complies to all the technical and regulatory requirements for the project.

In an interview at the Chief Minister’s office in Komtar recently, Penang Chief Minister Lim Guan Eng says as long as the developer complies with the conditions and requirements, the state government will grant approval.

Under a concession agreement signed in 1990 by the previous state government and the company awarded the concession to undertake the reclamation and development of the land in Tanjung Tokong in the north-east coast of Penang, there are a number of terms and conditions for the project’s approval.

“If the terms and conditions are fulfilled by the developer, the state government will have to respect the sanctity of the agreement, otherwise it will have to pay compensation to the developer for non-compliance,” Lim says.

On April 10, the Department of Environment, Ministry of Natural Resources and Environment (DOE) granted a conditional approval for the detailed environmental impact assessment study and conceptual masterplan for the proposed STP phase two.

The proposed reclamation for STP phase two involves 760 acres of man-made islands and 131 acres of the Gurney Drive foreshore that will be handed over to the state government for infrastructure development of a new expressway, a new Gurney Drive Promenade and a parallel linear park for public recreational purposes.

Given that the state’s approval is still pending and the tender process yet to commence, analysts say the proposed reclamation work for the 891 acres of the STP phase two is expected to begin only early next year.

Reclamation works are expected to take two years and the first launch assumed to commence towards the end of the reclamation works, possibly in the second half of 2016.

Responding to queries from StarBizWeek, E&O managing director Datuk Terry Tham says E&O is now proceeding to make the necessary applications as required by the relevant authorities in respect of the proposed STP phase two development plans.

Tham gave the assurance that E&O will continue to give full compliance to all regulatory requirements, as it has done with the first phase of STP.

“Going forward, E&O is fulfilling its rights and obligations as set out in the concession agreement for the reclamation of STP phase two.

“The proposed STP phase two is of significant size, hence the conditions set out by the DOE are to ensure that the project is carried out in an environmentally responsible manner, consistent with the prevailing regulatory framework,” Tham points out.

The DEIA approval is conditional upon the following terms:

·It is applicable only to the proposed reclamation of 760 acres of man-made islands and 131 acres of the Gurney Drive foreshore, and dredging activities at the “flushing channel”;

·The provisions of the Environmental Quality Act, 1974, must always be complied with;

·The proposed STP phase two must be in line with the project concept stated in the DEIA and is subject to the approval of separate environmental impact assessments by DOE for activities prescribed under the Environmental QualityOrder (Prescribed Activities) (Environmental Impact Assessment) 1987;

·The necessary approvals from the state government and relevant government departments must be obtained before the proposed STP phase two is implemented;

·The DEIA approval conditions and recommendations of the DEIA consultant must be incorporated as conditions of tender documents and contractual agreements, to be fulfilled by any contractor/subcontractor involved in the implementation of the proposed STP phase two;

·The DEIA conditional approval is valid for two years from the date of issuance; and

·All works to be undertaken in the proposed STP phase two must further comply with specific work-related requirements and specifications as set out, including reporting obligations under the relevant laws and regulations.

New lease of life

Tham says that in addition to the 60 acres on STP phase two that will be reclaimed and surrendered to the state government, E&O is also reclaiming 131 acres along Gurney Drive to be handed over to the state.

“This land is for the state government to use for the benefit of the people of Penang. A linear park along Gurney Drive has been proposed as part of the 131 acres,” he says.

E&O is not the first developer involved in the reclamation and development of the land.

The project’s history can be traced back to 1980’s, when it started off as a joint venture between Permaijana Ribu (M) Sdn Bhd (owned by UEM Bhd, Penang Bumiputera Foundation and Magma Bhd) and Koperasi Gabungan Negeri Pulau Pinang and Penang Development Corp.

The original project proponent faced a challenging start and reclamation works were twice abandoned due largely to the Asian financial crisis.

In 1992, Tanjung Pinang Development Sdn Bhd was granted the concession to undertake the project. The reclamation of Seri Tanjung Pinang phase 1 commenced in 1997 (not by E&O). Within the same year, works were suspended due to the Asian financial crisis. In 1999, reclamation resumed only to halt again in 2000. The project was left idle for the next three years.

E&O came on board in 2003 to revive the existing but abandoned project, and Tanjung Pinang Development became a subsidiary of E&O. The project is now known as the masterplanned seafront development Seri Tanjung Pinang by E&O.

Reclamation for STP phase one comprising 239 acres was completed in 2005, and within the same year the first homes were launched. To-date, about 2,500 housing units have been completed at Seri Tanjung Pinang worth an estimated gross development value (GDV) of RM4bil.

In 2011, the Penang government granted in-principal approval to reclaim the proposed STP phase two. The second phase is expected to generate some RM25bil in GDV.

The project had been incorporated as part of the National Physical Plan 2007-2020 as well as the Penang State Structure Plan 2020.

During the interview with the Chief Minister on Penang’s development, Lim gave the assurance that the state government will ensure a holistic and balanced development model for the state, and one that is not too commercial.

“For example, we will preserve landmark historical and heritage sites, like the Penang Esplanade, and will not allow the development of this landmark historical site for commercial purposes,” Lim says.

The founder of Penang, Captain Francis Light, a former Royal Navy midshipman and trader, who founded Penang in 1786, had landed on a point somewhere at the Esplanade. The Esplanade, which can be regarded as the growth centre from which Georgetown developed and expanded, is today an important venue for many of Penang’s important events, including the Merdeka Parade on August 31.

The state’s efforts to preserve the heritage, cultural and historical sites will be in line with the 2008 inscription of the inner city of Georgetown as a Unesco World Heritage Site.

With the right concerted efforts between the state and industry players to ensure a proper balance between the built and unbuilt environment for Penang, and an integration of the old world charms with new neighbourhoods like Seri Tanjung Pinang, Penang will be assured of a place among the handful of well-regarded liveable international cities of the world. - The Star

No surprises in property report

PROPERTY experts say the findings of the Property Market Report 2013, released last week by the National Property Information Centre, came as no surprise, with the various cooling measures having their intended effect of curbing speculation and excessive price growth.

Less certain is whether demand will recover in earnest during the second half of this year, in what some expect to be a “pre-GST boom”.

CEO-Agency of property consultancy PPC International Sdn Bhd Siva Shanker tells StarBizWeek that he sees buyers making a beeline to snap up property in the two quarters prior to April 2015, when the GST takes effect at an initial rate of 6%.

Shanker, who is also president of the Malaysian Institute of Estate Agents, does not believe Malaysia will follow the example of Australia, where prices soared and then tumbled pre- and post-GST back in 2000.

“In Malaysia, what goes up does not come down. I think our property prices will rise ahead of GST and find their level there,” he says.

According to the Property Market Report 2013, volumes shrank 10.9% to 381,130 transactions but their value rose a marginal 6.7% to RM152.37bil from RM142.84bil in 2012, indicating that prices gained strength despite a raft of measures designed to rein in speculation, including a ban on interest-bearing schemes and a higher real property gains tax.

“Most people say 2014 and 2015 will be tough years for the property market. A slowdown usually lasts for two years.

“But looking at the report, my view is that 2013 and 2014 are the slowdown years. I expect the market to normalise in 2015 and make a full recovery in 2016 and 2017,” Shanker remarks.

“This year’s volumes will probably be flat, but prices are not likely to go down.”

As in the past, the report showed that the residential market dominated close to two-thirds of all transactions.

Approvals for housing loans, however, fell sharply compared with an expansion the year before. Total loans disbursed for the purchase of residential properties rose to RM74.4bil from RM64.1bil.

The report says construction activity stayed solid, backed by high-rise and high-end properties in the Klang Valley, Penang and Johor. The shop and industrial segments also saw higher starts and building plan approvals in 2013.

The occupancy rate for retail and office space remained firm, buoyed by a moderate increase in new supply, as well as fewer starts and new planned supply.

But the market showed evidence of softening across the board. All sectors posted reductions in transaction activity, led by commercial and industrial properties.

Most states fared worse save for Johor and Perlis, which recorded high single-digit improvements.

Five states experienced double-digit contraction in activity, with Putrajaya, KL and Kelantan topping the list.

According to the report, residential properties saw improved sales of new launches and more housing starts and completions, which helped pare down the number of “overhang” properties.

The all house price index jumped to 192.9 points against 172.8 points the year before. Average prices rose 10% to RM266,304 from RM241,591.

In terms of volume, most states posted a downturn except for Johor, which expanded 16.6%.

In value terms, all major states saw growth except for Kuala Lumpur, which declined by 9.7%. Johor was most improved with 63.2% growth, while Selangor recorded 2.8% growth and Pulau Pinang, zero growth.

Houses priced between RM250,000 and RM500,000 were the most popular, capturing 27.3% of all transactions, while demand for those in the low-cost RM100,000-RM200,000 category weakened.

Terraced houses made up the largest share of residential transactions, with Selangor, Johor and Perak contributing to more than half of the market share, followed by condominium and apartment units, most of them being transactions in Selangor and Kuala Lumpur.

The number of new launches fell last year after three straight years of growth to 48,290 units from 57,162 units in 2012, even as their take-up receded to 45.1% against 47.7%.

Kuala Lumpur, Selangor and Perak topped the list of new launches, commanding 57.4% of the national total.

From a price standpoint, the Kuala Lumpur market continued to be resilient. The report reveals that single-storey terraced homes at Bukit Bandaraya and Lucky Garden, both in Bangsar, saw 25.3% and 11.4% growth, respectively, pushing the value of a unit to upwards of RM1mil.

Spurred by the MRT factor, homes in Taman Bukit Anggerik and Salak South Garden posted 17.2% and 17.8% growth, while double-storey terraced units in Kepong’s Desa Park City ranged between RM1.31mil and RM2.48mil.

The report highlights that select condominiums in Kuala Lumpur, such as Bangsar Puteri, OBD Garden Tower and Casa Vista experienced growth of over 20%.

A downtrend was seen in Mont’Kiara Damai and Tijani 2, however, as prices tumbled by 5.7% and 12.4%, respectively.

Home prices also stayed firm in Selangor, but Johor’s landed residential segment jumped by double-digits in certain areas, particularly Johor Baru.

Condominium pricing in Johor Baru remained competitive, with the highest transacted price being RM500,000 per unit in Taman Pelangi. On average, units were priced between RM150,000 and RM350,000.

Up north in Pulau Pinang, residential properties were stable as the limited number of terraced houses on the island boosted demand for the Timur Laut and Barat Daya districts.

While Iskandar Malaysia was clearly a boon for Johor, CH Williams, Talhar & Wong managing director Foo Gee Jen says he is concerned if that performance is sustainable.

The veteran property consultant also expects a pre-GST rush for property.

“Buyers are concerned that prices will go up. If you are looking at a piece of property, now is the time to lock in your purchase,” he quips.

In Foo’s estimation, residential property could experience an 8%-10% jump in price after GST, and the landed segment a stronger 10%-15%.

“There is no oversupply in landed homes, but I can’t say the same for condominiums, especially the Soho (small office home office) or Sovo (small office versatile office) types.”

Kim Realty CEO Vincent Ng tells StarBizWeek that demand in the primary market remains firm and will likely continue apace unless interest rates go up.

“The primary market may gain traction in the second half as developers have been holding back on launches. Those with unsold stock will want to unload them before GST,” he points out.

“I don’t think prices will be cut drastically, but developers will make it attractive for buyers.”

Nonetheless, Ng acknowledges that the banks have tightened the screws on mortgages, leading to a mass of loan rejections.

“From what I understand, 30%-50% of the people who have put in deposits have had their loan applications denied for various reasons,” says Ng.

“The damage has already been done. More cooling measures will kill the market,” says another property agent. - The Star

Property transactions dip, but house prices continue to rise

KAJANG: The various cooling measures on the property sector dampened transactions last year, with the volume of properties bought and sold dipping by 10.9% from 2012, even as total value rose 6.7%, a sign that prices did not come down.

According to the Property Market Report 2013 released by the Valuation & Property Services Department, there were 381,130 transactions in the country in 2013 compared with 427,520 the year before, although their value climbed to RM152.37bil from RM142.84bil.

The all house price index edged up to 192.9 against 172.8, and all house prices to an average of RM266,304 from RM241,591.

The residential subsector retained the lion’s share of the market at 64.6% of volume and 47.3% of value.

This was buoyed by the prevailing low interest rate environment on the back of a base lending rate of 6.53% and weighted average lending rate of 5.4%.

Last year saw 246,225 residential property transactions and worth RM72.06bil, which declined 9.7% and rose 6.3%, respectively.

There was a slight decrease in the sales of new launches but the number of overhang properties also dipped.

In the primary market, new launches shrunk after three consecutive years of growth, with 48,617 units of new launches rolled out from 57,162 in 2012. Some 45.1%, or 21,904, of these units were sold.

Five states exceeded the national average take-up, of which three – Putrajaya, Selangor and Pahang – surpassed the 55% mark.

In terms of units launched, Johor, Selangor and Perak topped the list with 20.9%, 13.5% and 11.85 of the national total.

Terraced units made up the bulk of the new launches with 47.8% comprising 9,080 single-storey terraces and 13,273 two to three-storey units.

Condominiums and apartments contributed to 19.1% or 9,265 units. The sales of both these categories stood at 50.9% and 44.8%, respectively.

In terms of value, the Valuation Department said most states saw a downturn in market activity save for Johor, which grew by 16.6%.

Transaction volumes in Putrajaya fell the most by 41.7%, and Kelantan 34.6%, a reversal of its 93.6% growth in 2012. This was followed by Kuala Lumpur (-34.4%), Labuan (-33.9%), Penang (-23.9%) and Selangor (-14.3%).

By market share, Selangor outpaced the other states, contributing to 26.1% of all residential transactions. Johor was next at 13.7%, followed by Perak, Penang and Kedah.

In terms of value, only Kuala Lumpur saw a contraction in value of 9.7%. Johor posted the best growth of 63.2%, Selangor grew 2.8% and Penang saw no growth. Perlis, however, shot up 80.7% from the previous year.

The report said the different market segments as measured by price indicated a divergent scenario.

Transactions in the lower-price range softened last year. Compared with 2012, the market activity of homes in the RM100,000 to RM150,000 and RM150,001 to RM200,000 bracket fell 26.6% and 17.9%, but the RM250,001 to RM300,000 range climbed by 23.2%.

Houses priced between RM100,001 and RM300,000 were the most active, capturing the largest share of the market at 42.9%.

Housing approvals fell sharply by 22.5% from an expansion of 47.4% in 2012, while total loans disbursed for the purchase of residential properties increased to RM74.4bil from RM64.1bil.

Deputy Finance Minister Datuk Ahmad Maslan told reporters after the launch yesterday that the goods and services tax, which comes into effect next April, was not expected to raise house prices significantly as the tax was exempted on the home itself. - The Star