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The property outlook for 2013

IN 2012, Malaysia's economy continued its steady growth in the order of 5% to 6% a year, a range that it has settled into since the Asian financial crisis of the mid 1990s.

The property market is correlated to economic growth. The residential subsector is also driven by high household formation that stems from Malaysia's relatively young population with rising income.

Residential prices, as measured against household income, is a key fundamental in this subsector. This is due to the fact that residential properties are mainly owner-occupied that mainly drives demand for residential properties.

To a lesser extent residential properties are also purchased for investment purposes, and thus rents, yields and capital appreciation are also important factors that drive the subsector.

Looking at historical trends, the subsector has shown an average relationship of four to 4.5 times of gross annual household income to residential price. But since five or six years ago, before and after the global financial crisis, residential prices have run up to higher multiples in many of the hotspots within Kuala Lumpur and other major urban centres in Malaysia first in very selected high interest areas and then in a horizontal spread.

The reasons for this run-up are many but can be narrowed to namely the prevailing low interest rate regime locally and globally, and a perception that property is a good hedge against inflation, more so after prolonged periods of low interest rates. There is also the fact that many investors are searching for higher yields to better protect their savings.

Net residential yields have also been falling to levels below 2% a year in many of the hotspots. Fearing a bubble in the sector, Bank Negara, like other central banks in the region, has introduced macro prudential measures, such as tweaking the loan-to-value ratio to defuse it.

This has had some effect but, as it has turned out, it has affected the secondary market (usually 80% to 85% of the residential market) more, than the primary market (where one buys from a developer).

A study of transactions in each of the first nine months of 2009 to 2012, as obtained from the National Property Information Centre or Napic, suggests that growth in transactions is slowing and may soon contract. Transaction numbers for the fourth quarter 2012 are still not out at the time of writing.

It also shows that while the compounded annual growth rate of transactions in the secondary residential market was 4.65% during those years, it was 28.5% in the primary market. While normally the primary market makes up around 10% to 20% of the market, for the first nine months of 2011, it reached an overall 21.76% and for the first nine months of 2012 it has gone on further to touch 24.05%.

The reason for this shift towards the primary market is not hard to rationalise. While Bank Negara has rightly introduced cooling measures in the market, developers, needing to continue to be participants at the same previous levels in the market, have introduced a variety of incentives to secure sales.

The incentives range from the initially introduced 5/95 scheme in January 2009, in the aftermath of the global financial crisis, to moves such as absorption of stamp duty and legal fees by developers, guaranteed rents and in some instances even cash-back payments. All this makes buying from the primary market a better proposition compared with the secondary market.

The allure of the primary market is further strengthened by the fact that in many instances loans can be secured without the purchase price being reduced by the incentives, as it should.

Market values are indeed the basis on which loans are approved but if a large part of the market is, and increasingly, priced at prices which includes the incentives, then the true market value can become hidden, which in turn can result in loans being higher than what they ought to be, and consequently, in a downturn, and or in the event of loan default, the carrying value can be higher than what it ought to be.

These issues need further study so that even better policy can be crafted for the residential property market so that it is sustainable.

In the big scheme of things, a main issue in 2013 for the residential subsector will be the inflow of funds that leave the low interest rate regimes of the developed economies in search for higher yields in emerging markets and in this part of the region.

This include flows into real estate investment.

A number of countries in the region have taken pre-emptive measures to strengthen their residential property sector from any possible repeat of the Asian financial crisis, like situations where cheap money flood in and exit in a hurry when there is an external shock.

While the residential market in Malaysia may not be a direct recipient of such funds unlike in other economies in the region, the fact that Bank Negara is watchful for such factors is evident in our macro prudential measures targeted at the residential subsector.

This indicates that if the market were surge to higher levels than what is seen as fundamentally reasonable, further cooling measures may be the order of the day. Perhaps policy measures then can also focus on maintaining a better balance between the primary and secondary markets.

> Elvin Fernandez believes in the free market and timely nudging by policymakers 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

The luxury condo market in 2013 is set to find itself in a ‘waiting game’ amid swelling supply

The overall high-end condominium market has been challenging in the past six months and this is expected to continue into next year.

Knight Frank reported that two new completions in the second half of 2012 with a total of 967 units from St. Mary Residences and Binjai 8 have brought the cumulative supply of condominium units in Kuala Lumpur to 30,849 units.

Real Estate Highlights (Second Half 2012) says this number is expected to swell further with the completions of several other projects. Their completions will significantly increase the cumulative supply by about 5,000.

The report says a high level of impending supply of high-end condominium is expected next year from on-going products.

This situation has led to developers and buyers playing a “waiting game”, with developers waiting for “the right timing” by putting launches on hold, and extending completion dates. Buyers on the other hand wait for better prospects.

Despite developers working with banks to offer easy lending schemes and incentives such as low down payments, discounts and free legal fees for sale and purchase agreement, the sales rates of selected recent launches and on-going developments, are slow.

This is particularly so for units with large built-up areas. This is a consequence of existing and impending supply and a challenging leasing market stemming from low occupational demand.

Against this backdrop, BRDB's Serai seems to buck the trend. Located at Bukit Bandaraya, Kuala Lumpur, Serai units range from 4,025 sq ft to 6,913 sq ft. Sold at between RM1,300 and RM1,500 per sq ft, that project is about 60% sold. There will be two penthouses of 14,000 sq ft, priced between RM19mil and RM22mil.

As for the Kuala Lumpur City Centre market, DTZ Nawawi Tie Leung Property executive director Brian Koh does not see any significant change in conditions for the larger units with a built-up area of 2,000 sq ft and above going forward.

“New supplies continue to be completed and even if demand were to improve, this will not be sufficient to mitigate market weaknesses,” says Koh.

“A new successful launch such as Four Seasons Residences or Platinum Park Residence will certainly create confidence, and assure existing and new buyers that the KLCC market is one that is worthwhile to hold long term. KLCC Properties will also have some iconic projects to be launched next year that will help to create and enhance the attractiveness of that overall location,” he says.

On the overall condominium market for the coming year, Koh prefers to focus on the Johor market. He says the condominium market will be the main demand driver in urban areas with Johor's Iskandar region showing more resilience given the low base it is coming from.

“Demand in the Klang Valley will be more selective and for more modest sizes and pricing. Locations that are further away but with potential MRT links will benefit most as their land cost remains more competitive,” says Koh.

It is not just the connectivity that buyers are looking for, as seen from the launch of Serai, which is ideally located between Kuala Lumpur and Petaling Jaya.

Increasingly, a popular trend in luxury housing is the branded residences concept that developers tie up with international luxury hospitality and lifestyle brands to set a new definition to luxury living. Hotel-like services such as concierge, security and room service provided by a luxury brand will help maximise the value of a development.

KL City is certainly getting a fair share of this new residential concept as evident from the success of Banyan Tree Signatures Kuala Lumpur (441 private residences) which were sold out at an average pricing of RM2,000 per sq ft. Other notable luxury brands coming on-stream include Four Seasons Place, W Kuala Lumpur Hotel & Residences, Ritz-Carlton and Harrods Hotel and Residences.

PPC International Sdn. Bhd's managing director Siders Sittampalamsays the high-rise residential segment registered an average rental rate of RM3.50 per sq ft per month. Rentals in the city centre were the highest in areas like KLCC, and for new condominiums in Bangsar and Mont'Kiara. Areas like Subang Jaya and Kota Damansara continue to command stable rates at an average of RM1.50 to RM2.50 per sq ft.

“Notwithstanding this, currently, there are no indications that market is heading towards a bubble' mode. Property prices next year are expected to stabilise with the exception of certain segments and localities that would experience a slowdown.

“We do not expect the market to be bullish as we have seen over the last few years. Our view is that there should not be stringent fiscal measures that would stifle the market. Excessive interference in the free market would have an impact on the investment climate.

“Prices should be market driven with sufficient government expenditure in providing affordable homes and a general improvement in infrastructure and transportation,” Siders says. - The Star

Bolton Bhd believes in a solid financial war chest and quick decisions in getting ahead

AS lands are getting scarce, developers have to form strategies to secure the land that they are keen on.

For Bolton Bhd executive director Chan Wing Kwong, speed is of the essence in deciding whether to purchase a piece of land or not.

To him, a solid war chest allows a developer to do just that.

“A lot of times, we have to make the decision on site. When we look at the land, we have to know what product we can develop there and how we are going to sell it and at what price, on the spot,” he tellsStarBizWeek.

Having a “war chest” then comes in handy.

“You must know the market well ... the moment you procrastinate, another player would have snapped it up,” he says.

When it comes to acquiring new land, the developer, especially those in city areas, may not have the privilege to study the land thoroughly.

Due to the rarity of good land, prices are heading north.

“Margins have become inelastic due to escalating land prices and rising material costs which make it hard to keep costs low.

“To mitigate that, developers have to increase efficiency and launch the projects quickly,” he says.

The increasing cost to fund projects will see more collaborations among developers in the future, he adds.

For Bolton, it has partnered with other developers for its projects at Wangsa Maju, 51G Kuala Lumpur and Mayang Land.

Besides the central region, the developer is also present in Pulau Langkawi, Penang, Sungai Petani (Kedah) and Malacca, with its landbank totalling 1,300 acres.

In East Malaysia, it has partnered with Mobuild Sdn Bhd in Kota Kinabalu, Sabah for a project worth RM480mil.

“We intend to establish ourselves in East Malaysia so most likely we will use Kota Kinabalu as a springboard to enter other areas (in Sabah and Sarawak),” he says, adding that it also aims to set up an office there.

The developer, which has accumulated 40 years of experience, is able to increase its efficiency, hence it is able to provide value products for buyers. He also says smaller players without much experience lacking in confidence may be left behind in the competition.

“What they do is to enter into a venture with bigger players to leverage on their marketing and networking,” he adds.

As for Bolton, it has established its reputation as a niche developer with notable projects like Tijani in Bukit Tunku, which sits on a 42-acre land it acquired in 2001.

Touted as one of the truly high-end projects, the brand “Tijani”, which means crown in Arabic, has travelled far, and is even known in the Hong Kong market, according to Chan. “So, we decided to take this brand to the other side of the town (to Ukay Perdana),” he says.

The company has noticed a shift in high-end development in the Ampang area since the completion of the Duta-Ulu Kelang Expressway.

Known as Tijani Ukay, the project spreads across a 23-acre leasehold land in Hulu Kelang. The site will house 110 units of zero-lot bungalows and eight units of bungalows with a gross development value of RM300mil.

Scheduled to be completed in 2014, the development will have facilities like jogging track, playground, tennis court, surau, and barbeque area.

Besides these amenities, one of the attractions of the project is its low plot ratio, which ensures that there are lots of greenery, so that residents feel relaxed when they return home.

“The cascading pond is carved out from the natural stream,” Chan enthuses while showing the low-density architectural model.

He says the price for a zero lot unit starts from RM2.4mil while the bungalow costs RM5mil and above.

The serene enclave is located between International School of Kuala Lumpur (ISKL) and Zoo Negara.

“ISKL has a strong following of expatriates and further down is the row of embassies.

“There are empty plots of land around that area which leaves room for growth opportunities.

“We love to be the catalyst for future growth,” he says.

When asked if it is harder to sell properties which are priced above the million mark, he says: “People know that land is getting scarce and expensive so they do not mind payng more for a landed property.”

As a matter of fact, its strong following is evident when 50% of the units were snatched up during Tijani Ukay's preview sales.

When asked if there are concerns about earth conditions at the site as it is in the vicinity of Bukit Antarabangsa, he assures that it is not an issue as there are engineering solutions to address it.

“This (piece of) land is not next to a hill slope. It sits on a gradual piece of flat land.

“To be cautious, we have submitted the calculations to the hill slope committee and they have granted us all the necessary approvals,” he explains, adding that there are no Class III and Class IV slopes on the land.

Class III slope has a gradient between 25 and 35 degrees while Class IV's gradient is greater than 35 degrees.

The project is expected to contribute 15% to 20% to its bottomline for the next two years.

Reviewing 2012, he says the company performed well in the first half while the momentum has been maintained for the second half.

Meanwhile, the breakdown of the buyers are 30% foreigners and 70% locals, he says, he says.

According to him, only 8% of Malaysian properties are bought by foreigners.

“Last time, people like to keep cash but over time, they realise that property is a good investment which is why we see many people putting their money into the property market,” he adds.

Going forward, Chan expects sales for the overall property sector in 2013 to be flattish compared with the bullish days in 2009 to 2011.Demand should settle at a sustainable rate pace which bodes well for developers as “we prefer gradual increase in sale price and volume as compared to drastic ones,” he says.

The expanding Malaysian population will also support the growth.

“We can see the trend of buyers purchasing their properties based on location and developers.

“Good developers are generally more credible and they can deliver.

“Besides that, they have the reputation to produce good designs and quality products,” he adds.

He also says gross margins for players will rationalise. As for their net margins, it should be within the range of low teens.

Come 2013, the industry may face a huge challenge in the form of a shortage of labour.

“The labour challenge comes in two forms: the actual costs and the quality of service.

“The booming development in Indonesia in the last two years has led to a shortage of Indonesian labourers coming to Malaysia,” he says.

He also says the problem is alleviated by hiring labourers from other countries like Bangladesh but it is different because they lack the construction and communication skills that Indonesians have.

“The Indonesians know our system so it is easier to work with them. They are also hardworking and has no problem understanding our language,” he adds.

Cost-wise, he expects material prices to trend upwards.

The Government has reduced subsidies so costs of production for cement and tiles will go up, he says.

“As the world economy is burgeoning, we have to compete for raw resources with giant economies like China and Brazil so we can expect material prices to go up.”

On the minimum wage policy, he opines that the increased salary will allow employers to have higher hiring power, including recruiting talents from the region.

“One of the reasons of human capital outflow is due to low wages so we should not be afraid of it,” he says. - The Star