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Consultants say intervention in property prices should be done gradually

WITH residential prices continuing to rise and and currently standing at 61%, 52% and 108% above the post Lehman troughs in China, Singapore and Hong Kong respectively, do interventions really help? And what are their effects on Malaysia?

In the April issue of Asia Pacific Residential Review, Knight Frank brought into focus how these markets have tried to cool property prices.

Singapore instituted seven rounds of cooling measures, ranging from increasing downpayment, rising stamp duty to property tax. The recent budget has also set out an increase in property tax for high-end residential real estate, set to be phased in over 2014-2015.

Cooling measures were also introduced to the non-residential sphere for the first time, with an exit stamp duty introduced on industrial property sold within four years from the date of purchase.

In Hong Kong, the stamp duty for property over HK$2mil was doubled to 8.5%, putting the brakes on volumes transacted in the local market. China, too, sent out strong signals, which include a capital gains tax of 20%. Buyers are looking to exit before these measures are enforced, most notably in Shanghai, which saw an increase in volumes transacted in March.

Bloomberg reported on April 24 that Beijing and Shenzhen have submitted tax plans to their central government.

The aims of the interventions are broadly the same across all of the key markets; control price inflation, reduce the role of speculators and help support first time buyers. The tools vary. It could be a mixture of fiscal policy, supply side intervention, home buyers regulations and financing restrictions, the Knight Frank report says.

Government intervention in the property markets is not a sudden new phenomenon. Policy-makers, to varying extents, have always found it necessary to intervene by exercising some element of control over market participants, along with two key factors of production; land and finance.

They do so because they desire “stable and sustainable growth”. Property consultants contacted say they prefer a gradual increase in prices rather than a steep hike.

While the recent increase in prices are fueled by high liquidity, urban migration, and economic growth, especially in China, questions on sustainability have arisen.

Their conclusion is that, interest rates – at their lowest today – coupled with speculative activities are fuelling prices beyond this “sustainable” barrier.

The various measures taken so far were a result of significant price rises that have brought into focus issues of affordability and the risk of potential asset bubbles.

Effects of cooling measures

The Knight Frank report says as a result of these measures, Singapore saw a reduction in annual price growth, but not perhaps the reduction policy makers expected. China saw prices drop in 2011, but they rebounded in 2012.

Hong Kong continues to see very strong price inflation, buoyed by low interest rates (the HK dollar is pegged to the US dollar) and tight supply.

Knight Frank is of the view that prices will soften in Singapore by an average of 5% and Hong Kong by 10% over the next 12 months. In China, prices will likely continue to appreciate in Tier-1 cities, while there may be drops in some of the Tier-2 and 3 cities.

The protectionist measures introduced into Singapore and Hong Kong have led to a reduction of purchases by foreign buyers. Singapore saw a drop of 23.5% in 2012 from 2011 (for permanent residents and non-permanent residents). Hong Kong also saw the proportion of mainland Chinese buyers drop from around 30% in October 2012 to only 9.4% in January 2013 (in the Hong Kong luxury market).

What is the impact of these various measures on Malaysia?

Knight Frank Malaysia’s head of project marketing Herbert Leong expects the additional cooling measures in competing Asian markets to lead to further interest in the Kuala Lumpur, Penang and Iskandar Malaysia property markets.

Leong also says that overseas investors have viewed Malaysia as an attractive alternative investment destination for some time and expects further activity in 2013, particularly post-election.

While prices in Hong Kong, China and Singapore have risen considerably, annual price growth in the major markets in Malaysia has flattened considerably over the last 12 months. Perhaps, this may be due to the “wait and see” attitude in light of the general election (GE). Malaysia is likely to see a rebound in activity following the GE.

Says Leong in an email: “Malaysia has always been favoured by investors from Singapore, HK/China, Indonesia and Middle East, though not as much as the countries (Singapore, Hong Kong and China) mentioned. The cooling measures will encourage investors from these countries to buy Malaysian properties as our prices are much cheaper and the returns (capital appreciation/rental returns) are reasonable.” - The Star

Analysts see huge potential in the palm oil industry for small-time players

INTEREST in oil palm cultivation in Malaysia remains strong despite issues of land scarcity and limited human capital.

Many small-time local investors are continuously eyeing pockets of idle land in Kedah, Perak, Kelantan and Pahang to venture into the thriving palm oil business.

While the local oil palm plantation big boys may have extensively expanded their land bank abroad in Indonesia, Laos, Cambodia, Vietnam and Africa, small-time investors find opportunities in upstream and downstream activities in Malaysia.

According to data from the Malaysian Palm Oil Board (MPOB), as at December 2012 the number of smallholders has grown almost 47% to 177,046, from 120,437 in 2007; as at February this year, smallholders have exceeded 180,000. (Smallholders own less than 40.46ha of oil palm plantation.)

Many have deemed it a profitable business, encouraged by the good times when crude palm oil (CPO) prices hit RM3,000 to RM3,300 per tonne.

One such small investor with serious intention to invest in palm oil here is the Malaysia India Entrepreneur Cooperative Ltd (MIEC).

Founded in 2010, the MIEC plans to allocate between RM20mil and RM30mil for its maiden venture into the palm oil industry in Malaysia.

“The cooperative is aware of the tough challenges in the palm oil business, but we remain optimistic given the increasing global demand for edible vegetable oils on the back of decreasing supply,” says itschairman Madhu Marimuthu.

“We hope to mitigate the risk issues through smart partnership. In fact, some of our members and several interested parties that are keen on a joint venture with the cooperative have expertise in the palm oil industry. It is also good that several of our members are already established in the industry.”

Start-ups

Chellam Plantations Sdn Bhd group managing director Venkata Chellamcautions investors about the long cultivation period, especially for new oil palm plantations.

“New investors have to be patient because it will take time to see even a marginal profit over a minimum period of 10 years.”

Chellam Plantations, which is a member of the MIEC, owns about 25,000ha and considers itself a medium-sized plantation player.

Venkata says the plus point for small-and medium-sized plantation companies with smallholdings of about 100ha would be lower operational costs compared to that of other bigger players who own plantations over 1,000ha which require a bigger number of higher management employees and headquarters.

“Similar to most industries, small- and medium-sized players have lower overheads, a more lean structure, are closer to the ground and tend to have a faster decision-making process,” says Chellam, adding that 40.46ha of land would be a good start.

On bank loans for small-time investors, Rabobank International country business director for Malaysia Kao Chee Ming says even though the palm oil industry provides a good margin, the banks will not depend on margin alone. The benchmark for granting loans will always be on the 5Cs – capacity, capital, collateral, conditions and character.

SME opportunities

“The oil palm industry is one of our strengths,” says SMI Association Malaysia president Teh Kee Sin.

Malaysia is the world’s second largest palm oil producer after Indonesia. “If more small and medium enterprises (SME) venture into the industry, they can generate further growth for the country’s economy,” he says.

SMEs form the backbone of Malaysia’s economy as they make up 97.3% of the total business establishments in the country.

Despite limited human capital issues, Teh says the use of fruit-cutting machines, enhancing road infrastructure, and, intensive research and development could reduce labour dependency and further attract small- and medium-sized planters to venture into the industry.

On possible business activities that could further spur the industry, Teh highlights several downstream activities suitable for SMEs, such as logistics, packaging, fertiliser, cosmetics, food substitutes and animal feeds.

Malaysia Estate Owners Association president Boon Weng Siewidentifies two scenarios for new investors.

One is green field development that would give some 22.5% return on investment (ROI) subjected to several factors – CPO prices at RM2,500 per tonne, capacity to produce five tonnes of CPO per hectare per year, cost of land and other related infrastructure at about RM30,000 per ha.

The other is to look at established plantations, complete with infrastructure that would give some 9.64% ROI, with market price around RM70,000 per ha.

Look abroad

Industry expert M.R. Chandran says Malaysia has vast marginal lands to be developed with a potential to generate 24 tonnes of fresh fruit bunches (FFB) per hectare per year.

“With the technology improvement in breeding and selecting as well as advancement in cultivation and management practices, it is possible to achieve that kind of yield,” he says.

According to Chandran, while high land prices and limited human capital continue to persist in Malaysia, there are still plenty of growth opportunities in Africa and South America for oil palm plantations.

“Oil palm trees can grow best in the rainforest climate with warm and wet climate and year-round rainfall exceeding 1,800mm. As such, oil palms can grow in South-East Asia, West Africa as well as in Central America which have the same climatic conditions as ours.”

He says the African and South American regions have great potential to grow oil palm as an “industrial” plantation crop because of the availability of vast tracks of arable land and good source of labour. The population in Africa is estimated to double in the next 35 years. Coupled with subtantial economic growth and rising affluence, the consumption of oils and fats for food, fibre and fuel are expected to double.

“Malaysia is today one of the biggest investors in the African region ahead of China,” says Chandran.

According to a report by CNBC, Malaysia’s biggest spenders in Africa include Petroliam Nasional Bhd and Sime Darby Bhd. In 2011, Malaysia was the third biggest investor behind France and the United States, pushing China and India into fourth and fifth positions respectively.

Chandran says the main driver for palm oil is mainly due to the increasing world population growth, predominantly in the developing world as well as the rising per capita income.

“We expect the world’s population to hit almost nine billion by 2050,” he adds.

Versatile crop

Of the world’s 17 oils and fats, palm oil and soybean oil account for 51% of the total world production. Palm oil alone accounts for nearly 28%.

At the same time, oil palm is a dynamic annual tree crop that produces not one, but two competitive vegetable oils with proven benefits. Oil palm is a versatile crop that produces the most economical oil which is used in various products – from margerine, shortenings, cocoa butter-like fats to infant formula. It is also used for oleochemical applications and in the biofuel industry.

Chandran expects demand for palm oil to increase from 50 million tonnes now to 60 million tonnes in 2015, and 80 million tonnes by 2020.

To meet the challenges of such big demand for oils and fats, palm oil production needs to increase without adverse impact in terms of environmental and social disturbance, to ensure food security, he says.

According to Oil World’s publication, consumers worldwide will be highly dependent on palm and palm kernel oils in the second half of this 2013-2014 season.

“Given such a high demand for palm oil, there is no choice but to increase production to meet the demand, especially from the boom in China and India’s economies.

“I believe the rise of China and India will have enormous business implications during the first half of this century,” says Chandran. - The Star

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