Almost 20 years ago, the property market in Malaysia was hit hard by the Asian financial crisis. House prices contracted between 8 to 9.5 per cent. The government’s stringent policies helped the market to recover. From 2006 onwards, the residential market experienced exponential growth.
The property market started weakening from 2009 when the base lending rate was increased and there was signs of an oversupply in office space and retail properties. Now, there is an oversupply in high-end properties and condominiums.
Property market in Malaysia looks bleak
Speculation is now rife that the property market is headed for a period of doom and gloom. Moody’s says the two main reasons for this are the cooling measures put in place in 2013 by central bank Bank Negara Malaysia and the April implementation of the six per cent Goods and Services Tax (GST). The research house says the lull in demand after GST could last six to nine months.
Affordability is a major issue. Sales volumes fell 8 per cent year-on-year in Q1-2014, the fifth consecutive quarter of a drop in transactions, according to Standard Chartered Research. This is primarily because housing prices rose 72 per cent in Q1-2014 versus 2005, or about 6.7 per cent on average annually.
Bank Negara came up with a string of cooling measures to curb rising household debt that stands at almost 87 per cent of gross domestic product. Loans for properties formed the bulk of household debt at almost 50 per cent. This is why one of the cooling measures was to tighten housing loan approvals. The housing loan application rejection rate dropped to 30 per cent. This affected the property market in Malaysia and 90 per cent of respondents in a Real Estate and Housing Developers Association Malaysia survey in 2014 said they experienced a slowdown in sales.
Residential properties will be exempted from GST but there is much fear that developers will find a way to transfer the increase in production cost to the consumer. Cost of building properties will go up because GST will be imposed on building materials and services, and developers will have to absorb this additional cost.
Developers are already sending out the message that cost of building properties are likely to go up due to factors such as higher labour cost, citing shortage of workers as a result of an increase in construction projects and infrastructure works. If this is a way of camouflaging the GST on building materials and services and justifying an increase in residential property prices, then developers are shooting themselves in their foot.
Developers are right, to an extent. There is a lot of construction work going on presently, and labour shortage has been a nagging problem for the construction industry. Does Malaysia need all this additional office, retail and residential space when there is already an oversupply?
The Rehda survey shows that 31 per cent of properties in the RM500,001 to RM1 million (US$139,000 – 178,000) range were unsold last year and they were mostly in hot property markets like Selangor and Johor. Properties in the price range of RM250,000 (US$70,000) to RM500,000 (US$139,000) had 34 per cent of the completed units unsold, mainly in Perak and Pahang.
There is a strong demand for residential properties, but in the less than RM500,000 (US$70,000) category in the hot areas. High cost of construction and land have prompted developers to focus on the higher end of the market. Developers need to re-strategise and address this supply-demand mismatch in the property market in Malaysia and the government may want to look into land acquisition rules and procedures.
In the long run, some say, the fundamentals are strong because of the expected growth in population and earning capacity, low unemployment and low non-performing loan rate are strong enough to sustain a growing property market in Malaysia.
The government has long been branding real estate and developers have capitalised on this by following the Government to woo foreigners to buy Malaysian properties. “The initial branding exercise was in Japan, Korea, China, Singapore and Indonesia,” Veena Loh, general manager of Malaysia Property Incorporated (MPI), a government initiative to promote real estate investments in Malaysia.
MPI works closely with government and private initiatives in medical and education tourism, and MM2H programme to market residential properties as well as other government agencies like the Malaysia Investment Development Authority to market industrial parks.
The efforts by MP were starting to show results. “But branding overseas is expensive, and so the board of directors decided to focus closer to home,” she tells The Establishment Post. The focus now is on Indonesian investors. Foreign investors continue to show interest. “The Japanese have been consistently coming (to invest in Malaysia).”
The next big investor heading for Malaysia is Takashimaya Co. Ltd, one of the largest Japanese department store chains. Ms Loh says: “It is likely to be located in either Kuala Lumpur because of the number of tourists or Johor because of the Singaporeans (from across the Causeway).”
The fact that the Japanese retailer is considering Johor may come a surprise because Takashimaya Singapore has been operating in the island republic since 1993. But Malaysia is targeting to get 14 million tourist arrivals from Singapore this year and there is a sizeable foreign population in Iskandar and these factors make Johor a viable option.
Iskandar is not a short-term plan
The property market in Iskandar saw a boom in the last few years, especially after China’s top property developer Country Garden Holdings Co Ltd built the massive Danga Bay project in 2013 and which sold out rapidly. [See: Forest City: The Latest Excitement in Iskandar]
From then on, almost all the major developers in the country were rushing to Iskandar but land cost started rising and it was becoming costly to build properties. So, when a few developers started downsizing their operations in Iskandar and sales bookings dropped by 20 per cent, there was speculation that Iskandar was going to collapse.
Ms Loh says: “Speculators bought properties ahead of the market and this drove prices ahead of its time. Iskandar is meant to be a long-term plan to attract homebuyers as well as to develop SME (small and medium sized enterprises) presence and build a strong education sector. All this takes time.”
Iskandar Malaysia is estimated to have 1.35 million people or 43 per cent of Johor’s population of 3.17 million by 2025. About 66 per cent of the population is expected to be of working age. Ms Loh feels the slowing down in Iskandar is short term.
“Malaysian properties will always be attractive to foreign investors because of the quality, spaciousness, relatively good infrastructure, pricing, forward-looking and innovative design, availability of quality education and healthcare.“
Meanwhile as debate rages over Iskandar, foreign investments are pouring in. In January, China’s Greenland Group has signed a RM2.4 billion (US$667,ooo) deal with Iskandar Waterfront City Bhd to develop the Tebrau Bay Waterfront City. And then there is Thomson Iskandar, a medical hub that Singapore billionaire Peter Lim and Johor crown prince Tunku Ismail Idris ibni Sultan Ibrahim are planning to set up. [See: Is the Bubble Going to Burst in Iskandar or Is there a Plan B?]
It would be unwise to rely strongly on foreign investment to pull up the property market in Malaysia. Or to hope for a Singaporean buying spree due to a weaker ringgit and stronger Singapore dollar like the one at the end of the 1997-98 crisis. That was when there was a growth in property sales in Malaysia and it was largely due to inflow of foreign funds especially Singaporean investment. The Singapore government has since January adopted a policy of slowing the Sing dollar appreciation.
Foreign investment in the property market in Malaysia alone is not enough. The supply-demand mismatch needs to be addressed and the fundamentals need to remain strong for the property market to remain vibrant.
Source: The Establishment Post