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Outlook 2015

By: Syamil Zahari

In Greater Kuala Lumpur, there are seven million inhabitants in 2014, up from 900,000 40 years ago, with 1.8 million homes and seven million registered vehicles. Employment in the area stood at 2.5 million jobs in 2010, and is targeted to increase to 4.2 million jobs in 2020.

“So you can imagine the logistics and infrastructure that this demands,” said CBRE Malaysia executive chairman Christopher Boyd.

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For instance, Boyd explained, the government is working on an RM50b MRT Sungai Buloh-Kajang line 141km, currently under construction. In addition, an RM7b LRT extension linking existing suburbs is also under construction.

“If you are looking for a residential property to invest, do get a hold of these plans, [and] do study the areas that will be best served by all these infrastructures,” Boyd advised.

He also highlighted a few major developments in the pipeline: the RM26b Tun Razak Exchange with 70 acres of masterplanned financial centre just outside the existing golden triangle, the RM5b Warisan Merdeka’s 118-storey building next to Merdeka Stadium, the RM30b Bandar Malaysia project, the 22-acre Pudu Jail Development, the 3,155-acre Kwasa Damansara, the RM 15b Naza KL Metropolis and the Jalan Cochrane development, to name a few.

For 2015, in the KL residential market, Boyd said, “we all know that market has softened in response to the cooling measures introduced by last year’s Budget. Because DIBS (Developers Interest Bearing Scheme) was taken away, there was a new focus on secondary markets because financing for these properties became pretty much the same deal as financing new properties.”

He added, “We have already heard complaints from developers that sales this year has been tough, and many developers tell us cynically that they have to sell every property twice because the first buyer can’t get his mortgage.”

However, Boyd pointed out, the Greater KL residential supply has actually been dropping since 2006, while the demand is robust yet. “You’ve got the pressure of demand from young, employed people, waiting and saving to buy a property at the right time. Nobody is going to wait forever,” Boyd said, and he believed in 2015 the secondary market is going to start creeping up.

While total incoming residential supply increased by 8.5% in 2013 for Greater KL, new completions and new starts decreased by 13.8% and 18.3% respectively compared to 2012. “Of course, more supply will stabilise prices to some extent, but at the moment there is actually more demand than supply,” Boyd said.

“I think developers will become impatient to launch developments. Probably by first quarter of next year, there will some very successful launches and this will encourage developers to turn on the tap a little bit more and come back into the market next year. I think, for next year, I’m not pessimistic. I think it’s going to be quite a strong market with a number of new developments and new phases coming into the market. And we may by the middle of next year be on a moderate growth curve once again, despite GST and the rest of it.”

Malaysian property still enjoys strong demand, according to Boyd, and it has generally trended up over the past five years. The residential market is still not volatile, and the steady demand is driven by a focus on home ownership, as well as favourable demographics and affordable prices.

In the later months of 2013, the percentage of loan approvals to applications dropped to 49%, “which was a pretty miserable number,” Boyd admitted, “But we note that the first half of this year, it has risen to 52%.”

This could mean that the consumers are not going around applying for loans anymore, said Boyd, “but I think the quantum of money approved hasn’t dropped, which is a good indication that the market is still very solid.”

For 2015, Boyd expects increased competition among developers. “Developers are turning to smaller, niched projects…that require less capital, and therefore you have many new entrants in the market.”

He added, “Developers are becoming more selective, with better market research, more tuned in and turned on to what the consumer wants and there are a lot of efforts being put into delivering values for money.”

In essence, Boyd believed the fundamentals for the Malaysian property market are still very strong. “We’ve got a young, industrious population, almost full employment,” he said. “I don’t think this is the time for pessimism.”

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Boyd’s sentiment was echoed by property guru and author Faizul Ridzuan. “If you look at loans applied for Q3 2013 and Q4 2013, the loans applied dropped by 8%. Commercial experienced more slowdown, a 19% drop quarter-to-quarter,” Faizul said. “So the overall loans applied went down by 12%.”

However, surprisingly, loan approvals for residential has only dropped by 1%, Faizul pointed out. For commercial properties, while the number of people interested in applying for loans has dropped by 19%, loan approvals actually only dropped by 3%. “So in term of overall approval, it is only a 2% drop,” he said, “So, to me, this is a clear indicator that interest in properties has gone down a bit.”

Examining the Q3 loan approvals, with RM38b loan approval in 2011, RM38b in 2012, RM46b in 2013, and RM45b in 2014, said Faizul, “In my opinion, our peak cycle for property market was back in 2013. We are experiencing a slowdown, without a doubt, but because the interest is lower. But the slowdown is not as bad as people think.”

Property transaction will go down further, but property value will rise, he believed. Three indicators, in his opinion, point to a healthy 2015.

First is the national jobless numbers. “If you look at our unemployment rate, as of now, it’s at an all-time low – it’s less than 3%,” he said, reasoning that “when people have jobs, they will have income. If they have income, they will able to buy properties. If you look at income per capita, it’s actually increasing. So in that sense, we are quite healthy.”

The second indicator is the strength of the banks. “If you look at non-performing loans (NPL), it is at 1.4%. This is very, very, very low. Our loan-to-deposit ratio is actually better than when it was in 1997-1998. In 1997-1998, it was 1:1, which means that if a bank has RM1, it’s lending out RM1. If you cannot pay, then the bank will fail. Now, the banks are lending less than their deposits.”

Looking at consumer deposits in 2009 versus 2014, too, the overall numbers have gone up 16%, Faizul explained. “So while we have a growing household debt, which has been repeatedly highlighted, we also have growing deposits. Bottom line is that there are a lot of people with a lot of cash.”

His third indicator is the movement of interest rate. “Interest rate was highest during the financial crisis of 1997-1998,” Faizul said. “The reason we went through a property crash in 1997, among other things, is that we drastically increased the interest rate. As long as that is not happening, and it doesn’t look like it will, we’ll be quite okay.”

Meanwhile, according to Boyd, remarking about the KL office market outlook in 2015: “Are we oversupplied? Yes, a little bit. Is it going to get worse? Yes, a little bit.”

The total office supply stands at 95.5 million sqft in Greater KL as at Q3 2014, and future supply at 23 million sqft by end-2017, “which is, yes, more than we need but not dramatically so. There really were times I’d seen vacancy rates at 30%, but at the moment we are at 15-16% and we figure it won’t go above 20%. So it’s not life-threatening.”

A very important statistic small investors need to know is that, of the 23 million sqft office space that is being developed, about a quarter of that is in the small office format – SOHOs, SOVOs, and so forth.

“If you’ve got one of these, and it’s nearing completion, you’ve got to think very hard whether you want to sell it and whether you are prepared to hold onto it for medium term, and you’ve got to ask yourself whether it is really going to let for office space or can it be also adapted for residential occupation,” he said.

In terms of retail space in 2015, according to Boyd, “it is expected that the best-located and performing malls will sustain, while others will have difficulty maintaining performance levels. While retail continues to be a preferred sector for both local and foreign investors, but few assets are available for sale. The suburban retail market has become much more competitive, and focus has shifted back to the city centre market.”

However, net revenue for most centres are impacted by service costs are going up due to rising utility costs and the spillover effect of other increasing costs. “With recent increases in gas, electricity and other costs, hike in interest rates in July 2014 and GST to be implemented in April 2015, retail spending is unlikely to grow significantly. This will have an impact on the overall retail market, and those centres able to best match offers with consumer demand will thrive,” he reported.

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