National Property Market Report – Special Focus

Property market is SOFT but they are not grim

Buying properties at uncertain times seems like an impulsive idea but the recent Bank Negara and NAPIC 2015 Property Market reports indicate that purchasing properties during this time may do buyers some good. Too much focus on the negative side of business has impacted perceptions of Malaysians in general. The market is soft, no doubt but they are not grim and measures are being taken to offset possible losses in favour of buyers and developers. Here is Property Insight’s take on what’s in store for buyers and developers in the property sector this year.

OVERVIEW

According to the NAPIC (National Property Information Centre) 2015 Property Market Report, Malaysia’s property market has indeed slowed down indicated by decline of 5.7% in volume and 8% in value. Reasons behind this declining trend point towards an economic slowdown, drop in global crude oil prices, softening consumerism, business sentiments and credit restrictions.

Financial institutions are basically urging investors to modify and adapt their expectations to the buying patterns in the market for the year ahead but to avoid a major hiccup, Bank Negara Malaysia had instated a cooling period in 2013, implementing several measures that soften the blow to the market. They include preventing pre-approved financing products, reducing home loan tenures from 45 years to 35 years and other anti-speculative measures that placed a speed bump on the climbing prices for residential properties.

The Malaysian House Price Index was increasing at an average rate of 9.6% for the past 5 years but growth only increased by 5.8% at Q4 in 2015. Repercussions of the measures witnessed reduction of 10% in loan applications and 14.6% in loan approvals for residential properties while non-residential declined by 16.8% in loan application and 24.6% loan approvals compared to 2014.

The tightening prevented consumer credit, ability to finance and borrowing thus avoiding any speculative bubbles to float around. Credit crunch by banks are inevitable during this period hence we see a higher loan rejection rates but the banking institution is only doing what it can to safeguard its interest instead of suffering from losses due to defaulted loan payments or non-salability. This however does not mean that one can never apply for loans until the market balances itself out. Housing loans are getting approved so long borrowers show a good credit rating on their behalf.

Finance consultant and CEO of GM Training Academy PLT Miichael Yeoh advises home buyers to conduct a mortgage planning and have a contingency plan to pay loans for 6 to 12 months before applying for housing loans.

The property market is resilient compared to the 1997 Asian financial crisis – during which the index slumped 39% between 1997 and 1999.

REI Group of Companies CEO Dr Daniel Gambero says the planning of Greater Kuala Lumpur has given birth to targeted developments in key locations and this contributes as a major factor that prompted the increase in house prices.

Despite a slowdown in transaction, property prices did not decrease because the potential of locations within Greater Kuala Lumpur still holds positive prospect for buyers and investors in the long run.

Additionally, the completion of the MRT Project and extension of the existing Light Rail Transit (LRT) Line is bound to connect millions of people within Klang Valley, forecasting a steady increase in housing price index in the second half of this year.

NAPIC figures indicate an increase in overhang units. Records show over 16% increase in volume and 56% increase in value at the fourth quarter of 2015. Basically, the increase in values percentage hovers around the luxury residential units that remain unsold due to their pricing schemes.

This does not look good for developers who specialise in luxury units as they are now forced to stop new developments and clear their existing inventory of completed projects. This scenario is already apparent since the beginning of last year as we saw lesser property launches. The number of new launches has dipped by 19% against 2014 as the market softens. They can expect to continue experiencing a slow run at least until infrastructure projects like MRT and LRT are fully functional. Analysts are expecting the market to slowly gain pace by the end of the year, with some predicting it to be active again after July 2016 and regain full balance by 2020.

As far as the commercial sector is concerned, records point to an overhang of 15% in volume and 50% in value due to reduced business activities to compensate for possible losses during a bad economy.  The sharp depreciation of Ringgit coupled with weak economic sentiment resulted in numerous businesses cutting cost hence the cautious sentiment behind this sector.

RESIDENTIAL FLOAT

What home buyers are looking for are houses that are comfortably laid out (doesn’t translate to spacious) between the range of RM250,000 – RM400,000 at a location that is connected by simple infrastructures. With today’s economy, RM500,000 is deemed affordable, or at least that is what the working middle income group – who make up the bulk of home purchasers – are forced to think while their salaries tend to suit properties priced below RM350,0000. According to the NAPIC report however, strong demand for residential properties below RM500,000 is steady and expected to sustain throughout the year.

Deputy Finance Minister Datuk Chua Tee Yong says 80% of property transactions in 2015 were for homes below RM500,000 and we expect more demands for such properties.”

Knight Frank Asia Pacific research head Nicholas Holt echoes this sentiment.

“Affordability is becoming a key word to end users. Luxury units especially those in Klang Valley and Johor are experiencing a dip in sales. Developments in the pipeline need to make adjustments to focus on affordable condominiums and landed properties below RM500,000,” says Holt.

Interestingly enough, Kenanga Investment Bank Bhd head of equity research Sarah Lim, in a recent forum says there is mismatch of supply for residential properties and only 35% of upcoming properties cater to middle income group even when the demand for it is strong.

Affordable development comes with several caveats for home buyers; you either settle for a tight spaced area within your preferred destination or you purchase properties that are located out of the way.

C H Williams Talhar & Wong Sdn Bhd (now known as CBRE-WTW) managing director Foo Gee Jen however says that building affordable homes must be within reachable means as its counter intuitive to build homes in faraway places that adds on to the cost and stress of commuting to and fro.

Developers have been developing their land banks at second tier areas such as Semenyih (UMLand), Kota Kemuning (Dijaya, IJMLand, Tropicana), Rawang (Mah Sing) and Sungai Buloh (KLK). Homebuyers in search for their dream landed properties to start a family with a medium budget can look into those options nevertheless if commuting is not bothersome.

That said, some Malaysians have also kick started an interesting purchase trend where they get their first property at the outskirts and subsequently one that is of closer proximity to the city amid higher income and borrowing capacity.

Kelly Ng purchased her first home in Rawang in 2011 and only recently begun searching a property that is closer to the city as her spending power along with the rental pressure of her current property, increases.

Based on the NAPIC report, residential rental market generally showed an upward trend, boding well with people like Kelly who wants to rent out existing units in favour of properties of their desires.

Affordability of property is an important game plan on the government’s agenda as highlighted in the government 10th Malaysia Plan (2011-2015) and the initiatives are likely to be extended through the 11th Malaysia Plan as well.

This is significant piece of good news for affordable home buyers and the government is fully aware of the property market situation. That is why PR1MA was introduced offering homes at 20% below the market rate.

Property gurus and investors claim that this is the best time for Malaysians to grab the opportunity of purchasing their first homes as there are several schemes besides PR1MA, like the Youth Housing Scheme and the Rent-to-Own to assist their purchases. Other programmes like the Private Affordable Ownership Housing Scheme (MyHome) and the My First Home Scheme are also intended to ensure the average Malaysians can afford a home. Each of these schemes come with its own fine prints so homebuyers’ due diligence is important.

DEVELOPERS’ DILEMMA

It may not be a great year for developers but as mentioned the property overhang has to be addressed moving forward. The value of the overhang largely rests on high-end luxury properties and developers have to approach the market cautiously considering the fluctuation of Ringgit and unpredictable tractions. Selangor and Kuala Lumpur have taken measures to mitigate the 2015 property overhang by halting permits to build luxury units in both states. These actions prevent the mismatch of supply from developers.

To sell, developers are forced to be more creative to attract buyers. Promotion packages, which include significant discounts, tend to be the headline grabber for buyers. The reality of slow economy means people are becoming overly cautious in buying properties. Deferred payment schemes have become increasingly popular to counter that. This package allows consumers to claim the remainder of deposit and differential sum through installments between 18 and 24 months from completion of their sale and purchase agreement (SPA). Have you heard of Free Stay @ No Pay campaign byIJM Land Bhd? This one allows buyers to stay for free for up to 12 months upon vacant possession including a zero-interest installment scheme.

Sunway Bhd has also come up with creative schemes offering up to 88% financing to homebuyers. For those unable to secure loans from commercial banks can obtain guaranteed loans from Sunway. This is coupled with voluntary exit plan that gives buyers the option to terminate the SPA as if they are facing financial difficulties. Tropicana Corp Bhd’s Just Bid It! campaign allows buyers to put a price tag on properties they are interested in with a celling price set by the developer.

As buyers, we want something, which has high market appreciation but everyone is trying to find ways to purchase properties below bank value. The auction scene, once quiet, has turned competitive and often fills up quickly. Developers cannot runaway from this trend, hence they bundle together schemes with heavy discounts and price rebates on top of such trends to lure in buyers. Though prices have not fallen, properties are being sold between the range of market value and bank value because buyers either cannot afford or unwilling to purchase anything at market value.

COMMERCIAL’S SURVIVABILITY

Shopping comes second nature to most Malaysians. With the weakening currency, retail tourism has certainly picked up, especially with the increase in foreigners’ spending power. With existing malls packed every weekend, new malls are also sprouting everywhere and the NAPIC report states an improvement of 0.4% in this sector.

Foo, however, warned older neighborhood mall might witness a slight dip this year although the retail sector is slated to maintain its high occupancy rate. The outlook for retail remains in the hands of shoppers and tourism.

In a nutshell, a lot of expectations are being put into the second half of the year. Most experts including the Finance Ministry are expecting a steady recovery of the economy towards year end. We believe the property sector’s market activity will remain moderately active and stable in certain key areas like affordable housing. The weak Ringgit although may not sound sexy has had some positive impact on the retail and industrial sector growth with investors finding fruitful investment opportunities here. How the market absorb the property overhang this year would set a direction for upcoming years in terms of new launches and pricing index.