Rebalancing the housing market

PR1MA house in Putrajaya

Napic: Authorities and developers need to address the overhang situation

AFTER making a profit of RM1mil from the sale of a property he lived in for a decade, Joe went house hunting.

Most of the properties he saw were completed in 2014 or 2015.

Some were tenanted, others left unoccupied the last two to three years.

After seeing about 20 properties, he settled for one that cost slightly less than RM1mil.

“It’s a buyer’s market, so maybe I can get the agent to negotiate it down to RM950,000,” he says.

Joe is not the only one looking for a good deal. There are others, but the appetite for anything in that price range has dwindled compared to previous years.

Around the city and the suburbs, most high-rise units cost about RM1mil. Some of them remain untenanted and unoccupied for up to three years. While owners try to rent or sell their units, developers are also struggling to sell their completed units. These completed unsold units are collectively known as a property overhang.

According to the National Property Information Centre’s (Napic) latest Property Market Status Report for the first quarter of 2017 (1Q17), launched units of condominiums totalled about 30,000. It comprises a third of total residentials launched.

PR1MA projects: (above) Abdul Mutalib unveiled plans in June to raise RM5bil to finance 89 of PR1MA’s executed projects nationwide.
PR1MA projects: Abdul Mutalib unveiled plans in June to raise RM5bil to finance 89 of PR1MA’s executed projects nationwide.

A cumulative figure, it includes units launched for the quarter under review and from previous quarters. About 5,000 units remained unsold, double that of a year ago, when there were 15,000 condominiums launched.

Serviced apartments are excluded. Starting 2016, Napic excluded serviced apartments from the residential sector. Serviced apartments are built on commercial land and are now categorised as commercial properties.

A third of the total residential overhang, or 28%, are condominiums.

The research head of a property consultancy says the current residential oversupply is “the longest” ever. “Anything above RM700,000 is hard to sell. Developers are realising that now.”

“It takes time for developers to scale back on prices because they have already submitted their plans. They have to re-submit them if they want to lower prices because it will mean new designs/sizes,” she says.

A Napic source says they have been telling the various authorities their concerns about the ballooning overhang since 2015.

“We have presented the numbers to different economic councils but developers keep pumping more and more units into the market and these new launches are priced at RM500,000 and above each. At the end of the day, we can only keep on telling,” she says.

Trapped mode: (right) Lee says the housing market remains trapped in a consolidation mode on a weakening bias.
Trapped mode: Lee says the housing market remains trapped in a consolidation mode on a weakening bias.

Overhang issues

According to Socio-Economic Research Centre executive director Lee Heng Guie: “After two years of decline (-12.8% in 2014 and -4.2% in 2015 respectively), total residential overhang surged 30.7% to 14,792 units at the end of 2016.”

This 14,792 units exclude the overhang situation in serviced apartments, which, since 2016, have been considered as commercial properties. If serviced apartments were included, the overhang in terms of units/ringgit value would be higher.

Lee says 1Q17 saw completed but unsold residential units totalling 17,809, a rise of 45.2% compared to the same period a year ago (12,268 units).

This shows that the housing market remains “trapped in the consolidation mode on a weakening bias,” Lee says in an email. Sentiment remains “weak and cautious”.

Transaction volume declined further by 5.4% year-on-year in 1Q17, at a slower rate of decline compared to -13.9% in 2016. In ringgit value, transactions rose marginally by 0.9% as at 1Q17 after contracting 10.7% in 2016 and 10.5% in 2015.

The value of the overhang jumped 74% to RM8.56bil in 2016 from RM4.92bil (excluding serviced apartments overhang) in 2015.

Over a 10-year period, the overhang value jumped more than 100% from RM4.48bil in 2008 to RM10.08bil as at March, 2017. Although the number of residentials launched have dropped compared to 2008, the overhang value has risen dramatically, due to high property prices. If serviced apartments, which have a residential element to it were included, the percentage increase would be even higher.


What is to be noted, says Lee, is that houses priced RM200,000-RM400,000, considered as affordable range, make up 28% of total overhang as at 1Q17, rising from 25.4% at 4Q16.

“This calls into question why affordable housing are not selling well,” Lee says.

Lee also noted that the overhang for this price range has been trending high recently. In 2014, they make up 26.7% of the total, rising to 31.6% in 2015 and 25.4% in 2016.

This reflects the general cautious mode of buyers, dampened by high cost of living, job worries and (lack of) income growth due to the softening economic conditions in recent years, he says.

“Even at this price, it remains out of reach for the first-time buyer. Reasons cited for the poor take-up rate or rather hampering sales are inconvenient location, lack of basic amenities, poor planning as well as the first-time buyer’s difficulties with down payment,” says Lee.

“Where do we go from here? Clearly, the relevant agencies and developers must coordinate in the planning of supply to manage the overhang. Besides helping to facilitate the end-financing such as higher loan eligibility for civil servants, step-up financing for PR1MA housing and lower stamp duties, the supply dynamics need to be reviewed.

“This is not about supplying more if there is no genuine demand or the location is not supported by public amenities, good public transport mode and connectivity,” Lee says.

PR1MA initiative

This brings to mind Perbadanan PR1MA Malaysia’s mandate to build 500,000 units of affordable housing for the middle-income group with a monthly household income of between RM2.500 and RM15,000. They are viewed as the unfortunate ones who have been priced out of the property market as a result of rocketing prices after the 2008 financial crisis.

Its chief executive officer Datuk Abdul Mutalib Alias unveiled plans in June to raise RM5bil to finance 89 of PR1MA’s executed projects nationwide, comprising 89,449 units of homes with an estimated gross development value (GDV) of over RM23bil.

PR1MA was established in 2012. Besides PR1MA, other agencies and state local authorities are also mandated to provide affordable housing. But because land is a state matter, different states have varying criteria as to what constitutes affordable housing and illegibility of applicants.

Balancing the current affordable housing focus and the prevalent “acute” overhang is tough but the issue has to be addressed, says Lee.

Otherwise, the overhang will exert pressure on prices and rental in an economic or financial crises.

In some locations, that pressure is already being felt. Agents specialising in the rental market in Kota Damansara, Petaling Jaya say the majority of owners want between RM2,500 and RM2,800 a month for their fully furnished studio or one-room units.

“Some owners have dropped their asking rental to RM2,000 but there is no demand. They may have to lower the rental by about 30% to RM1,700 or RM1,800,” says an agent. He says the project he is specialising in is about 10% to 20% occupied and was completed about two years ago.

Global binge

Lee says that given the substantial launches in previous years which have entered – or will enter – the market this year and the next, the re-balancing cycle will take time to adjust, according to supply-demand market dynamics.

“As long as there is no significant policy shock such as high interest rates, high unemployment and loss of income, the overall residential market should remain stable, but challenged. But there must be a will to clear the overhang units,” he says.

The amount overhang in the residential segment – numerically and in ringgit terms – underscores the massive property binge which gripped the world the last several years.

The property sector is cyclical in nature. Like any private businessmen, developers will make hay while the sun shines. The last several years was no different. This was around 2009/2010 period. The property boom came on the heels of the 2008 Global Financial Crisis. Massive asset purchases around the world, coupled with innovative marketing strategies in Malaysia, fuelled the boom.

Many entered the market, encouraged by low interest rates after 2008. The period also saw new players entering the sector at a time when buyers view properties not as homes but as investments which they can flipped with 25%-30% profit on completion.

The appetite for properties was not limited to Malaysia as Malaysians join the flood of Arabs, Chinese, Singaporeans and Russians to diversify from their home country. For Malaysians at least, the interest in bricks and mortar between 2010 and 2014 was unprecedented. Today, global politics and economics and social factors have turned against the sector.

China has put up barriers against big-ticket purchases, which is expected to impact the built-up of residentials in Malaysia and other destinations of this capital flight. Banks are scrutinising purchases as they put the brakes on money laundering activities.

Australia and Britain have – or planning to – raise taxes to deter foreign purchases in order to steer developers to focus on social and affordable housing. And like other countries, the last couple of years, the focus of the government has been on social housing.

Lee says: “The government is caught in a tough balancing act to ensure the adequate supply of affordable housing while safeguarding the orderly development of the market, especially on keeping a tight rein on house prices so that it is not out of line with economic fundamentals.”

Lee says housing is an essential sector of the economy. It has also been the source of vulnerabilities if there is a sharp correction in house prices or an over-valuation of house prices.

“It is, therefore, crucial to keep an eye on current housing market developments to prevent them from over-adjustment in terms of prices.”

Property consultancy Khong & Jaafar managing director Elvin Fernandez says the market as a whole is migrating from housing above RM500,000 to those below that threshold.

Household income, or more specifically, the part of the household income that can be set aside for home ownership or investment, has been shrinking rather than increasing as a result of the rising cost of living.

Developers had been banking on increasing effective household incomes – as they had in previous years – but this is not happening anymore.

The tide has changed. But for developers to shift – and to shift fast – is not easy since carrying land costs, which refers to the cost of holding land which they had bought earlier, are high. The established levels of land costs, for land banking, are also high.

The last couple of years, when transaction volume eased, has been painful for developers.

Reality, says Elvin, is setting in. They are also pushed by new rules for township projects by state governments who insist on higher quotas for affordable housing.

Profits are still there, but margins are squeezed, and do not commensurate with their risks, says Elvin.

Three things can be done. First, reduce compliance costs – which has been rising substantially – to as low a level as possible.

Second, focus more on the use of industrial building systems, a new and more sustainable form of building technology that cuts labour and time. It is not an easy task, but a much needed one, says Elvin.

Third, those involved in the sector need to bear in mind that developers play an intermediate role in the economic system. Any impositions on them will land up on the buyers’ plate.

If these issues can be addressed holistically, land costs (land for development purposes) can be brought down over the medium to long term, Elvin says.

As for the rise in unsold properties, he says, it is “not that serious”. It will adjust as the country moves forward.

Elvin explains that the current soft residential market may persist for some time as there are structural issues in the industry.

“This is not a cyclical low. It is also a structural low. And that was not the case in past crises. However, there are inherent strengths in the residential market. Houses are owned by a very large number of people who do not act in concert and sell based on current overall economic conditions.”

“Most owners, forming the majority, have the holding power. Therefore, the market will not shake easily nor descend in price rapidly,” he says.

There may be pockets of residential properties that may gradually sink below current levels but the market as a whole is likely to maintain at current levels, unless there are big events that happen outside the country to severely shake confidence. If there were a large group of speculators – large in relation to the total – they could, at times like this, emerge and sell in concert and then that could pull the prices down in an extraordinary way. But Bank Negara intervention, through their policy design, has contained the speculative element.

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