BUILDING a sustainable economic growth model also means allowing it to be commercially driven. The private sector should be left to manage areas where it has proven itself capable of running it better than the public sector.
Ideally, the government should get its hands dirty in non-profitable ventures such as financing and owning public transport systems, ports or railway lines. It should stay out of businesses that are already being well managed by the private sector.
For instance, commercial property development is a profitable venture and the private sector has a track record of managing it well. There is no need for the government to dip its toes into building or owning commercial property such as office and retail space.
Towards this end, it is puzzling that the Finance Ministry is taking up a 51% stake in the company that owns the Exchange 106 in the Tun Razak Exchange. Even if the price was low and hard to resist, it should be left to the private sector to deal with,
When the government gets involved in owning completed buildings, the status quo changes.
The government gets easy financing terms, is able to let out the building at favourable lease terms, can use gentle suasion methods to get tenants and will not be under pressure from banks if the financial numbers do not work out.
The entry of the public sector into the ownership of large buildings exacerbates the already stretched situation of the commercial property market.
According to Bank Negara, one in three buildings in the Klang Valley will be empty in three to four years’ time. Anybody with a property today will tell you that the central bank is right on track with the warning.
The warning is for a good reason – to prevent the economy and financial system to come under stress due to the overhang in the property sector. The property sector contributes 10% to the economy and employs 1.4 million people.
Prior to the 2005 period, the contribution of the property sector to the economy was much bigger. The country tends to go through a recession when the property sector is in the doldrums. We witnessed it in 1985 and in 1997.
For instance, the office vacancy rate in the Klang Valley was less than 5% in 1996 before Malaysia’s greatest economic crisis. Space was tight and the Twin Towers was completed in June 1996.
After the Twin Towers came into the market, the office vacancy rate started to rise. It went up to more than 15% in 1997 and 20% in 1998. It hit a high of 25.3% in 2001, largely due to new offices being relocated to the iconic building or into other buildings in that area.
Since 1996, the office vacancy rate has never gone back above the 90% level, indicating that there has always been a surplus of office space.
In the first quarter of last year, the office occupancy rate was 23.6% and it is expected to hit 32% in 2021 – meaning one in three office space that comes into the market would be empty.
According to Bank Negara, 38 million square feet of office space is coming into the market between 2017 and 2025.
Based on past experience, when there is a huge oversupply of office space within a short period of time, the country tends to go into a recession. That is the fear of many who have gone through the dark times of 1986 and 1997.
Even in the current bullish stock market environment, there is a view that this could be the last hurrah before the bears set in.
Stock markets around the world are at new highs, looking toppish.
The 10-year US dollar yields touched 2.6% earlier this week, signalling that the Federal Reserve (Fed) is set to raise rates again when it meets next. The US is already undertaking tax reforms that are expected to boost consumer spending.
Inflation in the US, which has stubbornly been under 2% since 2011, is expected to rise – adding more credence that the Fed will have three rate hikes this year. This would cause an outflow of funds to the US and impact currencies in emerging markets.
This is unless emerging markets such as Malaysia also chalk up strong economic growth and offer better prospects for funds.
To overcome the situation being faced by property developers today, there is an urgent need for policymakers to come up with strategies, policies and even reforms to help the property sector.
There is a serious over-built situation in office and retail space. The government owning more iconic buildings is not the panacea to help resolve the over-built situation.
Policies that restrict the unnecessary building of office towers are needed. There are already suggestions for the policymakers to think about.
Banker Datuk Seri Nazir Razak has suggested that the government and its bodies should not be in the business of developing property.
In relation to this, even Khazanah Nasional, Permodalan Nasional Bhd and the Employees Provident Fund should relinquish their majority stakes in property-related companies. They have the added advantage of stronger financing but lack the drive and imagination of entrepreneurs. Ideally, these funds should remain minority investors.
Another suggestion comes from former stock-broker Tan Sri Chua Ma Yu. He has suggested that the government brings back the ruling of requiring office towers to be at least 75% owner-occupied before they can even start building.
Changing ownership of iconic towers is not the panacea to the ills faced by the property sector. Concrete measures and structural reforms need to be taken, and soon.