Earlier this week, property consultancy Knight Frank said global companies are delaying making leasing deals in the Asia Pacific.
That does not bode well for Malaysia, in particular the Klang Valley, with its many top-notch offices being developed today.
Despite comparatively lower rental rates when compared with other regional capitals, occupancy here has been sliding over the years. The Covid-19 pandemic and the subsequent movement control order (MCO) has raised many questions on where the property development sector will be heading.
The magnitude of Covid-19 impact on the national economy -- and on real estate -- depends on the duration and spread of the outbreak, economists around the world say. National Property Information Centre (Napic) earlier this week echoed this.
In short, nobody knows where the market is heading – not the best central banker nor the cleverest economist or the most brilliant property consultant.
Our enchantment with taming inflation – where prices rise – has reversed. Today, the fear is deflation, where prices spiral down. We saw that with oil prices recently.
With the total property overhang across all segments at RM41.5bil, that effectively means RM41.5bil stuck to the ground. Unless there are buyers, this represents a loss for developers. Although the oil price plunge is not a good analogy for property prices, there are similarities other than the fact that one is a commodity and the other is man-made.
Oil is best left stored in the ground, but something has got to be done about recovering RM41.5bil worth of property. Both are in abundance today and both lack demand, and in the case of property, effective demand.
The property development industry runs on chalking up sales each year. It is a high-risk industry. During the good years between 2011-2013, some developers are said to have reaped profits of up to 40% or more.
Today, profits are in the single digits, or about 10%, a developer with a project in Melaka says. If it is in the single-digit range, then what that means is if anything goes wrong – if no proper research on feasibility and market studies are conducted and even if they were – profit margins could be erased.
There have been references to the 1997/98 Asian Financial Crisis, where the transaction volume was down by a third and prices by a quarter. The pandemic is not about economics, although it has spawned an economic crisis.
Developers can survive over the short term with losses, but they cannot function without cash flow. An overhang represents cash stuck to the ground, and RM41.5bil is a lot of cash stuck.
> Total overhang – defined by Napic as comprising unsold completed houses, shops and industrial units fit for occupation – amounted to RM41.50bil as at Dec 31,2019. Housing and serviced apartments formed the bulk, at RM33.86bil. The scary part is that the serviced apartment overhang continues to rise. It is up by nearly 51% in volume and 65% in value against 2018. Serviced apartments are built on commercial land, where utility charges are higher. Johor recorded the highest serviced apartment overhang. It also has the highest residential overhang. Together, they total RM16.26bil. The bulk of these units are in the state capital of Johor Baru. This excludes units which are unsold under construction, which will swell the overhang even more. Other states with high unsold completed residential units include Perak and Selangor.
> Residential transactions amounted to 209,295 in 2019, valued at RM72.42bil. This represents a 6% rise in volume and 5.3% rise in ringgit versus 2018. Most of these were direct negotiations between owners and buyers, known as the secondary market. Last year’s Home Ownership Campaign (HOC) brought in RM23.2bil. The bulk of these were developers’ units, or the primary market. Moving forward, there are talks about bringing back the HOC to cushion the Covit-19 impact. Rebates and freebies were the highlights of the HOC. Having another HOC may mean higher rebates, which brings us to the issue of transparency. Net prices less freebies should be stated in sales and purchase agreements, without which all record-keeping by Napic would be rendered meaningless. When real prices are not stated, buyers may borrow more than the actual house price, which puts bank and lending institutions at risk.
> Although total properties from all segments rose progressively between 2015 and last year, in the residential segment, the overhang dropped in 2019 versus 2018 in both ringgit value and volume. But it is not the time for cheering. It dropped because developers exercised more self-control compared to the heady and exuberant years from 2011 right up to 2014/15. Construction activities remained at a low as completion, starts and new planned supply declined. Nonetheless, many took the opportunity to bring out new products during last year’s HOC, besides trying to offload old stock by giving cash-back offers, rebates and other freebies. Of the 60,000 housing units launched in 2019, about 40% were sold with the sale and purchase agreements signed versus 34.6% of the 66,040 units launched in 2018.
> There were a total of 25,654 transactions from the primary and secondary markets worth RM28.99bil in 2019, an increase of 7.2% in volume but value declining by 1.8%. Selangor contributed 25% of the transactions with 6,394 units, followed by Kuala Lumpur (15.5%) and Johor (14.4%). Putrajaya had the least number of transactions, at 23 units (0.089%). Serviced apartments and small office home offices (SoHos) formed the bulk of the transactions, 9,741 units out of the 25,654, or 38%. Property development is such that there is generally a steady stock of units being completed at some future date. These may be work-in-progress and future planned supply. Collectively known as future supply, up to 70% of this future supply are serviced apartments.
> While residential overhang was reduced in 2019, there was a big jump in the commercial segment. A 40% to 50% jump in units and value versus 2018 is worrying. Up to 17,142 units, or 68.45%, are serviced apartments. Developers launch serviced apartments because they pay big money for commercial land. To make these units profitable for themselves and affordable for buyers, they “cut” the built-up areas small, from 500 to 1,000 sq ft. Buyers pay commercial rates for utilities; about 25% to 30% higher than residential rates. Many buy without being aware that there is a huge carrying cost. At the same time, these units fetch a higher rental rate. Owners, therefore, rent these units out on short-term stays via Airbnb to obtain income. Johor leads in the commercial overhang segment with close to 14,000 units. Of this, 12,207 units (87.2%) are serviced apartments. Selangor and Kuala Lumpur come in second and third.
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