Forget about 2015, says this real estate expert about the property sector. Best to put this annus horribilis behind us and look ahead to better times in the second quarter of next year.
ARE you currently renting or looking to rent? If you are, there might be some good news for you on the horizon.
Rental charged for condominium units is expected to drop by 20% to 40% due to an oversupply: as more and more of them become ready for occupancy and come onto the market, buyers are finding it difficult to sell their units for a good price and are being forced to rent them out for much cheaper than usual.
Siva Shanker, the immediate past president of the Malaysian Institute of Estate Agents (MIEA), says he is absolutely certain that for the next one to three years, the biggest winner will be the rental market.
“The guy who wants to rent will suddenly be able to find a nice, brand new condo with facilities for half the price it should actually go for,” says Siva, who is also the chief executive officer of PPC International Sdn Bhd, a property consultancy and real estate group.
This, he says, is because in 2012, 2013 and 2014, many properties were bought on speculation by those wanting to flip them – sell them – as soon as they were ready to be occupied.
And a lot of these condos will be ready at the end of this year and in 2016 and 2017.
These flippers, he says, did not put any of their money down because they took out a 100% housing loan (lending regulations were less stringent then) and also took advantage of DIBS, the developers’ interest-bearing scheme, in which the developer absorbs the interest of the housing loan during the construction period.
“They probably bought these units on the advice of some ‘property guru’ whose skills and credentials I would question.
“These investors clubs made a mess by telling people to buy, say a RM600,000 unit, as they would be able sell it off for RM900,000 in three years’ time when it is ready. So that fellow (the flipper) thinks he can make RM300,000 out of thin air. He only bought it because he took advantage of the DIBS and the 100% loan. Otherwise, he wouldn’t have been able to buy.”
Siva says a lot of properties that were bought in this way in 2012 and 2013 are going to become ready and available at the year-end and in 2016.
That is when the problem starts. Because with the property completed, the DIBS comes to an end and the housing loan kicks in, so the buyer will now have to start servicing his loan.
Because of the economic slowdown, the political uncertainties affecting sentiment, and the tighter banking regulations now, the buyer who bought a unit with the intention of flipping it right away might now find it difficult to sell even if he drops his price.
“He wants to sell it at RM900,000 but there are no takers at that price, so he drops the price to RM800,000 and still there are no takers, down to RM750,000, RM700,000, still no takers, and now he is at RM650,000, which is dangerously close to how much he bought it for, and he is panicking like mad.
“The bank doesn’t care if the market is good or not. You still have to pay the bank loan,” says Siva.
Siva says some buyers might end up losing their properties because they can’t pay their loan instalments and it becomes a non-performing loan (NPL); some would struggle but somehow manage to service their loan; and then there are those who might choose to rent out their unit rather than sell it at such a low price.
“The buyer (flipper) might ask for RM3,500 rental but not get it, then he’ll drop the rental, then drop it and drop it again to RM2,000 or RM1,500 ... so it will be a renters market,” he says.
However, Siva stresses that it is not the entire housing sector that will be affected by lower rents; this would apply only in selected speculative sectors.
“I think it will be with the RM500,000 to RM800,000 condos, the high-end residential condos and shoebox units like SoHo, SoVo and SoFo, which have been built by the dozens,” he says, referring to different types of small commercial units, the small-office-home office, small-office-virtual-office, and small-office-flexible-office.
He expects projected rentals to drop by 20%, 30% and 40%, adding that these projected rentals were already a bit too high to start with.
However, Siva does not think there will be a massive non-performing loan problem as in the 1997-98 financial crisis.
“My opinion is that even though the rent might not cover their monthly instalment, at least it’ll cover half, and they ll top up the other half.”
As for those wanting to buy homes, Siva advises looking further afield because land that can be developed in the cities is scarce and very pricey.
Even during the current economic slowdown, prices of property in the Klang Valley have not come down, he says.
Nevertheless, Siva claims, even though all the data is not in yet, he can tell that 2015 will end up looking like a bad year for the property sector.
This is the case, he maintains, even though there was actually a slight improvement in the volume of transactions in 2014 compared with 2013.
“It was very small but an improvement, nevertheless. All of us thought ‘great, the down side is over’. ”
Then, for the first three months of 2015, people were like “ostriches who dug their heads into the sand and stood still”, as buyers refused to buy and sellers refused to sell because of the GST.
“We thought ‘Okay, everywhere in the world it was the same human reaction when the GST was first introduced’.
“We predicted that through April, May and June, the market will get used to the GST and learn to adapt, and learn it’s not the end of the world after all. It’s just a bit tough but let’s get on with things.”
But, he says, just as people were getting used to the GST, the 1MDB issue “cracked open”. And when the Wall Street Journal published the report on money (RM2.6bil political funding) going into Prime Minister Datuk Seri Najib Razak’s personal account, people panicked and there was a bit of a halt in the property market, Siva says, adding ruefully, “Malaysians constantly have knee-jerk reactions.”
So the recovery the experts were expecting to see in the third and fourth quarter did not happen.
“We are now into the final quarter of the year. I do not believe we will see an improvement,” he says.
“What we have to do is write off 2015 as a bad year and put it in our pocket and forget about it. And say to ourselves that life cannot end. It must carry on.
“Let’s just ride this out, and let’s start all over again with vigour next year.”
He predicts there will be a bit of interest coming back in the first quarter of 2016 and that in the second quarter, the market will be just about ready to recover.
Debating DIBS for the property market