City & Country: Investment Forum on Real Estate 2014: Panel Discussion - ‘Not impossible, but improbable’ for housing prices to fall

WILL housing prices fall to more affordable levels? It is “not impossible, but improbable”, according to two property developers at The Edge Investment Forum on Real Estate 2014.

Prices of homes, whether on the primary or secondary market, may rise by at least 5% next year, they agreed. In the primary market, this is due to higher input costs and developers having to maintain margins. On the secondary market, it will be because of vendors raising their prices to match new launches.

“There are three types of GST: zero-rated, GST-exempt and the standard rate. With zero-rated tax, there is no input tax and output tax. How will it affect property? Residential property is tax-exempt, so we will still have to pay the input tax but we cannot collect the output tax. So, if the construction cost of residential properties is 60%, then that comes up to a cost increase of 3.6% or 4%, which we will still have to transfer to purchasers, but it will still be lower than commercial property, which is 6%,” explained Ong Pang Yen, Sunway Bhd property development division joint managing director.

He was one of the three panellists for the discussion, “Affordable housing — is it possible?” The others were Real Estate and Housing Developers’ Association (Rehda) president Datuk Seri Michael Yam and Master Builders Association Malaysia (MBAM) immediate past president Kwan Foh-Kwai. The discussion was moderated by The Edge Communications Sdn Bhd managing director Au Foong Yee.

The component costs of property development, the panellists said, have been rising over the years. They highlighted solutions that could theoretically reduce prices but concluded that these were unlikely to be implemented. The Goods and Services Tax (GST), Bank Negara Malaysia’s responsible lending guidelines and ever-rising construction costs featured prominently.

“So, will housing prices drop? Susah sikit la...” Ong quipped during his presentation.

Yam noted that the input cost of property development — comprising construction cost, compliance cost, funding cost and profit margins — has risen over the years.

“If contractors get a 5% consistent profit margin without risk of failure, it is already considered very good. Equity is quite low and the interim monthly payment helps to replenish funds upfront.”

Yam and Ong also talked about how design and integrated developments could be used to contain property prices. “Design cannot reduce cost psf, but it can maintain absolute value. Now the lifestyle is all about convenience. You don’t need a wet kitchen because only the maid uses it, and that’s for an hour a day. With an integrated development, you have all kinds of eateries at your doorstep so eat out!” Yam said.

Kwan, meanwhile, pointed out that prices of certain materials, especially cement, sand and bricks, have risen on the back of market liberalisation and constrained supply. These factors have weighed down on the profit margin of contractors,  which is about 5% during a good year with minimal “surprises”. Going forward, the GST and continuous easing of subsidies will exert more pressure on margins and raise the cost of development.

He also spoke of a need to innovate through technology, not only to control costs but also to upgrade the quality of products. “The whole industry needs to innovate, build high-rise homes. This means spacious and green, well-designed, with industrial building system (IBS), economies of scale...

“Smaller housing contractors need to sustain their margins. I am worried, if  there are less launches in the next two years, the state players won’t have enough jobs. So how can the property market be supported by a small number of indus players?”

Last but not least, Ong pointed out that in Malaysia, construction cost, which also includes landscaping and the building of infrastructure, accounts for 60% to 70% of development cost, followed by land cost, which takes up 10% to 25%.

Even if land prices were to fall — which is only possible with a credit crunch and other tightening measures like what happened in Japan over the past decade — property prices would decline by 5% at the most as land does not comprise the bulk of total housing cost.

However, the difference will become negligible with the implementation of GST, when a 6% tax will be levied on materials and labour.  This added cost of development will naturally be passed on to consumers to preserve profits, Ong pointed out.

“Developers would want more cost buffer to accommodate uncertainties so they will increase the price. If all developers do that, of course prices go up. So buy now, it is a golden opportunity. There is fear because of government announcements. Anyway, if you all don’t buy, developers need to keep their cash flow up anyway, so prices will rise. The developers will market their products as pre-GST prices and use gimmicks like Carlsberg girls!” Yam said.

On the build-then-sell model that the government plans to impose next year, the panellists argued that it would further reduce supply as smaller outfits would not qualify for loans from banks to start their projects, leaving only listed companies to fulfil market demand, which is well over 100,000 units per annum in Peninsular Malaysia alone.

“Compared with build-then-sell, the impact of sell-then-build — the banks finance all the construction cost from the day you sign the sale and purchase agreement to delivery. The charge is 7% per annum. Compounded, it’s very high. The bank does financing while you only put in 10% to 20%. We draw your bank loan at low margins of about 4%. We don’t pass the cost of bridging loans to you.

“We are telling the government it will cost more, and smaller developers cannot get loans because only around 100 companies are listed. The supply will be even less. We have not been able to meet the demand now as it is, so if we revert to build-then-sell, supply will drop by 40% to 60%. Then the mortgage drops and suppliers’ cost goes up because there are no economies of scale,” said Yam.

According to him, Rehda is studying an insurance scheme in South Korea that aims to protect property buyers. “They have an interesting insurance scheme and Rehda wants to understand it better. It does not guarantee no defects, but it will refund all the money they have placed on abandoned projects. If build-then-sell is the only system, then I can guarantee you that the next forum will not be so packed. The sale and purchase agreement is based on fixed price, so by sheer inflation, prices will be easily 30% higher with the build-then-sell model.”

This article first appeared in The Edge Malaysia Weekly, on April 28 - May 4, 2014.


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