City & Country: Investment Forum on Real Estate 2014: Slower transactions, resilient prices

PROPERTY transactions will slow down, but property prices will remain resilient and continue to increase in Greater KL and Penang, said Previndran Singhe, CEO of Zerin Properties.

In his presentation, “Are property prices falling? What to expect in 2014” at The Edge Investment Forum on Real Estate 2014, he noted that transactions in the residential market dropped by 16.75% in the first three quarters of 2013, while overall transactions declined 15%. He attributed this mainly to Bank Negara Malaysia’s responsible lending guidelines.

“However, total transaction value actually increased by 2.2% year on year. So prices have been very resilient, reflecting strong holding power. This is also due to the lack of incoming supply, which creates a situation where demand outstrips supply. There has been no drop in terms of value in the primary and secondary market.

“I believe developers have gotten creative with their pricing strategies, and even though sales are slowing, launch prices are holding. However, new launches that outprice themselves will suffer,” he said.

The property market is also affected by the internal and external economic environment. On this front, Previndran is optimistic. He noted that the International Monetary Fund has projected global growth of 3.7% in 2014 and 3.9% in 2015, while the US economy grew by 2.8% compared to 1.9% last year, and is expected to hit 3% next year.

Meanwhile, Europe, while still fragile, is turning the corner from recession to recovery and growth is projected to strengthen to between 1% and 1.4%. In Japan, annual growth is expected to remain unchanged at 1.7%.

“Closer to us are emerging markets like China, which many countries, including ours, are partially correlated to. China’s growth is expected to moderate around 7.5%. All of these economies, in particular China, will positively impact the Malaysian economy,” he said.

Domestically, he noted that Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz projected growth of 4.5% to 5.5% and inflation to inch up to 4% this year, which does not warrant an increase in interest rates (see page 28).

“Household debts as a percentage of GDP stood at 86.8% at end-2013. Zeti has acknowledged that it is high but notes that it has grown the slowest since 2010. She also said that based on the responsible lending guidelines, the quality of borrowers is very high, so she’s not very concerned.”

Counterproductive measures

The cooling measures announced in Budget 2014, some of which have been implemented, coupled with Bank Negara’s responsible lending guidelines, did not resolve the main reason for these moves, which was to control rising property prices, Previndran said.

“The property market is like any other market. It is a function of demand and supply, with exception to its liquidity. In the case of price increase, it’s always a situation where demand outstrips supply. So while I understand the good intention behind the measures, they have actually resulted in the further heating up of the property market because the fundamental issue of shortage of housing supply is not addressed.”

He believes the solution is to release government land cheaply instead of privatising it for commercial purposes.

“The government should also focus on improving the developers’ delivery system. At present, it takes six to 15 months for developers to get approvals for their projects and they have to go through much red tape. This is just expensive for the developers. And all that holding cost and expenses are transferred back to the buyers,” he added.

He said Bank Negara’s responsible lending guidelines have already controlled the excessive demand as seen in the drop in transactions. The biggest drop in transactions was for properties priced below RM500,000. Meanwhile, transactions for properties above RM1 million grew in Penang, Johor and Selangor.

“This infers two things — there are not enough property launches for products priced below RM500,000, which is a big issue in affordable housing, and the implementation of the responsible lending guidelines has restricted the number of buyers and first-time buyers. So, the cooling measures have been counterproductive,” he said.

Citing S P Setia Bhd as an example, Previndran said before the implementation of the cooling measures, the developer recorded a domestic sales increase of about 39% year on year in the last quarter of 2013. However, sales volume dropped by 25% in the first quarter of 2014, mainly pulled down by poor sales in Iskandar Malaysia, Johor.

A developer with less exposure in Iskandar, Mah Sing Group Bhd, recorded sales growth of 22% in 2013 but expected 20% growth in 2014, a 2% drop.

Previndran also noted a 5% dip in loan applications for the first two months of 2014. However, loans approved increased by 9%. “Basically, what is happening is a lot of banks are reselling their products to existing clients, including housing loans, and approving loans, even though loan applications have dropped. Another impact was that developers were holding back launches right after the announcement of the cooling measures. In fact, the lower sales volume in the primary market was in lieu of the lesser number of launches.”

The approval process for loan applications is also taking longer than it used to due to the more stringent guidelines, he added.

“Even the developers will tell you that their conversion from booking to actual sales is taking longer because of the longer loan application process. I think this has also slowed down the transactions.”

He feels that one hugely untapped source of funding for homebuyers is Employees Provident Fund (EPF) savings.

“In 2011, the amount of money withdrawn from account two, which allows withdrawals for housing, was only 4% of the total savings in account two. This accounts for 7% of the total residential transactions in Malaysia. I think this can be a source of liquidity moving forward.”

Meanwhile, developers have been building their landbank in recent months, which Previndran believes is an indication that they are expecting residential demand to come back due to pent-up demand.

“With the removal of the developer interest-bearing scheme (DIBS) and the required transparency in pricing in the primary market, we notice that many investors are now focusing on the secondary market. There was a period of wait and see after the announcement of the cooling measures but I think with the impending implementation of the Goods and Services Tax (GST) and the short supply, investors have come back in the secondary market,” he said.

In the primary market, developers are now seeing the pent-up demand and are planning to kick-start their launches.

State of the market

In Iskandar, Previndran said one of the main concerns is the rising supply and completions, which he believes is reflected in two recent launches, which registered only 20% to 25% take-up rate in the first few months.

“The take-up rate is low compared with the pre-cooling measures level. In my opinion, I think there are two other reasons why these two launches didn’t do well. First, they were overpriced. Most in the market were selling between RM800 and RM1,000 psf but the two launches were sold at RM1,200 psf and above. The other was the timing, which was too close to the announcement of the cooling measures.”

He stressed that Iskandar still has legs to run, while Medini has been drawing a lot of attention from investors due to its exemption from the real property gains tax (RPGT) hike and the minimum pricing requirements for foreign buyers,

“The same thing that has happened in the Klang Valley is happening in Iskandar. There is a whole bag of developers and many of them are landbanking. I’m sure you have all read about the big Chinese developers as well as Singaporean and Australian developers entering Iskandar. They are landbanking now in anticipation of pent-up demand.”

Previndran said investors should also look at the catalytic developments in Iskandar, ranging from industrial and education to tourism.

“The industrial projects are creating employment and housing need. And all the universities are open and the tourism projects are pulling in crowds.”

In Greater KL, Previndran noted that the spillover into the secondary market has been aggressive and investors are looking at landed properties in traditional locations, and condominiums in good locations.

“Investors are looking at various places but from what we have seen, Mont’Kiara and Kuala Lumpur city centre have been the prime targets. I think the most shocking was that the price point for properties in Sentul West and Sentul East in Sentul are inching up to Mont’Kiara prices.” (See page 28)

As for Penang, Previndran is not convinced by a recent report that says property prices on the secondary market in Penang would drop by 15% this year.

“Based on the activity in my Penang office and the strong fundamentals of Penang as a business and industrial destination, I think the secondary market there is on the way up. I just don’t see how the market can actually come down with the scarcity and the infrastructure coming into place.

“The property market in Penang is stable but will see a decline in transactions, which I think is going to be the theme this year in general. However, prices will inch up, especially for properties priced above RM500,000.”

Big office market crash?

There has been a lot of talk about excessive office supply and a possible big office market crash in Greater KL, noted Previndran.

According to Previndran, there is an expected incoming supply of 12 million sq ft coming on stream by end-2016, adding an additional 8.7% to the existing supply.

“The existing supply of purpose-built office in Greater KL currently stands at 130 million sq ft and average occupancy is at a healthy 80%. Assuming there is no take-up for the next three years, the occupancy rate will still be at a reasonable 74%, which is very sustainable in many markets,” he said.

It will be the older office buildings that will suffer the most with the new supply coming into the market.

“If you take a drive down Lebuh Ampang, you can see old office buildings being converted into boutique hotels or budget hotels. Moving forward, I also see these old structures being turned into condominiums or apartments, which will increase city centre living.

“For those who are keen to invest in office buildings or strata offices, I think you should look at those near light rail transit (LRT) and mass rapid transit (MRT) stations. We find that these are the most requested by tenants as they want public transport. Two other things are great lifts, lobby and lavatory, and good developers with proven management track record,” he advised.

Maintaining its up cycle

Property prices will maintain their up cycle in 2014 but the increase will be more modest compared to last year.

“I’m also unmoved by talk of a drop in residential prices as demand is still strong and supply is not matching up,” Previndran said.

He also expects a price increase from the implementation of GST. “Based on our calculations, the implementation will result in a price increase of about 3% to 4%. If you look at Singapore and Japan, prior to and during their GST implementation, there was a surge in property prices and transactions, which was then followed by a drop in transactions but not prices.” (See page 28)

He believes Greater KL will still be the most exciting market in the coming years. The completion of the LRT extension, MRT line one and two, opening of klia2, completion of the River of Life project and other infrastructure-based products will make Greater KL the choice real estate investment destination in Malaysia and Asia.

“My strategy for Greater KL in 2014 is as follows: follow the infrastructure, it is a good indication of where the new hot spots will be; invest in traditional locations; and stick with branded developers.”

In Iskandar, Previndran believes the recent approval of the RM60 billion Petronas refinery and petrochemicals integrated development (Rapid) in Johor will help spur activity there.

“The Rapid project will give access to about 70,000 jobs in the next five to 10 years. This and many other catalytic projects will carry Iskandar through.”

He expects prices in Iskandar to be flat in the next two years, excluding for landed properties and in Medini.

“My strategy for Iskandar is look for landed properties in good location and with a great product. Secondly, focus on Medini, and last and most importantly, look for developers with products that can distinct themselves from the incoming huge supply.”

Penang, in his opionion, is an excellent choice for investors.

“The opening of the second bridge, the proposed new highways in the island, quality developers with quality developments, and good quality of life are some of the main drivers. My strategy for Penang is very simple: stick to good developers and locations that are well connected.

“I think one thing we have to realise is that the banks still need to make money. As mentioned, with the tightening of the loan market, banks are focusing on existing clients instead of recruiting new ones. So as much as we see the tightening of loan approvals, we also see that banks are ensuring there is liquidity in the market by reselling those loans to cash up clients,” says Previndran.

As for the question of the day — to buy, hold or sell? — Previndran believes one should buy when there is good value.

“I think infrastructure is going to be key, look at where infrastructure is being developed. We also need to look at what happened in Hong Kong, Singapore and Japan’s real estate markets. Look at the lifestyle of the people and where they want to go.”

Investors should sell if a property has already met their investment criteria, he advised.

“If you have already got 30% to 40% of your capital appreciation and you’re a buy to sell kind of person, then you need to sell. The main reason to sell is to recycle your investment into something better and bigger,” he said.

“Lastly, you should hold if you have landed property, and freehold property in good locations,” he concluded.

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


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