City&Country: Buy now or wait?-- House prices will continue to rise

Property prices will continue to increase due to lack of development land in prime locations as well as rising land and building material prices, among others.

Dispelling the myth that property developers are raising prices to make higher profits, Daniel Lim, COO of Sunway Group’s property development division, said there are other costs that impact a developer’s bottom line, including an increase in labour cost and the cross-subsidy for low/medium cost housing. Property prices are also often dictated by economies of scale and as long as there is strong demand, property prices will not come down anytime soon.

Lim was a panellist during the discussion on “Buy now or wait?” at The Edge Investment Forum on Real Estate 2012.

Data from consultancy firm JUBM Sdn Bhd, an affiliate of Davis Langdon & Seah Group, showed construction cost had risen 80% in 3Q2008 before the global financial crisis, Lim pointed out.

“During that period, there were contractors who refused to take on a job because after four months of negotiations or by the time we awarded a contract, material prices had gone up so high that they were not able to carry out the job. There were also contractors who, in the midst of doing work, stopped and asked for compensation for the escalating prices of material such as steel bar, copper and aluminium. You also faced contractors who abandoned the job halfway as material prices were just too high,” Lim recalled.

However, comparing the Malaysia house price index and the building works composite tender price index from 1999 to 3Q2011, house prices in the country did not increase dramatically when construction cost spiked in 3Q2008. “House prices in Malaysia generally follow inflation. However, property prices have been catching up since 2009 and developers are then able to pass on some of the costs to the consumers,” Lim added.

Lim also revealed that in 2000, data showed construction cost made up 40% of the average house price while 18% was attributed to land cost. In comparison, in 2011, construction cost made up 40.03% of the average house price while land cost made up 26.68%. Developers’ profit in 2000 was about 20% of the house price while in 2011, profit came down to 14.5%.

“As a developer, we constantly face a challenging situation. Buyers always feel we are making a lot of profit selling properties at very high prices while landowners think we make a lot of profit and as such ask for high land prices. We are stuck in between. Aside from this, we face another challenge of trying to manage cost and build properties that are liked by our target market.

“Buyers want something lifestyle, something modern ... and all this costs money. So we’re always in a very challenging environment. Actually, our buyers are making more money from their houses then we make from development profits,” Lim said.

He cited the National Property Information Centre’s (Napic) 3Q2011 house price index which showed house prices had increased by 59% since 2000. House prices in Kuala Lumpur have increased by 73% on average since 2000, followed by Penang — up 62% since 2000. The hike in prices has been more evident since 2009.

Within the five years, from 2007 to 2011, new residential launches reduced from 50,000 to about 49,000 in 2011, while the number of transactions rose from 315,000 properties in 2007 to 430,000 in 2011.

Lim said he does not see a property bubble in the Malaysian property market. He believed house prices in Malaysia have increased gradually with no significant jumps or dips over the years, unlike Singapore property prices which are more volatile.

Furthermore, housing supply is quite constant at about 500,000 units every year, and there is a gap in demand due to the growing population. “In the next few years, we expect to continue seeing demand exceeding supply so there is no use asking if there’s a bubble or not,” he added.

“According to the population census in 2000, 50% of the population were below 20 years old while in 2010, 50% were below 27 years old. That means we have a slightly older population. Within the age group of 20 to 35-year-olds, they make up seven million out of our total 28 million population.

Assuming they all pair up as couples, that’s 3.5 million couples. If within five years, half of them get married and only half of those can own properties, it would leave maybe about 800,000 or 700,000 potential homebuyers. With our constant supply of around 500,000 homes per year, demand will exceed supply within the next few years,” he said.

Commenting on the new lending policies implemented by Bank Negara Malaysia since November 2010, he said buying activities were affected as investors now need to take out more cash for down payment of newly launched properties. Nevertheless, Lim said investors are still buying if properties are located in prime areas or those with good potential.

Lim said it is important to buy properties from reliable developers with a good track record of developments, attractive capital appreciations and strong financial standing, especially in uncertain times.

“Buy properties in growing areas, such as well-connected suburban areas with expressways or public amenities like the light rail transit, mass rapid transit and bus rapid transit. Areas such as Puchong South, Cyberjaya, Putrajaya and Seri Kembangan have potential too.

“Also look at urban redevelopment areas in the Klang Valley such as the Rubber Research Institute land in Sungai Buloh, former military airport in Sungai Besi, the Kuala Lumpur International Financial District in Jalan Tun Razak, former Pudu jail, as well as Jalan Cochrane and Jalan Peel,” he added.

In reply to a question from the floor on how receptive the bigger developers are towards the build-then-sell (BTS) concept, Lim said: “We are quite cautious about the BTS scheme considering our population growth and housing demand.

“As a big developer, we are probably able to handle it better. It is something we are still debating. We are continuing the dialogue with the government as well. I do not think Malaysia is ready yet. There is still a lot of demand for housing and it is not easy for developers to take on that scheme as it passes on all risks to them.”

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 909, May 7-13, 2012