City&Country: The Edge Investment Forum on Real Estate 2011-- Market healthy, appreciation may level off

Escalating prices in the Klang Valley property market have led to complaints that houses in both the primary and secondary markets are beyond the reach of most people.

But according to Chris Boyd, executive chairman of CB Richard Ellis (Malaysia) and a speaker at The Edge Investment Forum on Real Estate 2011, property prices will soon plateau and the market is headed for a “soft landing”.

“There won’t be a drastic drop in value but a levelling off, where annual growth over two to three years is perhaps 2% to 3% rather than 5% to 6%.”

Boyd adds that the movement of property prices is not homogeneous across the country.

“Over 10 years, the average price of 2 and 3-storey terraced houses in KL has appreciated from RM250,000 in 2000 to about RM550,000 now. This is healthy appreciation. Only in the last year or two did we see a sharp increase in prices. There was capital appreciation in Penang but to a lesser extent. In Johor, however, we have not seen the same phenomenon. So, this sharp increase in value is relatively localised and certainly not country-wide (see Graph 1).

“Sooner or later, the sharp price increases in the Klang Valley will level off and for three or four years we will only see moderate growth, as we saw in 2005 to 2007, before the prices take off again. This is a perfectly normal cyclical behaviour of the landed property market in KL where you see a trend of growth and then a levelling off.

“It also means that in the next 10 years, the average price of a 2-storey terraced house in the Klang Valley is going to top RM1 million.”

This highlights the increasing need for more affordable products that fall between medium-low cost and the cheapest 1-storey houses or products between RM180,000 and RM250,000, notes Boyd.
People will also have to increasingly draw on their family resources to raise a deposit for a house if they want to live in KL. They may opt to live in smaller units of 600 to 700 sq ft or they could move to the fringes. This trend is simply based on affordability, says Boyd, whose talk was entitled Will housing property prices drop soon?

He says the top end of the condominium market is weak and may continue to weaken in some areas because of oversupply.

“However, in areas such as Bangsar, Bukit Pantai and Bukit Damansara, where you really can’t get approvals for new high-rises anymore, any new launch would likely sell very well.”

According to Boyd, the sharp appreciation in the value of landed homes in the Klang Valley is due to strong demand for property in Malaysia. The 2008/09 global financial crisis had little impact on this demand, he adds.

Based on data from the Valuation and Property Services Department (Jabatan Penilaian dan Perkhidmatan Harta), Boyd says the supply of homes in the Klang Valley was 112,458 in 2003 but had dwindled to 30,037 in 2010. New starts in 2003 were 76,449 but these had dipped to 9,328 in 2010. The numbers point to a “supply squeeze” — too many buyers chasing too few homes — which led to a corresponding increase in prices, says Boyd. (See Graph 2)

“Simple economics — prices have risen to meet demand. We are always aware that the housing market regulates itself extremely well. Developers respond to rising prices by churning out more products because the margins increase, so last year we saw completions rising to 53,623 and new starts more than doubling to 22,745. We can anticipate these numbers to rise irrespective of the shortage of land in KL and, generally, in the Klang Valley. We are going to see developers turning on the tap fast to take advantage of the bullish market, the excellent financial products that are available and continued demand. Eventually, supply will increase and assist in levelling off the substantial price rise that we have seen in recent years. It is not going to create a catastrophic drop in prices but a gradual levelling.”

For the long term, Boyd says, the housing market continues to look good as it is supported by what some consider the “best-looking demographics” in the region — about 65% of the population are under 35 years of age and of this, 24% are between 20 and 34.  (See Graph 3)

“These are income earners — the new Malaysian middle class. These are the people strongly supporting not just the housing but also the retail markets. We have about six sq ft of retail space per head of population in the Klang Valley, which is one of the highest in the region.”

About 20% of the Malaysian population is still in school and upon graduation will join the workforce, leading to more demand for homes.

“We have about 1.7 million dwellings in the Klang Valley accommodating just over seven million people, which comes to about 4.1 persons of average occupancy per house. If you were to go back 15 years, in the Klang Valley, the average occupancy was 7.0 persons. In other words, in every house there were three persons waiting to get out and set up their own home.

“This has been a tremendous drive for the housing industry as a whole and is likely to continue, albeit at a much slower pace. Young people coming into the workforce still want to have a pad in the city rather than far away with their parents. This points to demand for small units closer to the city and near the MRT stations.”

The government’s Performance Management & Delivery Unit (Pemandu) targets 10 million population in Greater KL by 2020, creating a demand for one million new homes.

The creation of jobs will continue to take place in the Klang Valley, so it is a good idea to look at where the new office growth areas are because people will increasingly choose to live where they work, says Boyd.

One of these is the 70-acre Kuala Lumpur International Financial District (KLIFD) just behind Jalan Imbi, which will create demand for tens of thousands of homes for office workers.

Barring a crisis, Boyd sees the Malaysian property market remaining healthy. The levelling off of housing values will be “completely in tune with past performance where you saw a series of rises followed by a period of consolidation”, he adds.

Additionally, Boyd sees strong demand for housing on the back of a growing economy. However, with high economic growth comes the risk of inflation.

“Inflation is cynically dubbed the developers’ friend because one of the early symptoms of inflation is rising property prices. Interest rates will be raised to cool the market. My recommendation is that now is really not the time to sell,” he says, adding that those who want to buy now should take advantage of fixed-rate mortgage products.

Indeed, Boyd sees rising interest rates to be the potential threat to the property market. “But I believe this will be contained within reasonable limits,” he adds.

“However, we may see some fallout as a result of fairly high levels of speculation that took place two years ago when creative financing offers, such as the 5/95, came on the market because some of these projects will be completed this year and next. We have yet to see if those buyers who took advantage of the financing are able to sustain their purchases. Nevertheless, as values have gone up rather than down, it is unlikely that there will be a fallout. There may be some in the case of people who overextended themselves.”

The local property market also has the potential to attract more foreigners, especially from Singapore, says Boyd.

“In Singapore, foreigners are only allowed to own high-rises and cannot buy landed properties. Generally, in Malaysia, the assumption is that the same rules apply but they don’t. Foreigners can buy anything in the residential market as long as it is over RM500,000. When I tell Singaporeans this, they can hardly believe their ears. And I think the message hasn’t gone through.

“We may see another wave of Singaporean ownership simply because Malaysian landed residential property is such good value for money. If the high-speed rail link ever happens between KL and Singapore, then the knock-on effects will be accentuated.”

To a question from the floor on the low plot ratio for KL city centre developments as proposed in the draft Kuala Lumpur City Plan 2020, Boyd says, “Due to the rapid development changes in the Klang Valley and the demand for more homes, I feel DBKL should increase the plot ratio.

“You can’t have a draft plan that ignores the redevelopment of the Sungai Besi airport, for instance, or of the KLIFD, and the strong demand for residential dwellings that these developments will create.

“I believe pragmatism will prevail and DBKL will promote the development of greater density with smaller units with some concession for car parking in certain areas.”

As for the build-then-sell (BTS) concept, Boyd is totally against it. “It will promote speculation. The current sell-then-build model is perfectly workable and an acceptable method of delivery. Some 99.9% of the housing industry have done a fantastic job in Malaysia. If we did see a swing towards BTS, we would see wild swings in supply because it would create a speculative environment.”

Boyd also dismisses concerns over a property bubble. “Bubbles only happen or burst when there is a spike in interest rates or when people suddenly start to lose their jobs and can’t sustain their repayments. It is unlikely that we will see a fallout or anything other than a soft landing.”

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 854, Apr 18-24, 2011