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My Space: Equilibrium in housing market

I had a fun time trying to decipher the numbers in the latest 2008 Property Market Report by the Valuation and Property Services Department under the Ministry of Finance. The report is a slim volume offering raw data. It also offers a short introduction to the state of the property market as at end-2008.

The report should be compulsory reading for every developer and property owner. While past records do not, as a rule, provide any signs for the future, there are still nuggets of information that can point to what is going to happen.

The annual report (now into its second decade) provides a valuable service, and in Asia, Malaysia and Singapore are probably the only countries doing this. And the report’s online website, www.jpph.gov.my,  is user-friendly and also available in English.

Perusing the data in the 2008 report gave me the following information:

1.    Despite the hard sell by developers in “off the plan” real estate, it is the secondary market that is robust and Malaysians seem to prefer the touch and feel of completed property to that of buying off the plan.

For example, in Kuala Lumpur, of the 18,840 real estate transactions last year, 63% were private sales between individuals and only 33% were between a developer or a company and individuals.

In Selangor, the statistics are almost similar in that 58.8% of all transactions were between individuals and only 37% were between a developer or a company and individuals.

The story is similar in the other states. The ongoing debate between those in favour of the 10:90 payment scheme and those in favour of progressive payments are unnecessary as statistics show the consumer is slowly leading the way towards a more balanced property market where there will always be some who want to buy off the plan for financial reasons and some will want completed property. Choices are important to a consumer.

2. An analysis of the above information also points to the future where large greenfield developments may just cost too much to build when the market for residential properties is reaching equilibrium. Rapid urbanisation in Malaysia (current records show that 60% of the population in Malaysia is already urbanised) may only support niche development or land banking where developers would offer small converted parcels to contractors for building with all the basic infrastructure in place. Sime Darby has announced plans to do this with its large landbank.

3.    The property report also points to the strain on developers doing large-scale infrastructure. Malaysian developers involved in greenfield projects spend an extraordinary amount of time and money providing infrastructure such as roads, electricity, communication cables, substations, waste water treatment plants and street lighting. In other countries, the cost is always borne  by the local council or the state government, but in Malaysia, the developers build and hand over these facilities after construction back to the utility companies or the local council at no cost to both. The cost of the infrastructure is, of course, passed on to the ultimate property buyer. So, utility companies and local councils get paid by the consumer for the use of the facilities but do not have to pay for the cost of building it.

4.    Another major nugget of information is in the transfer of low-cost housing programmes from being the responsibility of the state to private sector developers, which have to set aside land and construct the units. In the 1980s, it was considered to be a cross subsidy where the more affluent purchaser of up-market housing and commercial products would subsidise the low-cost homes which are sold to a list of approved purchasers given by the state government.

The lack of greenfield projects in the future will affect the provision of infrastructure, utilities and low-cost housing. Alternative methods where the state provides the relevant infrastructure in return for approval of development may be needed.

Housing stock — are we overbuilding?

As at end-2008, Malaysia had 4,193,150 units of housing. In 2008, 130,309 homes were completed, of which Kuala Lumpur and Selangor accounted for 62,417 or 48% of the total new stock in the country.

Selangor had, at end-2008, 646,869 homes and Kuala Lumpur had 389,122 homes. But the largest number of homes is in Putrajaya with 1,204,525 homes. Perak comes fourth with 366,742.

The national incoming supply is 144,154 units. Selangor alone has 48,074 units coming on stream.

Not all the above units may be completed but if you look at the building starts in 2008, there are 107,856 units already under construction, which is 20% less than 2007, with a planned supply of a further 673,871.

Where transactions are concerned, in 2008, there were 216,703 transactions in the residential category for the whole country, out of which the largest transacted numbers were in the RM100,00 to RM150,000 range which accounted for 40,364 units.

The total value of residential property transactions was RM4.1 billion while the total number of property transactions last year was valued at RM8.8 billion.

In terms of transactions, Selangor had the largest number at 80,650, followed by Perak with 45,123 and  Kuala Lumpur with 23,000.

These numbers give us a clue, as we go into an economic slowdown, that the number of units coming into the marketplace needs to be realigned in terms of the affordability of the consumers and perhaps subsidies given to first-time home buyers so that they can afford to own their first homes.

Of the total residential units launched in 2007, that is, 52,664 units, only 45% were sold.  In 2008, of the 48,830 units launched, only 44% were sold. Johor had the largest number of units for sale but only had a 31% success rate, while Selangor had a 67.9% success rate. The best performance was Perlis, where out of 160 units launched, 127 were sold, or 80%.

The situation of unsold units then could become a growing problem. Developers with a track record of quality and delivery will gradually sell the remaining units in the next few years but others without such a profile face an increasing supply of unsold stock.

What can we learn from the data?

1.    Developers over the next few years will carry heavier burdens of unsold stock and continued maintenance expenditure in their books in providing free infrastructure for local councils, plus the cost of obtaining approvals for developments. It still takes an extraordinary long time for a project to be launched even though it is not due to any deep research or profound deliberations by the local authority.

2.    As the consumer moves towards purchasing more and more completed real estate developments, developers have to upgrade their skills to provide a price advantage and design parameters, green technology and an extraordinary planned future for the project before they can begin to attract the consumer to purchase “off the plan” real estate.

3.    Brand loyalty, corporate governance and a genuine desire to supply what the consumer requires are going to be important factors in any decision by a consumer to purchase. The younger generation, used to branded clothing and designer shoes, will now seek to live in a development by either a branded developer or a famous designer. The increasing maturity of the consumer is a welcome sign and will determine the next generation of developers in Malaysia.

4.    Local councils which depend on property rates for revenue always have new supply of housing and rates paid by new purchasers to buffer the cost of services they provide. With a reduction in housing supply and as local council expenses increase, the rates will increase and consumers will demand more transparency in the application of funds.

5.    Malaysian property is under-rated and under-valued in the international market and to a large extent, we have shot ourselves in the foot many times, due to our flip-flop regulations. Careless implementation and the lack of a consistent overseas marketing programme in an inclusive manner has resulted in us being a second class destination, even in comparison to Bali and Phuket.

As we enter into a new age of caution in the aftermath of the world financial crisis, and a shrinking economy with the fall in demand for our exports, it is time we re-evaluate the way we manage our country’s real estate. The 2008 statistics are raw data but, on analysis, the evidence is clear.


Kumar Tharmalingam is chairman of Hall Chadwick Asia, a property advisory company that provides corporations with solutions on branding and positioning their property development to compete in a crowded world



This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 759, June 15 – 21, 2009.
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