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my space: Where's the fire sale?

Property values around the world are in retreat and the situation is so fluid that it is difficult to keep track of the numbers.

In London, prices have already contracted by a fifth from their 2007 peak, according to Knight Frank’s Winter 2009 London Residential Review. The estate agency expects values to decline by at least another 10% before recovering, with bigger drops likely for newly built properties in secondary locations.

In the US, luxury home owners are reportedly falling behind on mortgage payments at the fastest pace in more than 15 years, a sign that the US financial crisis that began with the poorest Americans is not about to spare the affluent.

Meanwhile, home prices continued to dip across 70 Chinese mainland cities in January despite the central government’s efforts to prop up prices through interest rate cuts and tax incentives.

Over in Dubai, the once-glittering property playground of the rich and famous, real estate prices have reportedly retreated 24% from the September peak, while in Abu Dhabi — the richest member of the United Arab Emirates — prices have now fallen about 20%.

Closer to home, CapitaLand — Southeast Asia’s largest developer and Singapore’s biggest mall operator — will pay part of its managers’ bonuses this year in shopping vouchers totalling some S$1 million (RM2.4 million) in value.  Singapore Prime Minister Lee Hsien Loong has warned the trade-dependent island state to brace for a worsening global outlook which could cause the economy to contract by more than 5% this year.

As 2008 bowed out, prices of condominiums and apartments in Singapore’s prime districts have reportedly dropped by more than 20% y-o-y, with a forecast of further dips of 15% to 20% this year. The significant drop is no surprise, given the country’s tremendous success in attracting foreign direct investment before the global credit crisis hit.

In Malaysia,  experts remain divided on the fate of the real estate market in the near and medium term. Some are confident we will see the light at the end of the tunnel before the year is over. Others are less gung ho.

When the recovery comes — and it will — property prices in general will move northwards again. Trends have shown that with each property cycle, the values of properties with favourable addresses tend to attain new heights.

The truth is, no one knows for sure how long the market will stay weak and quiet. But intelligent guesses can be made based on market feedback, past trends, economic and financial data, plus one’s gut feeling.

So far, Malaysian property prices have managed to stay relatively stable compared to most other countries. The transaction volume is down to a trickle due to a gross mismatch of buyer-seller expectations. Buyers are scouting for fire sales but sellers are not budging.

There have been whispers of fire sales and if true, it is safe to assume these would have been one-off sales. According to recent report, the values of super high-end condominiums in the famed KLCC area have dipped 15% to 20%. A developer says at least one unit has changed hands at 30% below the peak value. Even so, the seller (assuming he bought the unit from the developer) would still be in the money as KLCC prices have more than doubled in recent years.

In the exclusive Mont’Kiara enclave, a favourite of  expatriates and the well-heeled, a modest-sized serviced suite was recently put up in a “fire sale”. This means, explains a real estate agent familiar with the area, that the  price is at a slight premium to the launch value a few years.

Apparently, the owner had passed away and his mother had insisted on selling the unit.

The likelihood of the kind of fire sale that buyers are hoping for may not materialise.

There are many reasons why sellers are not exiting in a hurry. Topping the list is the low cost of funds and the prospect of capital appreciation when the market recovers. While it is true property prices moved up before the global credit crisis, the rise by no means parallels the experience of the pre-1997 regional financial crisis experience (excluding hot areas like the KLCC where values have appreciated tremendously).

Forget about fire sales in the primary market — new and future property launches cannot get any cheaper as prices are primarily cost-driven.

Unless one’s disposable income is in danger, there is no compelling reason why people should not continue to consider property as an investment. While the country is not immune to the current global economic maelstrom, we must remember that Malaysia’s economic fundamentals were strong, entering the crisis. Growing concern about hyper inflation in the West could send capital inflows flowing to this part of the world.

Meanwhile, developers have switched back to sales mode after emerging from the extended year-end and festive season break. If you are looking at property as a means to hedge your money or are looking for an alternative means to make your money work for you, exciting options await.

For a start, the days of developers giving away free air-conditioning sets, heaters, automatic gates and built-in cabinets are over. Such carrots of yesteryear are non-starters.

These days, developers are teaming up with equally aggressive financial institutions to devise innovative schemes that  savvy investors will find hard to ignore. The entry cost is appealingly low, with mortgage rates locked in. What is most attractive is that the buyer only needs to service the loan upon completion of the property and, sometimes, even up to a year later.

Is it difficult to imagine the market improving three years from now? By which time, it is also reasonable to assume the property would be enjoying capital appreciation too.

What about the downside risks? What if a project were to be abandoned or if supply were to outstrip demand? That would be less of a concern if one buys from a credible developer with a proven track record, and keep in mind the property mantra of location, location and location.

Remember, with each property cycle, the values of property in good locations will scale new heights.

So, do alert me ([email protected]) if you hear of a honest-to-goodness fire sale property that has not been snapped up already.

Au Foong Yee is the editor of City & Country

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 744, March 2-8, 2009.

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