IN 2010, the top 8 listed property companies in Malaysia (excluding IOI Properties Group which was listed in 2011) sold an aggregate RM8.2 billion value of new properties. In 2011, total sales value rose to RM12.1 billion.
By 2012, sales value grew further to RM15 billion and exploded to RM21.9 billion last year. Within just four short years, the largest 8 listed property companies in Malaysia grew their sales value by 165% or at an annual compound rate of 27.5%.
Over the same period, property prices increased by 38.2%, using the MHPI index. Therefore, total annual units sold increased by 127% over the four years period.
What does this mean? These 8 developers sold 50% more in terms of units in 2012 as compare to 2010 and in 2013, they sold twice the number of units as they did in 2010.
Developers took advantage of the very strong property market in terms of demand and favorable prices, with banks aggressively providing mortgages. This is what you would expect in a competitive business environment.
As a result, the property market is in excess supply!
We know the sales translate to new construction and in the books of these companies, unbilled sales. Revenue will be recognized over the construction period, where these companies will be able to report rising profits.
Once completed, between 24 months to 48 months from sales, depending on landed or high-rises, these homes need to be occupied or they will be left vacant. How much will rentals, especially of older homes, be driven down?
Already signs are emerging of rising mortgage defaults in the commercial banks. Consequently, banks are turning down a large percentage of applicants, thereby, reducing properties sales by developers over the past few months.
Our analysis imply the following conclusions:
1. Rental yield will fall, just as interest rates are beginning to rise. Consequently, property prices will likely be subdued. We do not expect prices to fall substantially given land values, rising construction costs and the historical trends.
2. New sales of properties for 2014 will fall as demand slackens.
3. While revenue recognition of listed property companies will be positive in 2014 and only peak in 2015, earnings are likely to peak this year. This is because margins for 2015 will be lower due to higher costs of construction, partly from absorbing the GST tax.
The Edge this week carries the full report.
Tong Kooi Ong is executive chairman of The Edge Media Group. Feedback is welcomed at www.tongkooiong.com