Tuesday, 21 February 2012
Friday, 17 February 2012
Property Prices Trending Now
Strategies for developers, investors and homebuyers
By Peter Yee
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It is envisaged that KLCC and Mont’ Kiara properties will experience a price correction and yield lower rental rates this year. |
This development can be attributed to the simultaneous financial measures adopted by countries near and far, during the global financial crisis of 2008-2009, namely:
- the quantitative easing QE1 of US$1.3 trillion and QE2 of US$600 billion by the US
- economic stimulus package of US$570 billion by China
- Singapore’s US$13.7 billion
- Malaysia’s RM67 billion (US$21.4 billion)
The simultaneous financial measures and economic stimuli flooded the supply of money and increased global liquidity. This caused the real value of money to depreciate relative to property. As such, the real value of money is getting “smaller” in comparison to property.
High liquidity, low interest rates and higher costs of land and construction materials are some of the factors pushing up property prices in Malaysia.
Curbing effects
Recently, property prices in China and Hong Kong have begun to decline due to measures to curb speculative buying by their governments.
Singapore has imposed an extra stamp duty of 10% on homes bought by foreigners in early December 2011.
In Malaysia, since Nov 2010, the maximum loan-to-value ratio of 70% for the third and subsequent property has affected housing loan borrowings.
Real property gains tax as outlined in the 2012 budget has increased to 10% for the first two years and 5% from the third year to the fifth year.
Bank Negara has also introduced guidelines to rein in Malaysian household debt by assessing potential borrower’s nett income in their evaluation process from Jan 1st this year.
Gross Domestic Product (GDP) is estimated to be around 4.8% for 2012. Household debt to GDP ratio is expected to balloon to above 78% in 2012. Household financing facilities account for more than 55% of the total banking system’s loans.
Oversupply
Malaysia’s property market has begun to cool down during the second half of 2011 due to an oversupply of high-rise properties in the Kuala Lumpur City Centre and the Mont’ Kiara area.
General market sentiment has also cooled due to the slowdown in China, Europe’s debt crisis, stagnation in Japan and the US economic crisis.
The general trend for Malaysia’s property market in 2012 will be a slowdown due to declining liquidity, borrowing capacity and sentiment. It is likely the KLCC and Mont’ Kiara area will experience a price correction and lower rental rates for 2012.
Demand for newer, high-end landed residential properties such as semi-detached and bungalow units with prices above RM1mil may also decline in 2012. This is partly due to the relative rental yield to investment which does not justify the monthly loan repayment. For example, a RM2mil bungalow fetches only a monthly rental of about RM5,000 while the monthly bank repayment is approximately RM12,000 (depending on the duration of the loan).
Property prices in the city and its fringes may be stable but property located far from the city, may decline in price as the property market extends outward from the city during a booming market and contracts inwards towards the city during a market decline. The right type of property located in a good location will be stable in prices.
Investment strategies
There are certain property investment strategies that developers, homeowners and investors in Malaysia can adopt.
For developers, the demand for properties above RM500,000 from foreigners is likely to reduce, due to property prices “correcting” in their own country, such as China and Hong Kong.
Properties priced above RM500,000 is beyond the affordability of most Malaysians whose average monthly income is about RM6,000.
The Malaysian population by July 2011 was 28.7 million. The new wave of baby boomers born during 1979-1985 (aged 26-32) are now in the workforce. Currently, 60% of the population is below 30. Low interest rates of 3% and the low unemployment rate of 3% will sustain the demand for properties below RM500,000 in 2012 by this generation. Developers may choose to develop more properties priced below RM500,000, phase out development to avoid oversupply, build property with attractive and innovative design, give more freebies to attract purchasers or build and sell a few years later.
Rent now, buy later
For homeowners, the strategy may be to rent first in a preferred or selected area and buy later. They may also selectively, “bargain-hunt” the secondary residential market for renovated property below market price or buy from established developer with all the freebies.
In recent years, most investors invest for capital gain, for 2012, the probability for capital gain is reduced due to the high prices and changing global economics which has dampened sentiment.
Buy-and-hold
The upside for capital gain may be limited for 2012. Property investors may consider changing from a capital gain strategy to a cash flow strategy - change from buy- and-sell to buy-and-hold for rental income.
Investors can choose to reduce or sell property that have appreciated in value, such as no-income property or low-income yield residential properties such as vacant land, bungalow lots, super-link, semi-detached and bungalow homes.
They can then choose to reinvest in high-rise residential properties (apartments and condominiums) with yield of more than 8% in a high-occupancy area. Reinvest in commercial properties which can yield more than 6% in a high-occupancy area such as shop-offices, shophouses, shoplots, retail lots and factories.
Financial defence
The above observations and proposed measures to adopt are only my opinion of the probable trend in the property market.
However, during times of uncertainty, one’s financial defence measures become more important.
For a developer, a contingency financial plan should be in place for the worst-case scenario.
A specific and targeted group of purchasers and their needs should be identified. And the suitability of a project location with innovative design and quality building materials should be vital points to consider to attract various segments of purchasers.
For a home buyer, the monthly loan repayment should preferably, be less than 30% of one’s household income.
And one should also allocate money for an emergency fund to cover three to six months of one’s expenses.
Credit line
For a property investor, a specific credit line such as over-draft facility should be in place for a period of low occupancy. There is always opportunity in property, if you know how to prepare and match your own financial capacity with the possible changes in the property market in 2012 and beyond.
We cannot change the direction of the property market but we can adjust our property investment fund and portfolios to prevent possible setbacks and capture the opportunities that arise from the changes in the property market.
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Over the years, Peter Yee has taken on many roles including as a management consultant, stock broker, restaurant owner, property investor and investment coach. Yee is the author of You Can Become Rich in Property and The Certain Way to Life’s Riches.
Star Property
Strong property demand in Q4
Strong property demand in Q4
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| Metro Homes has about 500 representatives including real estate agents and negotiators. |
The first quarter of the year would be “quiet”, pointed out See, 41, a director of Metro Homes Sdn Bhd. The nett income of most people such as property buyers would not increase substantially. But banks were likely to be more stringent in assessing borrowers due to prevailing economic factors. (See related article on “Property prices trending now” in StarProperty.my )
Price increases
Therefore, property transactions in the second and third quarters of the year would generally be quite “flat”. In the past two years, there have been quite substantial increases in property prices. So, property prices were already quite high compared to what the market could afford, explained See, who holds a master’s degree in business administration as well as an accounting degree from Universiti Malaya.
The costs of construction material and development land would not likely come down, he added. Faced with a soft market situation, the bigger developers who were financially strong, might delay any project launch this year.
But the last quarter of the year, would see a significant price movement – upwards, predicted See.
And due to such a scenario this year, he rationalised that the more speculative type of property purchases including high-end condominium units will be affected.
But he advised property buyers who intended to buy for their own use or “with a purpose” to proceed.
“The supply side is still plentiful. Projects that were launched in 2009 and 2010 would have been completed or are nearing completion by now, therefore contributing to quite a significant supply.”
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| Prestij @ Kota Damansara is another project marketed by Metro Homes. It offers three-storey, semi-detached shop-office units with an average starting price of RM3.8mil. The units come with individual titles with lift facility and private parking space and land. |
See said that every completed project would take time before buyers or tenants started to occupy the units. The occupancy rate would initially be low due to the time lag. Therefore, property buyers shouldn’t be unduly influenced by such a situation when assessing a project to buy in.
“Everyone in the industry worry about the occupancy rate,” said See, when asked to comment on the seemingly high number of vacant units in many high-end condominium developments in the Klang Valley.
“If there is 30% occupancy rate in the first year of the project’s completion, the developers would be very happy.
“Normally, the rate would increase to 60% to 70% in the second and third year.
“Our property market is not as active as in Singapore or Hong Kong. Over there, residents will start moving in within two weeks of vacant possession or when the property is ready to be occupied as the rental market is active.”
See explained that many people who buy such condominium property were cash rich. And therefore, were not in a hurry to occupy the units or to rent out.
“Such property purchases represent only a small investment in their total portfolio. And some would be only waiting for capital gains.”
Infrastructure
When it comes to picking the right developments or areas to invest in property, See advised prospective buyers to look at the overall picture.
All prime areas were popular and one should also look at the infrastructure of the developments. For instance, Damansara, Puchong and Cheras represent the more matured areas.
When linked-houses were launched in Puchong a couple of years back, the price was RM600,000 per unit, now the asking price is about RM1mil.
Buyers of newer areas of development have to take greater risks.
For example, demand for Setia Alam property in Shah Alam were rather slow between 2006 and 2008 but the market picked up later. The township was launched in 2003 and subsequently, the New Klang Valley Expressway was opened in 2006. Today it is quite a popular residential area with access from the Federal Highway and Klang Town via Jalan Meru.
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| Each Metro Homes representative has at least 50 property listings, says K.L. See |
See, who is licensed by the Board of Valuers, Appraisers and Estate Agents in Malaysia, said property agents and negotiators needed to be trained in order to provide professional services.
“We have close to 500 representatives including agents and negotiators. And each of them has at least 50 listings. While other agencies have franchised their business, we don’t do that. We are stakeholders of our branches and we own the operations. So, we are able to mobilise all our offices for any marketing project,” said See who cited economy of scale as one his company’s advantages in operation.
Since Metro Homes was established in Petaling Jaya in 1995, it now has offices in Sri Hartamas, Damansara Utama, Kota Damansara, Subang, Puchong, Shah Alam, Cheras, Klang, Setia Alam, Serdang as well as Penang and Kota Kinabalu.
“Last year, we conducted a fair bit of project marketing by bringing developments from here to East Malaysia. For instance, we were involved in projects by Glomac and Mah Sing. We are exclusive agents for such projects in East Malaysia,” said See whose company also market projects by smaller developers and overseas properties.
“Our business comprises 70% transactions involving property in the secondary market and 30% from new developments. We also have special teams to handle luxury property as well as industrial projects and property put on auction.”
See advised property owners to have a written agreement with agents tasked with selling their property, stating whether it would be an exclusive, ad hoc or joint listing.
Owners need to check the relevance of the information on their property. They cannot leave it to the agent with a “freehand”.
- StarProperty
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