Still a ‘sparkling’ property market

Continuing an examination of the property sector post Budget 2016, Sunday Star discovers that, despite high prices, investors remain upbeat because demand for property continues to outstrip supply many times over.

Investor Ahyat Ishak says for the rakyat, property prices are “beyond annoying”.

They see all these new properties springing up – but, he points out, these are not “rumah mampu milik” (affordable houses) and are only “rumah mampu tengok” (houses you can look at but not own) for most of us because of the high prices.

“Property has become something of a bad taste in the mouth and people have become negative. And the market feels negative even though property prices continue to rise,” he says.

Although there is this “huge disconnect” between what’s being built and what people can buy, many developers continue to “defy gravity”.

“They do business as usual and offer properties beyond afforda­bility,” says Ahyat, who runs workshops for potential property investors and is the author of the 2013 bestseller, The Strategic Property Investor.

Dr Daniele Gambero, a marketing and strategic consultant for developers, says over the past few years developers have been over-delivering high-end, high-cost properties.

Towards the end of last year, however, they started developing more affordable areas further out from Kuala Lumpur, such as south, east and west of the city within the Klang Valley, as well as in places like Semenyih near Selangor’s border with Negri Sembilan and Nilai, Negri Sembilan.

Gambero says most of the big property developers in the country have had launches in these areas, quoting as an example, Malaysian Vision Valley, a 108,000ha development extending from Nilai to Port Dickson in Negri Sembilan.

He notes that developers have been buying up land in these areas at affordable prices like RM15 to RM25 per square foot compared with several hundred, or even several thousand, ringgit they would have to pay for land in the Klang Valley or KL.

At such prices, he points out, developers can actually build affordable houses of say 1,600sq ft to 1,800sq ft, which are reasonable sizes for families, and which are in such high demand.

“But instead of doing that, one of the things I find a bit funny is that developers have been building huge homes of 2,500sq ft to 3,000sq ft.”

Doing the math, Gambero points out that a 1,600sq ft house selling at RM300 per square foot would come up to RM480,000, but a 3,000sq ft house at RM300 per square foot would cost a whopping RM900,000.

“So unfortunately, developers have again brought the end house price to an unaffordable level!” says Gambero who is the CEO of the REI group of companies and who is an Italian expatriate who has been in Malaysia for almost two decades.

He has been doing extensive research on per capita income, household income, and the value of affordable homes in both Selangor and KL, which represents one-third of the country’s population and says that, “If you get it right here, then you can replicate it in other areas”.

He breaks the figures down into categories.

There is this ‘huge disconnect’ between what’s being built and what people can buy, yet developers ‘defy gravity’. - Ahyat Ishak

For Selangor, he estimates the need for low-cost houses is relatively low as only 8.2% households need houses that costs RM120,000 and below, while the figure in KL is 6.2 %.

The majority of households (63.6% in Selangor and 61.6% in KL) can afford houses priced between RM260,000 and RM600,000 (see chart for break down).

Gambero notes that only 15.4% in Selangor and 16.3% in KL can afford houses above RM500,000 up to a maximum of RM700,00.

“But if you look at what the big property guys are offering, most of the houses are above RM600,000. It doesn’t make sense,” says Gambero.

And, he points out, banks are no longer providing 90% financing for these huge houses because of overpricing.

“Banks are not stupid. They have been doing their homework and they have been coming up with the same conclusion that I have been coming up with, which is that there is going to be an oversupply of big homes and you (developers) are not going to clear your stock.”

Gambero points out that in the last three to four years, more than 60% to 65% of the supply of houses that developers built have been directed toward the top 20% of Malaysians who hold 40% of the country’s wealth.

“These are the people who can afford to buy whatever the market is throwing at them.”

But what about the rest?

You don’t hear of prices dropping. Because demand is 10 to 20 times higher than the supply of homes. - Dr Daniele Gambero

Prices won’t drop

Adrian Un has been involved in a number of property launches.

And he says that it is not true the property sector has been lacklustre.

One has to just look at all the pictures on Facebook and other social media sites to see that there are still a lot of people queuing up to buy properties.

“These are actually people queuing up to buy. I have seen huge numbers placing their cheques to buy. Whether they are first time buyers or not, we don’t know. But the situation is not as bad as being portrayed in the media or as claimed by the developers.

“The buying sentiment for units costing from RM300,000 to RM800,000 is still pretty much positive,” says Un who is the CEO and cofounder of Skybridge International, a property education and investment company.

But with everyone saying property prices are now sky-high, are there still properties out there going for RM300,000 or RM400,000?

Un says developers have been building small shoebox units of about 450sq ft to 600sq ft to entice Gen Y people to enter into the property market. These are priced between RM300,000 and RM500,000 and are often near the LRT and other amenities.

“So even if it is RM700 per square foot, a young graduate earning RM3,000 calculates it based on his affordability to pay the instalment. So he sees it as being quite affordable because the absolute entry level is RM400,000.

“A lot of the Gen Y have been on a learning curve on how to be a millionaire.

The Gen Y see owning a property as an investment. It also gives them bragging rights. - Adrian Un

“They are starting off early to be financially free and see owning a property as an investment. It also gives them bragging rights,” he says.

So these small units are still very much in demand and selling, he says, even though the rental might not be enough to cover the loan instalment.

“It’s already happening now. Demand for these units (to rent) is not big in numbers. Buyers would have to lower their expectation on the rent. So over the next one or two years, it is going to be a renters’ market. And it still boils down to location – if you are within 12km to 15km of the city, and there is a good infrastructure hub with the LRT and amenities like a shopping mall and hospital nearby, I don’t think it will be that bad,” he says.

It is the higher end properties priced at RM1mil and above which are struggling, says Un.

He says sales for these have been slow because many investors have already chalked up a lot of loans over the last four to five years for properties, so it is not as easy to secure more financing to buy another.

For Un, it is the secondary market that is going to struggle next year.

This is because there is a mismatch of perception between owner and buyer: the owner is positive the price of his house, even though it might be old, has climbed substantially but the buyer will not be willing to pay that price because he has an alternative to go to, which is the primary market to buy a new house.

Un agrees that banks are very careful when giving out loans these days. Instead of one valuation quote for the property, he says, most banks now demand for quotes from two valuers.

“Valuers are very cautious. They are professionals, so I don’t think they are willing to give the offered price for a new housing area that has just been completed.

“Once a house is completed and the seller asks for a sky high price, the valuers will not justify his asking price.”

But says Un, even with the mismatch, the price of landed semi-detached properties and bungalows will not drop.

He reckons to have bought a house priced at more than RM1mil, the buyer would need an income of at least RM15,000 a month to qualify for the loan, and logically the buyer would have to be at least 28 years old to earn that kind of money. So at that age, he says, the buyer would probably have understood how borrowing costs work before making the purchase and would have the holding power.

“He will hold it until the market recovers,” he says.

Optimistic about the economy

Two weeks ago, Budget 2016 was tabled in Parliament.

With regards to housing, there was no change in the measures already in place to curb property speculation, such as real property gains tax (RPGT) rates and prohi­biting developers from offering the Developers Interest Bearing Scheme (DIBS).

For Un, there was not a single exciting thing for the housing industry in the budget. But this is not unexpected, he says, because the industry was not anticipating any freebies or goodies anyway.

He says the measures implemented over the last two years have “somewhat worked” to cool down property prices “a bit”.

“For the government to do away with the RPGT or actually come back to DIBS now will create some kind of uproar among the public.

“I don’t think they want to be in the bad books of the public,” he says.

So naturally, he says, “affordable housing” was the main property sector element in the budget, devised to please the people.

Ahyat, however, has a more upbeat take on Budget 2016 for the housing sector.

He says while there was nothing big for the housing sector itself, there are huge plans for development and infrastructure.

He loves that RM5bil has been allocated to develop Malaysian Vision Valley and that RM7bil has been earmarked for developing a KL International Airport “Aeropolis”.

He feels “vindicated” that RM11bil is being pumped into Cybercity Centre in Cyberjaya because, while other investors shy away from Cyberjaya, he is one of the few who see potential there.

For him, the MRT II Sungai Buloh-Serdang-Putrajaya line coming up, which will be completed in 2022; the LRT 3 line from Bandar Utama to Johan Setia, Klang, which will be ready in 2020; and the KL-Klang Bus Rapid Transit (BRT) are exciting. There are also plans to build new hospitals and upgrade airports, he points out.

He says these are clever ways to spur growth, although it does not solve the massive problem of spiralling house prices and income levels that do not rise as fast to keep up.

“The budget is not a magic tool to fix problems. It is the Government’s forecasted expenditure,” he says.

Ahyat says he likes to “sniff” at the direction of development.

“I follow the infrastructure and investment. The moment they talk about billions in development, I stop, take a look and follow the money (to invest).”

Gambero’s first impression when reading Budget 2016 was that it was like an “economic crisis budget” where “you keep low, try to find shelter, stay put and wait for the next year to pass”.

But after reading through it for the third time, he finds it a “pretty decent” populist budget.

It is good, he says, that Sabah and Sarawak are getting funds to complete their long-awaited Pan Borneo highway, and that there are incentives, subsidies, and tax exemptions in the budget that will put more money in the pockets of the people.

“Increasing the welfare of the bottom 60% of the rakyat will definitely spur, in the medium term, the housing market. They might find enough money to buy a long-awaited home.”

Gambero sees the Malaysian Vision Valley development as “just the opening chapter of a totally new history of infrastructure for the southern corridor” and he loves the BRT because, unlike trains, buses are flexible and can go anywhere.

For him, Malaysia’s economic fundamentals are in the right place.

He says the GDP is quite steady although this has decreased a bit, the unemployment rate is still very much under control, foreign reserves are still very high, the economy is still developing, and the current account balance is still positive even though crude oil prices have dropped.

He says most international agencies have given Malaysia a positive outlook even though Malaysians themselves like to “cry and look down on the country”.

“The worst thing right now is the political instability. That is not a small joke.

“We have this political uncertainty about the future. A lot of laymen are asking ‘what if’ and ‘what comes next’ and saying that ‘if the Opposition takes over, the country will be a mess’, and ‘if Umno keeps ruling the country there is a big question mark about the future’, and ‘who is going to rule Umno? Do you choose someone based on loyalty or capability?

Despite all this uncertainty, Gambero remains optimistic about the economy.

“We have to take shelter for the next three to six months, but some shy signs of recovery are already visible.

“It will be more visible after Chinese New Year. The general feeling is that after the Chinese New Year, consumer confidence will begin rising and the housing sector will start moving ahead again.”

He says Malaysia’s under-supply of houses is still high compared with general demand.

He points out that even though developers have been experien­cing negative sales in the last few months and that there are a number of uncompleted sales with buyers pulling out because of uncertainty and perception, developers are still not dropping prices.

“There has been a big fall in the number of transactions in property this year but prices are still stable. You don’t hear of prices dropping. Because demand is 10 to 20 times higher than the supply of homes.”

He reckons Malaysia has at least another seven to eight years of a “sparkling” property market. - By Shahanaaz Habib (The Star)

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