M'sian Builders Struggling To Cope With Higher Costs

Source : The Business Times, June 19, 2008

They'll try to pass on extra costs to buyers, but market already showing softening

WOULD-BE home buyers are keeping a close eye on new launches after Malaysian developers warned that construction costs will surge as much as a third because of hefty hikes in fuel and power charges.

But how much more can be squeezed out of buyers - given the segment was noticeably softer in the first quarter of the year - remains to be seen.

Regroup Associates managing director Allan Soo reckons developers will try to pass on the additional costs, but he is unsure whether buyers will bite. 'They'll try. But with today's climate and sentiment, it may be difficult to sell,' he says.

Regroup's Klang Valley Housing Property Monitor, which keeps track of the secondary market, showed a slight decline - even in prime areas. Compared with 2007, when foreigners lapped up many offerings, Mr Soo said this segment 'all but evaporated in the first quarter' of 2008.

Location is the key to whether developers can ask higher prices, says Real Estate and Housing Developers' Association (REHDA) chairman Ng Seing Liong. According to him: 'Just because the cost of materials goes up does not mean the price of homes will also go up.'

After a flat first half, Mr Soo expects the outlook in the third quarter to remain uncertain, citing fuel price increases and political worries.

Prime Minister Abdullah Badawi could face a vote of 'no confidence' next Monday after threats by the small Sabah Progressive Party that its two Members of Parliament will back such a motion against the embattled premier, whose ruling National Front coalition did badly in the March general election.

Local demand has waned, said Mr Soo; it is price-sensitive now. Most developers will likely have to accept lower profits, and smaller ones without strong reserves may not survive the shake-up he sees coming.

Stronger developers are undaunted. In June, Sunrise completed a transaction that analysts place at close to RM180 million (S$76 million) for Wisma Angkasa Raya, on 0.63 hectare of freehold land.

This works out to some RM2,600-2,700 per square foot, given that it has to sell back some of the new space to the original owner at a discount.

The Malaysian developer paid a third more than the previous benchmark set by YTL group for real estate in the vicinity of the Petronas Twin Towers. But Sunrise's view from Wisma Angkasa Raya is quite unmatched: directly opposite the iconic towers.

In the popular Mont Kiara area, Bukit Kiara Properties plans to launch the third of four residential blocks of its high-end Verve Suites, which come completely furnished.

In March 2006, the first block was launched at an average RM570 psf, rising to RM650 in February last year when the second block was launched.

Management indicated that the third block would be priced 'substantially higher'. Industry executives say it is likely to be in the RM800- plus psf range, but expect it to sell well even then.

Although foreign buyers from traditional markets are more cautious now, new ones have emerged from Bangladesh, Pakistan and Russia, says Mr Soo. Koreans, many of whom have settled in Malaysia under the Malaysia My Second Home programme, remain positive about the country.

Another group still keen on Malaysian assets are institutional buyers, with 35 funds showing interest in a building that Regroup is now pitching.