M'sian Real Estate Sector May Face Rocky Road Ahead

Source : The Business Times, July 17, 2008

Developers currently relying on more resilient higher-end segment

in Kuala Lumpur SINCE real estate is a natural hedge against inflation, buying property in Malaysia would seem a capital idea, with inflation running at its highest level in more than 20 years. But in these uncertain times, other variables have to be considered.

Property players say the sector was quieter in the first half of 2008, with significantly fewer launches. But the real test will be seen in the coming months when US economic problems hit home - America is one of Malaysia's biggest trading partners - and the recent huge jump in fuel and energy prices starts to bites.

Building contractors are under stress, with many turning down government jobs that they say they will lose money on because of the soaring cost of materials.

The Master Builders Association of Malaysia has warned that more projects could be abandoned. So buyers will have to exercise care. As of January this year, Selangor, which sees the most launches, had 100 abandoned residential projects involving almost 34,500 units and 29 commercial projects involving some 4,500 units, the Selangor chief minister revealed recently. Many of these projects are poorly located or were started by parties with suspect track records.

Developers not confident of passing on higher construction costs to buyers are opting not to launch new projects for the time being. Those confident they have a niche market are willing to proceed, even if take-up rates are slower - which may well be the case given asking prices have doubled in the past two or three years in popular areas such as the KL City Centre (KLCC).

For the past five or six years the property market has enjoyed brisk sales. But with plenty of supply in the pipeline, investors are wary of a mismatch in future supply and demand.

Most players think properties costing up to RM300,000 (S$125,288) are likely to be hit hardest, as lower to middle income earners find it harder to cope with the soaring cost of living.

Developers are relying on the higher-end segment, which appears more resilient. iProperty.com Group says there are some indications of fewer transactions even at the high end, but that this is not significant - unlike in Singapore.

'There are still buyers at the same prices as before and nobody is desperate to sell,' says iProperty.com executive chairman Patrick Grove. Foreigners continue to look in the elite areas of KLCC, Bangsar and Mont Kiara.

Indeed, The Star newspaper recently quoted developers as saying properties priced at more than RM1 million are snapped up fastest, usually in a week, whereas those priced below RM300,000 take more than nine months and those costing RM300,000 to RM800,000 take six to 12 months.

Mr Grove believes prices will have to rise because costs have gone up, but says developers can only pass on cost increases bit by bit and will have to absorb as much as they can for the time being.

Prices will ultimately be determined by demand, rising costs notwithstanding, says PPC International executive director Thiruselvam Arumugam. 'Developers can increase the prices, but demand will just not be there,' he reckons. 'This will result in an overhang, and eventually prices will have to come down.'

The commercial sector in the Klang Valley remains a bright spot, with particularly strong interest among Korean and West Asian investors, according to property consultants, who point to new benchmarks being set, especially in the city centre.

Mr Grove pinpoints Johor's Iskandar Malaysia zone as an area to keep an eye on 'as we start to see more progress with what is being built there and the take-up in general'.

In Penang, however, there is a reported 2.8 million sq ft glut of office space, with the occupancy rate only 74 per cent.

Niche retail projects appear to be attracting strong investor interest. SP Setia recently announced plans for a joint venture with the Singapore-based Lend Lease Asian Retail Investment Fund 2 for a RM750 million retail mall in Shah Alam, Selangor, where the Malaysian developer has a township.

Besides the relatively weak ringgit, Malaysian real estate is still some of the region's cheapest and entry points are good, say Lend Lease executives, who are on the lookout for other retail projects in the Klang Valley where they can add value and differentiate from those that already exist. Another international mall operator is expected to announce a tie-up later this year with iBhd on its RM2 billion iCity mall, also in Shah Alam.

Analysts expect the going to be tough over the next 12 months and are underweight on property counters, saying most developers are already posting lower profits. According to UBS, the sector has fallen by an average of 45 per cent. Government-linked MRCB has posted the sharpest decline in share price of about 60 per cent.

KLCC Properties, which has most of its assets in the city centre, where occupancy remains high, registered the lowest loss of about 20 per cent. Sime Darby Property was quick to move last month before times get rougher, selling more than double its target over a 10-day home fair involving real estate in its nine townships.