TOWARDS the close of 2017, a couple of news items reported in the local newspapers dampened the merriment of the year-end party for the property market.
There was a prediction by a property professional that the market will crash this year and following that, Bank Negara highlighted that there was an acute oversupply of properties/space in the residential, office and retail sectors and that the stock of unsold houses as at the first quarter of 2017 was the highest in the last ten years.
Earlier on, the National Property Information Centre (Napic) confirmed that there was a slowdown in the property market and its statistics showed there was a drop in the volume of property transactions in the first half of 2017 and a substantial increase in the stock of unsold houses although the value of the transactions registered a slight increase. This has led to a more somber mood in the property industry, which has been through a sluggish phase since 2015.
The year 2018 is now here and February 4 marked the beginning of the year of the yang earth dog (although the Chinese Lunar New year starts on February 16). What holds for the property market as the fire rooster leaves the stage and the earth dog takes over?
A prominent Malaysian Feng Shui master predicted that this year will benefit the water, metal and earth elements and industries associated with these elements will prosper. As the banking industry is associated with the metal element and the property industry is related to the earth element, these sectors will be among those which should do well this year. He further predicted that these industries could start to perform better around October.
This is certainly sweet news to all players in the property industry — developers, contractors, estate agents, consultants, house buyers, investors and service providers.
Will this Feng Shui expert’s prediction come true? Well, for those who believe in geomancy, there was another prediction by another even more well-known Feng Shui consultant that the property market in Malaysia will only recover next year.
We will only be able to find out at the end of this year who has made the most accurate prediction. In the meantime, what do the economic and industry statistics show and what conclusions can property researchers draw from our analysis of these facts and figures? Although we do not have the spiritual capabilities to make predictions based on the stars but we can try to analyse in the good old fashioned way, all related factors which will influence the property market and then try make an educated forecast on how we think the market will behave in the year ahead.
The Malaysian economy grew strongly by 6.2 per cent in the third quarter, up from 5.8 per cent in the previous quarter, leading Bank Negara Malaysia to forecast 2017 gross domestic product growth to be at the upper end of the official projections of 5.2 to 5.7 per cent.
The economic growth is supported by strong domestic demand as well as exports due to favourable global conditions. For this year, the Finance Ministry has projected between 5.0 and 5.5 per cent growth and the International Monetary Authority (IMF) has also made a similar forecast.
Crude oil prices hit a 30-month high in December last year after prices went on a recovery path following an agreement reached between Organisation of the Petroleum Exporting Countries and Russia, the major oil exporters, in November 2016 to cut production. Nevertheless, oil price recovery may stimulate an increase in American shale oil output and this may impede the positive effect of the production freeze agreement.
The manufacturing sector enjoyed strong growth, driven by both export-oriented industries which were led by the good performance of the electrical and electronics sector as well as domestic-oriented industries supported by food-related and building materials sectors.
Private consumption rose 7.2 per cent in the third quarter 2017 (up from 7.1 per cent in the second quarter) while private investments went up 7.9 per cent (7.4 per cent in second quarter). Public consumption, on the other hand, expanded 4.2 per cent in the third quarter (3.3 per cent in second quarter) while public investments recovered with 4.1 per cent growth compared to a decline of five per cent in the second quarter.
Foreign direct investments for the first nine months of 2017 is set to match the previous year’s record high. Headline inflation declined steadily from 4.3 per cent in the first quarter of 2017 to 4.0 per cent in the second quarter and 3.8 per cent in the third quarter but is expected to remain at elevated levels in the immediate term due to rising oil prices.
The ringgit continued to improve against the US dollar and has appreciated to slightly above 4.00 to US$1.
In the run-up to the 14th General Election (GE14) which has to be held on or before August 24 this year, it is safe to say that the government, in trying to create a feel good factor, will monitor closely and take immediate steps to ensure that economic growth outlook remains positive. This is expected to create a more positive economic environment which will benefit the stock and property markets at least in the immediate term.
OUTLOOK FOR THE RETAIL SECTOR
The year 2017 was a disappointing year for Klang Valley retailers due to weak consumer spending, intense competition, depreciation of the ringgit and rising cost of operations.
The issues continue to plague the sector this year and the outlook appears challenging, as weaker consumer sentiment and oversupply of shopping malls weigh down heavily on the sector.
Despite a challenging environment, established shopping centres which are well-located, professionally-managed and more receptive to the needs of their tenants and customers will be able to survive the current tough market conditions. For new shopping centres which are currently under construction, it is yet to be seen whether they will open as scheduled and achieve a respectable occupancy rate. Older malls in prime locations should be able to maintain their edge but should start planning for refurbishments to upgrade shoppers’ experience in order to survive in the current market.
OUTLOOK FOR THE OFFICE SECTOR
The supply of office space has increased substantially over the past six years and this has raised concerns about a serious glut which may have a drastic impact on the office market.
Newly-completed buildings are taking a longer time to fill up and more incentives have to be offered to attract tenants. Older buildings which have not been upgraded to meet the needs of modern businesses lose out as tenants take advantage of the attractive rents and incentives to relocate to newer buildings with better amenities and higher quality specifications.
As vacancy rates rise, rentals have come under pressure. The completion and commencement of the mass rapid transit line as well as light rail transit extensions have made areas served by the transportation links more attractive as office locations and this has spurred a decentralisation trend and relocation to new buildings in city fringe areas, such as Damansara Heights and Mutiara Damansara/Damansara Perdana.
Overall rentals have weakened in the face of higher vacancy rates and, although still generally stable, will come under increased pressure when the huge supply of space from few mega projects undertaken by government-linked companies, such as Merdeka PNB 118 and Tun Razak Exchange, are completed in the coming years.
The alarm bells set off by Bank Negara about the supply glut and the ramifications it has on the market and banks which finance projects have put all the stakeholders on high alert. The government’s proposed freeze on new approvals for luxury projects, if enforced, will help avoid worsening the oversupply situation and buy some time for the market to digest the supply. Due to these structural issues, the outlook for the office market certainly looks challenging in 2018 and the sector will face increasing pressure on both occupancy rates and rentals.
OUTLOOK FOR THE RESIDENTIAL SECTOR
The residential sector continued to be subdued last year. As reported by Napic, the volume of transactions declined in the first half of the year although interestingly the value of the transactions recorded a slight increase. The stock of unsold residential properties went up in the first half of last year with the bulk of the unsold stock being houses priced above RM250,000.
Although residential properties costing above RM500,000 formed the largest portion of new launches in 2017, the most active market segment was the affordable homes segment which saw designated government agencies like the 1Malaysia Housing Programme (PR1MA) launch more projects priced between RM200,000 and RM400,000 in partnership with private developers. Private sector developers also refocused their attention on smaller sized homes priced at RM500,000 and below as market demand for properties RM700,000 continued to be sluggish.
We believe the residential market will continue to be sluggish this year although some improvements may be seen after the dust has settled post-GE14. With the freeze on approvals for high-end condominium projects priced above RM1 million, service apartments, office buildings and retail malls (which was later relaxed to allow selective approvals), we could see fewer launches for such projects over the next few years and this may help clear the oversupply of such properties.
Another positive development was the government’s decision to not proceed with the planned increase in the stamp duty rate for residential properties in the RM1 million and above tier.
With the announcement on a 50 per cent tax exemption on rental income not exceeding RM2,000 in the 2018 Budget, investors will have an added incentive to invest in completed residential properties in the secondary market particularly in locations which are popular with the middle income group as well as yuppies who are not ready to own houses.
Suburbs which are served by the LRT/MRT/monorail will have an added advantage as access to public transportation is still an important consideration to this group.
First-time house buyers should take advantage of the new affordable home launches by the government agencies as well as private developers as they can now enjoy access to the Step Up Financing programme which was previously restricted to buyers of PR1MA houses. As prices have stabilised and declined in some areas, house buyers should take advantage of the situation and the many incentives and easy payment schemes offered by developers.
The focus of the residential market this year will continue to be the affordable home/small-sized unit market segments, and the hotspots to look out for are the areas which have benefited from improved accessibility resultant from the newly opened MRT stations and new highways as well as the areas surrounding massive government initiated urban regeneration projects such as TRX.
Of course, only time will tell whether our forecast will turn out to be correct but for the investing public, a soft residential market like what we are currently experiencing provides better opportunities to pick up good properties at more realistic prices.
Property developers are now offering more incentives and attractive payment terms in order to close a sale while in the secondary market, sellers are more realistic in their pricing and more willing to negotiate.
For the office and retail sectors, the supply overhang weighs heavily on these sectors and the freeze in new approvals will help prevent the situation from becoming worse. Nevertheless, these sectors are still stable and although there is increased pressure on overall occupancy and rental rates, we do not see any imminent signs of a crash in the near future.
The growth of co-working space has injected a fresh breath of life in the office market. Nevertheless, at this stage of development, these co-working outfits generally favour less prestigious buildings in less prime locations to keep costs low although there has been a move by at least one of these outfits to take up space in the prestigious KLCC location.
The visa waiver programme for tourists from China which was introduced on March 1 2016 and later extended to December 31 2017 has resulted in an increase in tourist arrival numbers from China and the momentum generated may well extend to this year and even beyond. This will benefit the leisure and retail sectors.
Further, despite the increased difficulty in transfering funds out of their country, we are still seeing Chinese nationals buying properties in Kuala Lumpur, Johor Baru and Penang, although at a slower pace, as our real estate market offers affordable and attractive investment opportunities to foreigners.
With increased involvement in our economy by China companies, we believe China money inflows in our property market is here to stay for a long time to come and this to a certain extent, could help spur the upper end of our residential market.
Dogs are known to be a loyal and dependable companions and it is hoped that in this year of the earth dog, the property sector will not be betrayed by unruly negative swings in the market.
Story courtesy of Henry Butcher Malaysia