Malaysia's Real Estate Market - Prices gone haywire?

Kuala Lumpur and its close neighbours are perhaps the main hotspot for real estate investment, often called the Klang Valley. Looking at these core regions, as described before, we find serious oversupply, e.g. in luxury condominiums, office space as well as retail space. This oversupply situation usually means massive discounts and for office space, you would be right to expect so. 

Average prime office gross rents/month

Following DTZ Research, we are at the beginning of a slow downturn of prime office space prices. The diagram offers an idea of what is supposed to come. From a quite obvious peak in 2008, slowly rental prices are going down over the last yeasrs and might even accelerate the plunge during 2012. This effect might be increased as we cannot predict the total impact of the crisis in Europe and the slowdown in China. On top and as always, we have the unique situation of a massive amount of projects to be completed and therefore a big income of new office space supply in 2012. DTZ offers an overview in the second diagram, which shows that 2012 seems to be a developing or better completion peak for office projects in comparison with previous years as well as compared to plans for the coming years. Anticipating this development, we can expect during 2012 and 2013 a lot of pressure on office rentals. In this context, we even can conclude that for this specific sector a price bubble is rather unlikely.

Office development pipeline

What is next? Well, I will not extend a lot of attention to retail and industrial real-estate, since they usually do not become driving forces of a bubble. For industrial, we can already conclude that the overhang is rather small, while retail suffers especially in the range of cheaper shop lots of RM 250,000- RM 500,000. Larger projects, especially large retail malls, demonstrate strength in the current market. Furthermore, Malaysian consumers are still hungry for exciting new mall experiences, which increased the demand for integrated mall and entertainment projects. Mostly, vacancy has been low and replacement was achieved quickly. Consequently, this segment in the market seems to be less likely creating a bubble.(NAPIC Dec. 2011: Property Market Status Report Q4 2011) Moreover, if we look at the subprime crisis of the US, the main issue was the believe of private investors in residential property prices. Since they were supposed to always go up, loans would not cause trouble. Unfortunately prices went down and most investors could not settle their loans by simply selling their house. Certainly, there are other factors involved, but that does not concern this post. In the context of Malaysia's real estate market today, luxury condominium and overal luxury residential projects (incl. housing), although oversupplied, keep on testing new hikes every day. (DTZ Research 2011: Property Times) Property valuers  are puzzled and discovered that recently the primary market is considerably higher priced than the secondary market. That alone in prime areas would not be impossible, but we are talking about development in the periphery. Here normally people would buy houses below RM 500,000 (below USD 150,000). The sq ft would fetch perhaps RM 400 - RM 500, and  below. Developers are trying their luck and there are already adverse signals from the market. With prices going up to RM 3 mio for houses and more or respectively RM 600 - RM 700 per sq ft, the take-up of new units in mentioned projects is slowing down.

Lux. development in Kepong

From my personal perspective, it is a troublesome development to see prices going up that much in townships such as Kepong, Cheras or Ara Damansara, as these spots are partly more than 20 km away from KL-city. People specifically buy in these areas to escape overprized condos and houses in Bangsar or Damansara Heights, while not only the distance is an issue. The overal development, convenience, entertainment, education, you name it, cannot challenge the older hotspots yet. Some developers obviously argue, they invest a lot in security, but valuers clearly mention that this could only offer a premium up to 30 %. Besides, let us not talk about the neighbourhood. (Thean Lee Cheng 5 May 2012: Where is the market heading?)    

 

What reasons could we find for this unusual development, which puzzles valuers and customers alike? Well, greater Kuala Lumpur is expected to grow to 10 mio citizens by 2020. The drive into urbanisation and away from rural areas is strong. The potential for rising residential and commercial real estate seems to be set. Furthermore, foreign investors, who currently just comprise about 2 % of unit sales, are supposed to be attracted. In this context, Malaysia Property Inc. has been setup, as the sole government agency to promote Malaysian real estate to foreign investors. For more on MalaysiaProperty Inc, just follow the link.(Thean Lee Cheng 3 March 2012: Malaysia a real-estate shopping destination). It is also known that Malaysian's have a strong investment interest in real estate and heated up the market themselves. Observers stated that besides the developers price testing efforts, there are a lot of Malaysians who speculate on rising prices with their private money. The newspapers pointed at stories, where people would loan money for three or more luxury condos during the early sales period. This investment is way above their income and the banks are also to blame on it. While the project is completed and prices tend to rise, they would sell it off. This matter has caused quite some worries in the market and Bang Negara addressed this risk by announcing new guidelines for banks' lending policies. (The Star 24 April 2012: Bank Negara defends rules) This could already cool down the property market, which is why I will pick this matter up in my next post.

Another concern or let us call it some heat for this discussion has been added by local house buyers recently. It was for the ongoing price hikes that consumer advocates pushed forward and tried to increase the price tags for foreign investors to at least RM 1 mio. They claim that foreigners are responsible for the price hikes and Malaysian citizens, especially the middle income groups, were not able to afford housing or find condominiums in prime areas. On this one, I could be cynical, but let us be rational.

Real Estate Sector Price Spread

Firstly, I wonder, if these guys have done any research. Only 2 % of the yearly sales in real estate goes to foreigners. Secondly, foreigners already have to buy units above RM 500,000 according to the law. Now let us look the price spread of units in the market and what it tells us. The diagram on the left is in particular quite helpful and based on research of Malaysia Property Inc. If we take four real estate hotspots, we will realise that actually only Kuala Lumpur has a significant price hike of more than 40 % luxury residentials on offer. I believe for most experts and anybody with a rational perspective, this would make sense. Kuala Lumpur as capital and with only a limited amount of land available for development, but rising demand would see the demand driving prices up. Similar issues are seen in major cities globally such as Tokyo, Shanghai, Hong Kong, Singapore or London, Paris and Rome. I doubt that Americans start to complain about the sq ft price in Manhattan, New York, where we can see an average of more than USD 1,000. Not talking about prime property at all. Take a look at the article of CNN (CNN Money 2012: NYC apartment sells for a record USD 88 million). Probably Americans understood the principles governing prices, supply and demand. I really tried not to be cynical. Anyways, since we can conclude that hikes are mainly based on an exceeding demand for property in central locations, such as Kuala Lumpur, the point for a new price tag having a great effect on overall real-estate prices in Malaysia is quite weakened. Just take a look at spots such as Penang, which is basically an island with very limited space. Furthermore, in Johor we will find some places, where Singaporeans are taking up a lot of units and prices go up. I mentioned Iskandar before. After all, many large-scale development projects, such as Iskandar, are not possible without foreign investors. In the end, we are talking about very small areas. Malaysia Property Inc's KUMAR THARMALINGAM puts it like this: "The rest of the country is pretty much stuck in the RM300,000 RM600,000 category."  For more on this matter, I can also recommend his comment in The Star: The Star 5 May 2012: Priming, pricing KL property for the future. 

In an election year, it is expected that people start screaming about "indisputable injustice" in Malaysia, e.g. that they cannot buy a house above their living standard.The most noise came from middle income groups, which would like to buy houses below RM 1,000,000, but in prime areas. There is indeed a shortage, since we have an oversupply in luxury and cheap residential property. However, I cannot see a solution, since in Kuala Lumpur prices will go up along the high demand and little supply. If you want to stay in the city, you need deep pockets.

Knowing more about the pricing and developments in the market as well as some irrational fears and populism, I will finally conclude on the question of a bubble in Malaysia. Prices partly went haywire, but I believe the market will correct these matters. Since sales did not take off, developers will need to adjust. After presenting so many facts and developments, I am sure everybody agrees that it is not as simple as it seemed in the very beginning. Let us put the puzzle together.

Stay tuned for my next post and the final question on whether or not we are heading towards a real estate bubble.