Bargains in the property market
THE chatter of the week is that property prices will crash next year because of an impending interest rate hike and a growing supply of unsold houses.
Yes, interest rates are likely to go up and there is a mismatch in the supply of houses – something that all developers are addressing.
But will this lead to you getting your dream home located in a prime location for a bargain? Will this lead to a double-storey house in Bandar Utama being sold at a distressed price of RM200,000? No, it will not happen. Anybody waiting to get that dream house next year or the year after in a fire sale may not land the deal they have always wanted.
There are several reasons for this – from the state of the economy to the type of properties that are seeing a surplus and likely to be on a fire sale.
A look at the statistics shows that the bulk of properties that are likely to come into the market for a bargain are high-rise residential units, serviced apartments as well as office and retail space.
Bank Negara sparked off a storm when it stated that there were 130,690 unsold properties at the end of the first quarter of this year.
This encompasses completed and incomplete residential units that include landed property, serviced apartments, small office/ home office (Sovo-Soho), high-rise condominiums and apartments.
The central bank raised the red flag because in the past years, the average unsold units were at less than 80,000.
Closer scrutiny reveals that of the 130,690 unsold units, the number of residential units that are completed and not sold is 20,876 units. Out of this 20,876 units, some 34% are priced at more than RM500,000.
The number of completed resi- dential units priced below RM500,000 but not sold is 13,605 valued at a total of RM3.75bil. The units are not sold due largely to their location, where residents cannot afford them or prefer different types of homes such as landed property.
Going forward, the large supply of cheap homes is going to be in the categories of serviced apartments, Sovo/Soho units, condominiums and apartments. Most vulnerable are those priced above RM500,000 and located in places away from the city centre.
So, it is not that dream double-storey terrace house in Petaling Jaya, Penang or Johor Baru that is going to be put on fire sale.
Another segment of property where there is almost a certainty of a fire sale is office and retail units.
According to Bank Negara, a total of 140 shopping complexes are going to come up in the Klang Valley, Penang and Johor Baru by 2021.
Retail rental rates are already coming down. The incoming supply of more malls will only push down rental rates or leave many shopping complexes empty.
As for office occupancy, the situation is alarming in the Klang Valley, where 38 million square feet of office space is expected to hit the market by 2021. The office vacancy rate is forecast to be 38% in the Klang Valley, more than double the national average of 18%.
The vacancy rate for office space in the Klang Valley of 38% is far higher than the regional average of only 6.6%. What this means is that one in every three office blocks would probably be empty after 2021.
The saving grace for the property sector is that the Malaysian economy is doing well based on Bank Negara statistics and the mismatch in the property market causing an overhang is a well-known fact.
Malaysia’s economy grew at 6.3% in the latest growth statistic, thanks to the export sector.
The oversupply in some segments of the residential and commercial property market is something most people have been aware of since 2015, which is why banks have virtually stopped financing such projects.
Anybody who has a property such as a Soho/Sovo or condominium knows that rental income is not enough to cover the bank loan. In fact, the owners have to subsidise the tenant for occupying the unit.
Bank Negara has stated that the mismatch in the supply and demand of housing would affect the overall economy if there is “a shock” to the financial system.
The operative word here is “shock”.
A “shock” tends to take place when there is an element of surprise. When the financial system and policymakers underestimate the risk.
Based on history, property prices tend to fall off the cliff when there is a shock to the system because liquidity dries up. This forces banks to suddenly raise interest rates and pull back lines of credit, leaving customers with no choice but to dispose of their assets to meet obligations.
It happened in 1998 during Malaysia’s worst economic crisis. Banks pulled back credit lines overnight because corporates were over-geared and there were fears of a default.
At that time, it was said that a double-story house in Bandar Utama was being sold for RM200,000. The transaction was in cash. However, it was an isolated incident and not widespread.
Will Malaysia get a “shock” to its financial system next year or the year after?
Nobody can predict with certainty.
However, banks and property developers themselves have been well aware of the imbalance in the supply-demand situation since late 2014. And they have taken the appropriate mitigating steps.
These days, there are not many who dare launch properties priced at more than RM500,000, unless the location is excellent.
House prices have also adjusted downwards from a peak in 2013. The Malaysian House Price Index, an indicator of change in the house prices, has come down to less than 6% compared to almost 14% in the fourth quarter of 2012.
There is no explosive build-up of prices, unlike the three years prior to the 1998 crisis.
If anybody is expecting a widespread fire sale of landed property in prime locations, it is not going to happen. However, there are many other types of property that are already going for a bargain, such as the Sovo/Soho units, serviced apartments, and retail and office space.