Steady uptrend in valuations
No sign that prices will drop
ALTHOUGH the property market is set to remain soft this year, it still has a lot of good things going for it and the outlook is far for grim.
At the 11th Malaysian Property Summit 2018 (11MPS) held this week, Valuation and Property Services Department (JPPH) director-general Nordin Daharom says property valuations had been on a steady uptrend last year. This, despite falling transaction volumes, is expected to continue into the year.
During his presentation, Nordin points out that transaction volumes in the nine months of 2017 slipped 4.3% to 229,529 compared with 239,916 in the previous corresponding period.
However, in the same period, transaction values rose 6.7% to RM102.29bil in the first nine months of 2017 compared with RM95.85bil in the previous corresponding period.
“There is no sign that values will drop and transaction values in 2018 should be maintained at 2017 levels,” he says.
The 11MPS was co-organised by the Association of Valuers, Property Managers, Estate Agents and Property Consultants in the Private Sector Malaysia (PEPS) and JPPH.
CBRE|WTW managing director Foo Gee Jen, in his presentation, says that the residential property sector is expected to continue dominating transaction volumes this year.
“We expect more transactions in the secondary market versus the primary market.”
Foo, who is also the president of PEPS, says the secondary market will mostly comprise transactions of properties below RM300,000 while the primary market will mainly see transactions of units worth over RM300,000.
“The benchmarking of property prices will be driven by the secondary market,” he says, adding that this will see the development of more affordable homes, especially those below RM500,000.
“Developers will need to restrategise and this will create a lag in launches as developers change their property development strategy. This will drive volume but not so much value.”
Despite this, Foo says that “it was still a good sign” for the local property market, as “some growth” was still better than “no growth.”
He says a major damper on transaction volume is that the residential property market is facing an undersupply of housing stock. Foo attributes this to a mismatch in price and location.
“Based on the population growth rate of 1.3% of 32 million people as of 2016, the annual growth is around 390,000 and based on the average household of four people, we need about 97,500 units per year.
“However, only 78,216 units are completed annually.”
Foo observes that there is still a serious overhang situation in the country. He attributes this to high property prices, especially within the Klang Valley – which are unaffordable.
“Median house prices in Kuala Lumpur has grown faster (7% to 7.4%) compared with national prices (5.4% to 6%),” he says. According to Khazanah Research Institute’s “Making Housing Affordable” report, overall house prices in Malaysia are 4.4 times the median income. Zeroing in on the states, the price of a house in Kuala Lumpur is 5.4 times the median income. In Penang, it is 5.2 times, Johor 4.2 times and Selangor four.
Rising property prices
Foo says there is a number of factors driving up property prices – among them the disintegration into new and smaller family units.
“The average household size is changing. In 1970, it was 5.5 people. By 2020, it will be four people. The formation of new households and smaller family units will increase the demand for houses.”
Foo says urbanisation and population growth has also contributed to higher house prices.
“There has been an influx of population into the Klang Valley, Johor and Penang over the years.
“By 2030, the major cities will make up about 42% of the country’s population. Land scarcity on the cities exert more pressure on property prices.”
He adds that prices have also been driven by increasing construction cost due to inflation, as well as higher prices of imported materials as a result of the depreciation of the ringgit.”
To deal with rising property prices, Foo suggests looking to countries such as Singapore and Hong Kong – and observe how they address such issues.
“Hong Kong has a home-ownership scheme, whereby it subsidised the sale of public housing to the low-income group. Mortgages and resales are also restricted to low-income individuals.”
It has a scheme that allows existing tenants to purchase their flats at below market price, due to subsidies and restriction on selling.”
Foo says there are numerous ways to ensure houses can remain affordable for the public.
“Provide more incentives for private developers such as release of state lands or co-sharing of infrastructure costs, centralise policy-making and delivery of affordable housing to eliminate hidden or hindrance costs or streamline and simplify the application procedures.
“Alternatively, there can be a one-stop data centre to provide information on the market, or a database of tenants and landlords to protect both parties in the rental market.”
The idea of such a database is not new. Khazanah Research Institute’s research director Dr Suraya Ismail has said that the property sector is in need of an integrated database with comprehensive, statistical information that can be accessible to both consumers and developers.
The database, she says, will provide information for the consumers of housing products as well as developers to plan for a steady supply of units at the right location and at the right price.
“Housing is such a huge chunk of your savings. So if you are renting now, in 10 years time, if you want to purchase, you might want to know where that house will be and how much it will cost.
“Currently we don’t have a proper national housing survey that looks into the existing stock, vacancy rate, price range, last transacted price or transportation cost,” she told StarBiz.
Having information like this would allow developers to plan for a steady supply of housing for the people, says Suraya.
“If a developer were to build in a particular district, say 300 units of houses worth RM1mil each, the local council there can say ‘no’, because following the national housing survey and integrated database, there’s no such demand there, as household income is just RM4,000”.
“The database can also be a strategic tool to monitor the incoming stock... To ensure that it is at the right price for people residing there. It is like a census. It will be accessible to consumers and developers, as well as be a strategic tool for legislation makers at the district level,” she says.
Withering retail property market?
On the local retail property market, Savills Malaysia Sdn Bhd deputy executive chairman Allan Soo says that there had been more store openings in 2017 compared with those that closed down.
“There were less than 10 closures last year, compared with 23 new stores coming into the market,” he says during his presentation at the 11MPS.
Among the new stores are Origani, Red Wing Shoes, O Bag, Hotwind, Jack & Jones, Original Cake, HLA, Sfera and Lanvin.
The local retail property market has been under the spotlight due to the endless supply of incoming space and slowdown in consumer spending.
Soo says the medium-term out- look for the local retail property sector is expected to “remain challenging.”
“With incoming supply over the next few years, we expect to see more consolidation,” he says, adding that the local retail property market will be flat this year.
Soo says there will be a total of 197 malls in Malaysia by 2021, representing 86.2 million sq ft of retail space.
There are 170 malls or 62 million sq ft of retail space as at end-2017.
He adds that e-commerceis starting to have a transformative effect on the local retail property market.
Many bricks and mortar-based retail players have started incorporating digital services to complement their business.
“There has been further integration between digital and bricks and mortar operations as retailers further embrace advanced technologies to improve customer engagement.
“Panera, Shake Shack, McDonalds and Subway are adding digital kiosks in their stores.”
Soo says Starbucks reported a 20% jump in mobile pay and ordering during peak hours in its US stores.
“However, the increased sales volume actually hurt the company’s same-store sales growth, as congestion at the hand-off counter caused incoming customers to leave without making a purchase.
“In Malaysia, the retail market has also witnessed a trend of successful e-commerce players setting up bricks and mortar stores includ- ing Christy Ny Shoes, Pestle & Mortar, FashionValet, Twenty3, Zalora and Poplook.”
Despite its growing popularity, e-commerce penetration in Malaysia is still low at just 2%, according to Malaysian Association for Shopping and High-Rise Complex Management past president Richard Chan.
“It’s still quite negligible,” he told StarBiz .
According to CBRE|WTW’s Real Estate Market Outlook 2018, the retail market is expected to continue its modest recovery this year.
“Existing retail spaces in the Klang Valley will stay resilient in terms of occupancy and rental rates amid the evolving retail landscape and challenging market conditions.
“The incoming supply of 5.8 million sq ft will be more prudently managed by new developers/mall owners in order to be competitive with established malls,” the report said.
According to a report by real estate services firm Nawawi Tie Leung Sdn Bhd (NTL), as of the third quarter of 2017, total retail stock in the Klang Valley stood at 61 million sq ft and estimated pipeline supply for those under construction is currently estimated at 16 million sq ft, comprising 23 projects.
NTL also said newer malls have been struggling to establish market share, which had been diminishing and become increasingly fragmentary.
NTL said that in recent years, it
had witnessed a mall closure in Petaling Jaya as well as increasing occupancy stress, low footfall and retailers’ turnover in some of the newer as well as older malls.
It said this was matched by slower or no rental growth as well as an increasing need to provide for tenants’ incentives.
Chan believes the occupancy rate had dropped to 86% not due to oversupply – but rather underperformance of weaker malls.
“To derive at a figure of 86%, it would mean that more than 80% of malls have an average occupancy rate that is higher than 86%. If there is an oversupply situation, then rentals will have dropped.
“But if you check with large malls, rentals have not dropped. In fact, many even have potential tenants that are on a waiting list.”
“Old strata malls are pulling the figures down. There are 10 to 15year-old malls in Cheras that are struggling with occupancy rates of between 20% and 30%.”
Chan says many of these malls struggle with occupancy rates because they fail to conduct proper due diligence prior to building the mall.
The Government recently decided to freeze developments of new high-rise luxury residential projects of units costing more than RM1mil, which took effect on Nov 1.
The measure was implemented to cut down the glut in Kuala Lumpur and following Bank Negara’s findings on the mismatch of housing demand and supply in the country.
Sales in the Malaysian retail industry contracted 1.1% in the third quarter on eroding purchasing power, according to a report compiled by Retail Group Malaysia (RGM). For the first nine months of this year, the retail sales growth rate was 1.9% compared with the same period a year ago.
RGM says all retail sub-sectors suffered decline in sales in the third quarter, except pharmacy and personal care as well as other specialty retail stores sub-sectors, which reported a 6% growth.
After a short recovery, department store-cum-supermarket sub-sector suffered a dip in sales during the third quarter of the year with a decline of 3.5%. The department store sub-sector slid into the red with a 4.4% decline in the third quarter.
Despite selling basic necessities, the supermarket and hypermarket sub-sector reported the worst result during the latest quarter. For the third quarter of 2017, retail sale of this sub-sector dropped by 5.2%.
Going forward, members of MRA estimate an average growth rate of 3.8% during the fourth quarter of 2017. “With consideration of the latest poor result, RGM has revised its annual growth forecast downwards again from 3.7% to 2.2% for Malaysia retail industry in 2017.
E-commerce boon
In his presentation on the Malaysian industrial property market, Rahim & Co International Sdn Bhd research director Sulaiman Akhmady Mohd Saheh points out that the growth in e-commerce has benefitted the sector.
He says e-commerce has been recognised as a critical enabler to accelerate revenue growth for the economy, thus driving demand for logistics and industrial space.
“There will be a new trend on how industrial properties should look like. For example, smart factory is gaining traction in the marketplace with the implementation of smart building technologies with cutting edge solutions that has features such as energy monitoring and smart apps
“Due to this, there is potential for the industrial sector to expand its operations and there will be opportunities for the supply of new breed of industrial properties.”
CBRE|WTW’s Real Estate Market Outlook 2018 meanwhile says the emergence of e-commerce in the country will spur industrial properties related to logistics and warehousing.
“Last mile delivery shall expand. With the adoption of technology in supply chain management, which enhances delivery and inventory efficiencies, large size warehouses in industrial parks or ports may have to cater for different segment of the industrial sector.
“In view of the rising commonality of e-commerce among urban population, warehouses may slowly shift to be closer to urban areas to cut down delivery time.”
Sulaiman says the successful performance of the industrial property sector relies on basic fundamentals.
“The locations of these industrial developments and the availability of infrastructure within the area such as highways, railways, ports, airports and Internet connection for the digital economy players, on top of the low-cost or optimised-cost of friction between the supply chain and related players – are important.
“Proximity to skilled labour supply as well as the pool of expertise to the manufacturing base are also key to ensuring a sustained demand and growth for any industrial facility,” he says.