Old issues go into the new year

It has been an eventful year on all counts for those on the property front, be it buying or selling

SENTIMENTS matter and over in the property sector, they have been weak for some years now. The key issue is affordability. Incomes are not rising fast enough as house prices.

In the last two years, the focus has been on building more affordable units although there is a view that maybe the country should strengthen the rental market.

Some of the problems of the current year will be carried forward to the next. Affordability, debt, over-supply are among some of them. Starting a family

There is this perception among the older generation a long time ago, and maybe even now, that buying a house and getting married can add some degree of maturity to a young person. This may be true to an extent.

Rising foreclosures debunks this. As for debt, don’t go into too much of that at least for the first year lest it leads to the route of foreclosure and the marriage hit the rocks. You can cut the wedding cake into many pieces but you cannot even cut the house into two. So both require financial restraint and emotional maturity, besides other forms of intelligences.

Malaysia’s household debt to Gross Domestic Product (GDP) ratio fell slightly to 83.2% as of end-September 2018 from 83.8% at end2017, according to the Finance Ministry.

A large portion of the household debt catered for asset accumulation such as buying residential properties (52.8%) and non-residential properties (6.8%), as well as investment saving funds (5.7%).

The government said most individual borrowers boasted a prudent debt level, while the overall Debt Service Ratio of accumulated financing was at 32%. So let not debt and poor finance management ruin a great beginning.

Left on the shelf

It is no fun being left on the shelf. Developers are finding that the hard way. When properties remain unsold on completion, it represents a holding cost for developers.

Malaysia has completed housing totalling 30,115 units, worth RM19.54bil which remained unsold. The figure has been escalating the last couple of years. Known as an overhang, this third quarter saw an increase of 48.32% over the same period a year ago in volume. In ringgit value, it is a rise of 56.43% over the third quarter of 2017 (RM12.49bil). This excludes those built on commercial title.

The Valuation and Properties Services Department (JPPH) defines an overhang as completed unsold units nine months after launching, and after the issuance of the certificate of fitness by local authorities.

The government is trying to resolve this with a massive national home ownership campaign. Developers will unveil their respective marketing plans next month.

Serviced apartments and SoHos

To make properties more affordable, developers introduced serviced apartments, small offices home offices (SoHos) several years ago in a big way.

This type of properties came with less encumbrances during the construction stage so developers like them. Because they are built on commercial land, the price is also higher. Developers need not provide space for mosques or schools. They can be used as a house or an office. This type of properties are now flooding the market.

Because these units are built on commercial land, owners have to pay higher utilities and taxes – utilities can go up 25% to 30% – compared with properties build on residential land.

As as Sept 30, there were 10,801 units completed but unsold units, valued at RM7.84bil. This is an increase of 162% from a year ago when there was a total of 4,120 units. In ringgit value, it is a rise of 165% in value (2017: RM2.96bil).

About 70% of serviced apartments and SoHos priced RM500,000 and above in Malaysia are unsold today.

Wealth preservation

For some, a house is a roof over one’s head, a shelter on a rainy

day. For others, it is an investment. If you had put your money in stocks, would it have given you the same returns?

The FBM KLCI has gone up 32.53% between Jan 4, 2010 and Dec 27, 2018 while the Kuala Lumpur Property Index went up 10.34% during the same period.

Stocks are more volatile but they have the advantage of liquidity, which also means investors can dump stocks when sentiment is poor.

The collapse in the stock markets around the world today is an example. Property is illiquid.

As for buying the physical property, the Malaysian House Price Index (MHPI) went up 192.1 points as at the third quarter ended Sept 30, with 2010 being the base year. Prices have been on a continuous uptrend over the last eight years.

Taking stock

The slow market has impacted developers and they are building less. Holding unsold stock comes with a cost.

So they have put a hold on launching new products and at the same time, slowed down the building process.

In the last two years, the incoming supply has dropped to an average of about 470,000 units compared with the period between 2010 and 2016 when incoming supply rose from about 530,500 to hit a peak of 870,442 in 2015.

It dropped slightly to 837,251 in 2017, but plunged to the 461,000 level in the third quarter, representing a drop of 45%.

Planned supply has also dropped in tandem the last two years to average at 440,738, compared with peak planned supply in 2011 of 663,963.

Office space

According to JPPH’s report, office space in the country totalled 174.81 million sq ft, with the Klang Valley accounting for 127.77 million sq ft. Office space supply has been an issue over the last several years. The Klang Valley office space is a course for concern as new offices in large scale projects near completion. The over supply has pushed down rental as building owners lower rent to attract tenants to keep up with occupancy.

Putrajaya offices have an occupancy rate of 42.75%, among the lowest. It was 52.6% a year ago.

Vacancy of Klang Valley offices average less than 80%.

According to Jones Lang Wootton research, a total of 13.332 million sq ft of office space, in the form of 33 office buildings, is scheduled to be completed in the Klang Valley over the next 30 months, and almost half of this, 6.586 million sq ft is “scheduled” for completion in the second half of the year. It is anticipated that 50% to 60% of this space, could be deferred to 2019 or beyond.

JLW says there is already a growing trend of developers deferring completion dates and based on the historical trends set in oversupplied markets, it is anticipated that 50% to 60% of this space, could be deferred to 2019 or beyond.