Real Estate Market Conditions of Malaysia

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Despite speculation of a property market crash, Malaysian banks had been performing well in the KLSE market recently. There had been many rumours, speculations and insights on our current economic conditions. Malaysia Property Times took the opportunity to visit Dr Sr Rosli Said, a prominent Land Economist and Property Expert in Kuala Lumpur who is also currently the senior lecturer at the University of Malaya to find out more about the Real Estate Market Conditions of Malaysia. This will ultimately help our readers, investors, developers and the nation as a whole to understand and obtain insights on how the real estate market is performing in the past, the current, and what is expected of the future.

The opinion below is purely Dr Sr Rosli Said’s and does not represent the opinion of University of Malaya’s views. Organizations are advised to consult their own real estate experts for market research.

1) What are the current real estate market conditions for primary and sub-sale in Malaysia? Are there any forthcoming dangers/risks in our real estate market?

Evidence shows that real estate is one of the main drivers of Malaysian economic growth and the engine of social stability thus an important part of economic development. In answering this question, we may focus on housing development because it is not only essential for the social security of homebuyers but also the highest form of long-term savings; more particularly for owner occupation purposes. Therefore, the interrelationship between the purchasing power of homebuyers and the present uncertainty of domestic economic becomes paramount.

As reported widely, the economic climate in Malaysia is starting to be looking up, although there is still a lot of uncertainty. There has been economic growth which is expected to remain steady at 4% – 5% throughout 2017. The uncertainties for our economic arise due to the global economic outlook, especially influenced by the commodity (oil) prices. It has a major impact on our real estate market especially in terms of domestic financial markets and real estate prices. We may not realise even with increasing incomes, we may still like we are unable to get by with our day-to-day expenses. This is what happens in the present days, where the potential homebuyers’ real income may be on the downhill rather than the uphill. In other words, the purchasing power of the majority of potential homebuyers is diminished because of higher prices of real estate products. To go further in answering this question, we may study the housing cycle as given in Figure 1 on the next page.

Figure 1 differentiates the nominal and real cycles by correctly adjusting inflation in the variables, where the real term residential cycle has been established. The analysis shows that the real cycle has reached a complete loop in 2016, meaning that it took about eight years from the previous cycle. The typical cycle in developed countries normally takes about 8 – 10 years to complete the full swing. Therefore, I could conclude that our residential market has been softening since the year 2013 and continued heading to a lower point. There is a risk of heading towards the bottom of the cycle if no positive interventions are established. If the present situation remains, there is a risk of having a real estate crisis in the next two years.

Based on my analysis, the residential market is lagging about a year of the country’s economic performance. By employing the Vector Autoregressive (VAR) technique, the residential market needs about 4 – 5 years to reach the steady state again, as proven by the shock of occurrence as a result of the Asian financial crisis in 1998. The analysis also shows that, within a year, shocks as a result of the structural break will reduce the house price as much as by 24%.

This is the main issue that we need to solve immediately. The market needs to be vigilant to ensure that it is heading down to the right track. The win-win situation needs to be established between the homebuyers, the developers and the government.

Back to the question, I observed that several strata developments had been called off due to no takers. My different analysis also shows that residential bubbles, in particular for strata developments, already exist in certain states namely Selangor, Kuala Lumpur, Penang and Johor. The same thing happens to office development. However, nothing to worry about primary units if the developments are located along the main infrastructure routes such as the MRT and LRT and in any area of economic activity.

As for the sub-sale units, I posit that we are now in the buyers’ market. There are a lot of choices available in the market and this is an excellent opportunity to purchase especially for cash-rich purchasers. This is also a great time to consider for auction properties.

As for the forthcoming dangers/risks in our real estate market, as mentioned above, our residential market is heading towards the lower point of the cycle. If this is materialised, then the purchasing power will also be diminished due to higher inflation. If we let the market goes to that stage, then all the market players will be facing a huge problem in the next few years. Among the risk that may incur throughout the period includes; the credit risk – the homeowner or borrower will be unable or unwilling to pay back the loan, asset price risk – the risk of assets depreciating in value, resulting in financial losses and liquidity risk – the risk of unable to sell the existing units own by the investors or unable to obtain financing. However, no investment or construction project is risk-free. Risk can be managed, minimised, shared, transferred or accepted. Unfortunately, it cannot be ignored.

2) What are the forecasts/expectations 2 to 3 years/near future that is to come?

In dealing with the financial part of the real estate sector, the Overnight Policy Rate (OPR) can be used as a guide for short term forecast. If the Bank Negara Malaysia (BNM) maintains the OPR at 3% for the next few years, we expect stronger growth in the financial market. However, higher inflation is also expected with such a move. As reported widely, the inflation rate throughout the remaining of 2017 and 2018 would be in the range of 4% – 5%. If the inflation is getting higher, the purchasing power will be reduced and therefore, the purchasers will be unable to purchase any newly launched unit, if the prices on offer are still at the present state. However, it is officially reported by the BNM, the Malaysian economy expanded 5.6% year-on-year in the first quarter of 2017. This is a good sign towards a better economy which will influence the real estate sector.

Taking into account all those factors, I posit that, the house price will continue to deflate until the end of 2018. As mentioned before, the Malaysian economy leads the real estate market for about a year. This lead-lag relationship will determine the short-term forecast of real estate performance. However, the uncertainty of global economic performance will affect the real estate sector in the next two to three years. Based on the analysis above, I believe that the real cycle will reach the lowest point by 2018 and takes about four years to go back to the steady state of market behaviour.

3) What advice would you provide property purchasers/investors?

In real estate market, there will never be a bad time to buy properties as an investment. We can observe that, if the real estate market is booming, this is usually coupled with widespread availability of competitive mortgage products. This market is typically counter-cyclical, meaning that when property values are stagnant or decline, the availability of mortgage is much tighter. This will make borrowing more expensive in the next few years and less costly as compared to the last few years. Therefore, the investors should come out with their strategies in accelerating the growth of their investment portfolio in dealing with gearing and liquidity strategies.

However, there is better to have cash in the bank in dealing with such strategies. Many investors get greedy and over accelerate the growth of their portfolio by investing all monies raised from their investment in real estate. It is good if substantial of monies raised from refinancing be kept as cash and the remainder is used for reinvestment especially during the next few years. During the bad time which I expect in the next two years, the rental demand for investors’ portfolio will decrease depending on the available units for rent. In this situation, the investors can use the cash to cover during this bad situation until the market recovers over time. However, there is an excellent opportunity for the first time home buyers to start looking around for their dream unit. There is no doubt that we are now in the buyers’ market, where there are lots of opportunities for the buyers to choose from. The same as investors above, if the purchasers are in the market to buy, it is better to have cash in the bank to help them in the case they are unable to borrow. During this time and two years ahead, the buyers could focus on either sub-sales properties or auction properties. The buyers could also consider the newly launched projects which are located along major infrastructure developments such as LRT and MRT or the area with established economic activities. Therefore, knowing the buyers’ market at this time around is crucial in making decision.

4) Advice for property developers?

This is the peak time for the developers to revisit their development activities. The cash flow is king for any real estate development activities. However, it is acceptable to certain organisations that if the profits were made during good times although the profit does not happen during bad times. In whatever situation, cash flow is considered as being everything in any real estate business. In addition, the developers could also potentially take the opportunity to improve their position relative to their competitors and focus more on the target markets which are more profitable. In order to improve their position, there is a need to make a realistic assessment of the business environment, identifying the company’s position and pursue a dynamic and efficient strategy. Developers cannot become complacent and they should assume the unforeseen is always just around the corner so that they are always prepared.

In relation to the above, the first thing to do is to know the market. I am giving examples of my analyses in Klang Valley which are equally applicable to other areas. The developers should listen to the need of their target markets in order to adequately engage them. In other words, the developers should recognise the emotional and rational motivations of prospective buyers. This is because, the property is often the biggest purchase in the lifetime of a buyer and it is considered as a home to find happiness. If we look at the trend of purchasers’ need over the years, they are no longer investing in the physical structure of the unit. Purchasers are more concerned with the many elements surrounding the property itself including, among others, the lifestyle, location and culture of the area where all of these things influence the choice of a purchaser.

Figure 2 shows the score of components and elements under property criteria that is statistically significant with demographic criteria. The result indicates that the type of house becomes the highest priority that has always been considered by the buyer during decision-making stage prior to purchasing a house. It follows by elements such as environmental quality, distance from the house to education area, topography form, the design of the house and finishing inside the housing unit.

The result suggests that the developers can still launch new project even in adverse market conditions if they fulfil what the potential purchasers want. Otherwise, the developers need to compete with sub-sales units on offer during bad times..

The more thorough property market study needs to be conducted in making the newly launched projects more competitive. The developers also need to identify the affordability level of potential purchasers in their target market. During this tough time, higher living costs combined with static income level, it is good to assess on people’s saving within the catchment area. This will help the developers to come out with new pricing strategies to suit what the potential purchasers can afford.

Table 1 and Figure 3 next page shows my recent analysis in Klang Valley area focussing on young couples, with a different level of income group (Table 1), to identify the amount left as saving (Figure 3) after deducting all necessary expenses (food & beverages, transportation, utility, etc.) out of their gross income.

The majority of young household couples in Klang Valley had allocated RM300 and below for total savings from their gross income. Only 16.7% to 33.3% of those surveyed (G4, G6, G8 and G9) allocated the amount of more than RM500 for this purpose. Overall, the results show a different spending pattern among potential house buyers from different income categories. The figure also shows that the young couple in the low-income category had spent the same amount similar to a young household couple in high incomes categories. Based on the analysis, the developers could estimate the affordability level of their potential buyers to justify the price strategies to be adopted.

In terms of the price that can be sustained in the long run, I would advise the developers to conduct a study to justify the area that can sustain the house price in the long term. An example of analysis in Klang Valley is given in Table 2.

The developers could follow the following priority areas (Klang Valley) by employing COPRAS method in determining the potential location of their development site. The total of 32 factors is considered in the analysis namely housing attributes such as price, quality, types, etc.; accessibility attributes such as near to commercial area, transportation, etc.; and surrounding attributes such as environmental quality, traffic congestion, safety level, etc.

As evidenced in Table 2, the location that best describes the factors in sustainable housing affordability in Klang Valley area is Kuala Lumpur as reflected in the utility degree of 100%. The second best ranking would be Klang with the utility degree of 98.51% followed by Petaling Jaya at 98.38%. Shah Alam is the lowest in ranking as reflected in the utility degree of 98.25% just below Klang at a slightly higher rank with utility degree of 98.51%. I have also done the same analysis in Kuching and Kota Kinabalu. On the other side of the coin, although the government does not make it compulsory for the developers to adopt the Built then Sell concept, I posit that the concept has to be revisited especially during the bad time. A new mechanism has to be established in order to help small scales developers to stay competitive in the market.  This will help the price to be stabilised and create a win-win game between the market players towards a matured real estate market. The developers also need to focus on small-scale developments and could consider a joint-venture business during this time around.

Article contributed by Dr Sr Rosli Said
Chartered Surveyor, Registered Valuer & Estate Agent
Senior Lecturer, University of Malaya
Land Economist & Property Expert

Dr Sr. Rosli Said, graduated from Reading University, UK with a BSc (Hons) in Land Management and M.Sc. degree in Urban Land Appraisal. He received his PhD degree in real estate finance from Ulster University, Northern Ireland, UK. He is a Chartered Surveyor, Registered Property Manager and Registered Valuer and Estate Agent. Rosli commenced his career with Abrar Group International and involved in feasibility studies, development appraisal and real estate marketing. Rosli enhanced his professional career with Henry Butcher Malaysia and engaged in real estate research, valuation, development, marketing, finance and investment. He is now a senior lecturer in real estate at the Faculty of Built Environment, University of Malaya, Kuala Lumpur. Rosli involves in research projects, among others, an assessment of housing affordability in Malaysia, evaluation of housing finance system in emerging markets and forecasting office demand in Kuala Lumpur. Rosli’s fields of interest include housing research, property modelling and forecasting, real estate development, finance and investment.

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