Is there really an oversupply?
The Star 30/4/2005
AS at end-September 2004, overall take-up rate for new housing development
was 45.3%. Penang recorded the highest average take-up rate of 47.1% while
Johor had the lowest with an average of 20.3%. The Klang Valley registered
an average take-up rate of only 30.5%.
“These figures clearly show that the risk of oversupply is high in Johor,
but is well-contained in Penang,” says Avenue Securities property analyst
Chan Ken Yew.
During that period, the residential overhang was 15,162 units valued at
RM1.75bil. Unsold residential units that were under construction and not
constructed surged to 59,761 and 20,173 units respectively, from 57,931
and 17,582 units as at end-June 2004.
Market observers agree that the oversupply problem will always be present
especially in less strategic areas such as Bukit Beruntung and Tanjung
Malim.
“The bulk of the unsold residential units are under construction and those
not constructed were priced below RM150,000 per unit. Hence, this further
supports our view of oversupply in affordable housing and the mismatching
of location,” says Chan.
An observer says the oversupply issue should be viewed objectively. It is
likely that oversupply in Johor is concentrated in lesser known areas. In
such areas, the problem of oversupply will persist.
According to the Finance Ministry, there are only 11,200 units of
residential overhang valued at RM1.5bil as of the third quarter of 2004.
“The overhang has been fairly stable since 2000. Compare this to the more
than 100,000 houses transacted per year, 11,200 of overhang is
insignificant,” says an analyst from HLG Research.
INTEREST RATE
A depressed mortgage rate has been one of the key drivers of the
residential property market. Currently, investors have the opinion that a
revision in interest rates would affect demand for houses.
Higher financing costs may also have a direct impact on banks’ default
rates, especially by borrowers that had acquired properties for investment
purposes.
“The current low interest rate environment coupled with various attractive
housing packages are a boon for the property market. However, with rising
interest rates in the US, the jury is still out on whether Bank Negara
will raise its overnight policy rate. We believe the quantum of increase,
if any, will not be apparent enough to choke demand,” says an analyst from
AmSecurities.
It is also likely that investors have confused headline interest rate,
which is nominal, to real interest rate. While nominal interest rate can
go higher, this will not have an effect on demand as long as real rate
remains accommodative.
“We estimate that real interest rate will need to increase by 300 basis
points at least to have an impact on demand,” he says.
A foreign stockbroker is anticipating a 25 basis points increase in the
third quarter of 2005, followed by another 25 basis points in the fourth
quarter.
Nonetheless, if the Malaysian economy continues to be robust, there is no
reason why the property market will not prosper.
A good example would be the 1994-1997 period, when interest rates were
soaring, yet property sales were booming.
“A rational increase in interest rates can be absorbed by the market. The
property market is very tied to the general economy. If you look at the
confidence index by the Malaysian Institute of Economic Research, it is
now at a 5-year high,” says the stockbroker.
Indeed, the latest consumer sentiment index (CSI) points to the fact that
consumers are in good spirits. The CSI has risen to 120.9 points,
indicating that current incomes are in good shape.
FOCUSING ON THE HIGH END
The trend to focus on high end is probably due to the fantastic demand the
entire property market enjoyed in 2004. In addition, landed or not landed,
this high end segment is doing well because buyers are focusing on
location and the niche market.
“As developers, concentrating on the high end enables them to maximise
their profits for every sq ft they sell. After all, it’s the name of the
game to make as much money as possible,” says a property analyst.
But another property consultant begs to differ. He says a fat margin is
hardly a factor. “As a rule of thumb, a developer usually makes a margin
of 20%-25%. Buyers perceive that developers are fetching margins of over
50% but that's not true. Buyers are not going to buy if they believe this.
If they are going to pay a couple of million ringgit for a property, they
expect numerous expensive features such as quality fittings and so forth.”
While many property developers are focusing on the very high end sector,
statistics show that only 1% of Malaysia’s 26 million people have very
high purchasing power.
“It would be dangerous to build such high end houses only for such a small
group of people,” says the analyst.
Nonetheless, for high-end developers who are able to differentiate
themselves, prospects are brighter.
One good example would be Bandar Raya Developments Bhd. According to
Credit Suisse First Boston (CSFB) analyst Tan Ting Min, Bandar Raya's
Troika Condo projects, which is due to be launched in end-June 2005 is
designed by Norman Foster.
Foster is one of the world’s most innovative architects. His remarkable
buildings and urban projects have transformed cityscapes, renewed
transportation systems and restored city centres all over the world.
“Getting Foster to design their condos is a big plus point for Banda Raya.
This is differentiation, and people would be interested to take up these
types of condos,” says one observer.
LIQUIDITY
Tan expects the robust economic growth to further fuel the property
market.
“Malaysia’s gross domestic product is forecast to grow at a robust rate of
5% in 2005. There is near full employment. We believe that a robust
economy will fuel the property market, and this is depicted in the high
correlation factor of 83%-88% between the performance of SP Setia Bhd and
IOI Properties Bhd versus per capita income,” she says.
According to the HLG analyst, house prices have appreciated by 15%,
underpinned by the steady economic growth and increasingly buoyant
liquidity environment.
He says the behaviour of developers, consumers and bankers provide further
comfort that the property sector is still in its early stage of an
up-cycle.
First, property developers continue to have fairly ambitious launch plans.
Second, consumers and investors’ demand for properties are still
encouraging. Third, bankers, be it local or foreign, are aggressively
fighting for the mortgage loan market share.
He cites an example of Public Bank Bhd, which is now offering 0% interest
rate for the first year of mortgage loan. Other features that favour house
buyers are high margin of financing, legal fees waiver and flexible
repayment, among others.
YOUNG POPULATION
Many analysts are using the young population argument to support their buy
calls on the sector. The belief stems from the notion that the young will
provide the pent-up demand for the sector moving forward.
According to the analyst from HLG, out of Malaysia’s 26 million
population, some 29% – which translates into 7.5 million people – falls
under the 25-44 age group.
“This group consists of prime house buyers for personal consumption or
investment. By 2010, there will be 2.4 million more of this age group,” he
says. Another analyst, however, points out that while more than 50% of the
population is under 25 years old, only 10% of the population is in the
25-30 age group.
“In the long run, I foresee the property sector doing relatively well.
Over the near term, however, it is only those in the 25-30 years age group
that will be actively buying. Those over 30 are likely to have already
bought properties,” he says. |
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