House buyers to wait and see

The dynamics of the Malaysian real estate landscape are changing. Following two good years of aggressive launches and growth, industry players are now bracing for tougher times ahead.

This is in anticipation of waning consumer demand as the impact of a slowing global economy filters down to the man on the street. Against that backdrop, developers expect to cut down on launches in the coming months and ensure existing supply is taken up by buyers.

“The slowdown is inevitable. It’s how we cushion ourselves as purchasers adopt a wait-and-see attitude,” Real Estate and Housing Developers’ Association Malaysia (REHDA) president Datuk Ng Seing Liong told The Edge Financial Daily.

Property prices had not fallen much, though the decline would depend much on the location, said Ng, who speaks on behalf of some 1,100 developers in Peninsular Malaysia.

A crippling global financial liquidity crisis in the US and Europe has taken a toll on major economies. Singapore, Japan, New Zealand and the 15 Euro zone nations are technically in recession, defined as two consecutive quarters of negative growth.

The weakening of these economies likely would translate to less export revenue for developing nations such as Malaysia. Analysts said Malaysia was expected to feel the heat of the credit crisis by early 2009 as exporters cleared their previous order books amid shrinking new orders.

When the overall economy is beaten down, coupled with the wealth destruction on the local stock market, the housing industry will be hurt due to consumers’ declining disposable income.

Historically, there has been a strong correlation between the stock market and the housing industry. When the stock market falls, aggregate demand for housing too will slump.

However, the local financial sector is still deemed liquid, which means, local businesses and consumers still have adequate access to bank borrowings to spur domestic demand, a pillar of the national economy.

The government has revised downwards the country’s gross domestic product (GDP) growth next year to 3.5% from the earlier target of 5.4% while the nation’s budget deficit forecast was raised to 4.8% of GDP from 3.6%.

Aseambankers Malaysia Bhd analyst Ong Chee Ting said: “People will stay defensive with a wait-and-see attitude, hoping for a good (property) buy over the next two years. Prices may be flattish, or come down slightly next year depending on the severity of the external environment.”

Winners in a tougher real estate landscape will be developers with substantial locked-in property sales which will be able to cushion their earnings.

But then again, the backdrop of poorer consumer sentiment may prompt developers to trim their product launches, hence, affecting income in the coming years. “If launches slow down drastically next year (FY2009), earnings could weaken in FY2010,” said Ong.

Huge incoming supply of properties in the next two years will lead to lower rental yields which can, in turn, result in limited capital appreciation, and a plunge in property prices.

OSK Research Sdn Bhd analyst Mervin Chow Yan Hoong expects some 5,000 units of high-end condominiums, priced above RM400 per sq ft, to come onstream in the Klang Valley by the end of this year. This will be followed by a similar quantity the following year (2009) before supply eases to around 2,000 units in 2010.

Slower capital appreciation and falling real estate prices can have a far-reaching impact on the local sector. Investors or speculators may flee the local property market, leaving most end-users on the sidelines, hence, stifling demand, and more downward pressure on prices.

“What we fear most is, however, that the recent weak demand brought on by the softening domestic economy may snowball into 2009, thus potentially increasing the severity of the downcycle.

“In other words, a combination of both much subdued demand and intense competition as a result of the supply cycle may provide just the right ingredients for an impending ‘perfect storm’ for the sector next year,” said Chow who for now kept his neutral call on the sector.

In a Nov 6 report, OSK has a buy on SP Setia Bhd and Plenitude Bhd, with target prices of RM3.14 and RM4.77, respectively. SP Setia and Plenitude closed at RM2.67 and RM1.75, respectively, last Friday.

by Chong Jin Hun (The Edge Daily)

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