A sluggish Malaysian real estate sector has prompted the man in the street to ask several key questions. These include when property sales and prices will bottom out, and where attractive real estate bargains can be found in anticipation of possible lower interest rates in the months ahead.
The real estate downcycle comes against a backdrop of slowing economic growth in the country as exports fall and domestic demand weakens. This has raised the spectre of poorer corporate earnings and higher unemployment, a trend which does not bode well for developers across the board. Based on the historical strong correlation between property sales and gross domestic product (GDP) growth, and the fact that real estate sales lag GDP growth by about three months, analysts said the country’s property sales could bottom out, at the earliest, in the first quarter of 2010.
This is in anticipation that the nation will register GDP growth in the fourth quarter of 2009, following contractions in the second and third quarters, according to HwangDBS Vickers Research analyst Yee Mei Hui.
“Historically, when GDP decelerated sharply, property sales would fall by 1% to 48% and remain lacklustre for 12 to 18 months. Presently, property sales are into its eighth month of decline since the second half of 2008.
“Given the weak sector outlook over the next 12 months, we maintain our cautious stance on the Malaysian property sector. We prefer property asset owners over developers for their more defensive earnings,” Yee wrote in a note last Friday. The market is pricing in further downside in developers’ earnings in anticipation of weak demand, delayed launches, dwindling unbilled sales and lower profit margins.
RHB Research Institute analyst Low Yee Huap said despite cheaper building materials, developers’ profit margins could be stifled by higher marketing costs to sustain sales.
At the same time, players have also indicated plans to skew their product mix towards more affordable offerings with lower profit margins as consumers grapple with a tougher economic landscape.
“Overall, although raw material prices have retraced since August 2008, amidst the current economic downturn, demand is expected to remain sluggish. Hence, we expect to see a sharp decline in developers’ unbilled sales due to lower property demand, and delay in launches which will affect the subsequent year’s performance,” said Low, who is underweight on the sector.
HwangDBS Vickers’ Yee expects property sales in 2009 to fall between 25% and 30% to around RM64 billion after growing at an annual pace of 15% in 2008 to RM88.3 billion. In 2009, volume is anticipated to shrink by 18% to 280,000 units, while average transacted prices are forecast to fall 10% to RM230,000.
In the fourth quarter of 2008, property sales plunged 14% from a year earlier amid economic and political uncertainties in the country while volume was flat. Average transacted price, meanwhile, saw a yearly decline of 15% due to the slowdown in high-end residential properties, deemed the most vulnerable segment.
Asking prices for units within the Kuala Lumpur City Centre (KLCC) and Mont’Kiara enclaves, for example, have fallen by 20% to 30% to as low as RM800-RM900 per square foot (psf) (for KLCC) and RM650 psf (for Mont’Kiara) respectively over the last one year, according to Yee.
Both areas had benefited from the government’s move to liberalise foreign ownership of residential properties and exemption from real property gains tax.
“The sharp price appreciation has attracted local investors, with most buying with the intention to flip for a quick profit.
“Given the risk of the ongoing financial crisis becoming more protracted and deeper than expected, we could see more cash-strapped buyers throwing prices to realise sales,” said Yee.
Most resilient would be prime landed residential properties in areas like Damansara Heights, Kenny Hills, Bangsar and Taman Tun Dr Ismail. This is because buyers in this segment are generally less affected by economic cycles due to their strong purchasing power.
“Despite heightened economic and political uncertainties, recent tenders for bungalow lots in Damansara Heights have fetched as high as RM670 psf versus RM400 psf two to three years back,” Yee said.
This segment, according to the analyst, was usually among the first to rebound and see the strongest growth during a sector recovery. Also deemed resilient is the KLCC grade A office market, considering the fact that commercial space in the area has locked-in rentals from blue-chip tenants, and limited supply of office space in the enclave over the next three years.
Johor is a market to watch. The anticipation of more retrenchments of Malaysians working in Singapore could stifle demand for properties in Johor, Yee said. - by Chong Jin Hun (The Edge)
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