Glut dampens market value and rental of condos

Since the high-end condominium market took a beating following the global financial crisis in 2008, their values have been left pretty much battered even today. Investors who got into the market around the peak must still be quite disheartened by the market's lethargy.

The big supply coming onstream has also been a dampener on property values and the rental market of these residences.

There are now many condominiums in need of tenants and the net rental yields are in the range of 3% to 5%, depending on the location.

But despite this, the speculative fervour in the upper-medium to high-end landed residential sector has not abated. There are signs that it is spilling onto the latest craze small sized, and more affordable, commercial cum residential accommodation known as SoHo's, and service apartments.

It is time to exercise caution on property matters to ensure the market's sustainability and avoid unnecessary losses.

The fact that even analysts are concerned and have downgraded the property sector pretty much indicates the party is coming to an end and it is time to be cautious.

UOB Kay Hian Research has downgraded its grading for the property sector to “market weight” from “overweight” citing that the property valuation cycle has peaked.

A global double-dip recession, coupled with the European debt problems, would certainly have spillover effects on the domestic economy, including the property sector. If the world economy is hit by a recession, the property market will not be spared either.

The recent market volatility and sell-off has affected investor confidence and the market is taking a breather now.

Although the market seems to be holding out quite well for now, there is no telling how it will react if sentiment is badly eroded by the gloomy external outlook.

As such, developers should also be cautious and build more affordable property units priced below RM350,000 that still has strong demand.

As shown by the havoc caused by the oversized property bubble and sub-prime loan crisis in the United States which literally brought down the world economy to its knees, we have witnessed how significant a role property has on the health of the economy and financial system of countries. The world would have been spared the agony of the global financial crisis and the continuing state of volatility and uncertainty had the United States been vigilant on its crumbling market fundamentals that inflicted such gargantuan damages felt till this day.

For the sake of a sustainable property market in the long term, it is important to have policy measures that will ensure the market is closely tied to market fundamentals, and to curb any artificial inflation in property value.

The more that is known of the fundamentals, the better and this calls for greater transparency.

To ensure financial and social stability, it pays for the Government, through its policy measures, to keep the property market closely tied to fundamentals.

The hot property market and sharp rise in property prices in residential markets in the Klang Valley and Penang continue to be of concern among property buyers and the authorities.

Bank Negara is said to be considering further tightening measures to cool the market and rein in speculative buying and further price hikes.

Some of the possible measures that are at the disposal to tighten the market include hikes in bank interest rates to fight inflation, and the further tweaking of the loan to value ratio (LVR) to dampen the excessive property demand.

The central bank is also said to be keeping a close watch on the mortgage loan market to see whether a capping of the LVR (at 70% of the property price) on second mortgages is necessary.

The critical sectors are the upper medium to high-end landed residential sector and non-owner occupied houses. Purchasers who have multiple properties and who already have a mortgage loan will be subject to the new loan limit if it is implemented.

To address speculative activity in the property market, there is also a likelihood that the Government may reinstate the real property gains tax (RPGT) to a higher quantum from the current 5% for all property sold within the first five years of purchase.

The Government has tweaked the RPGT on various occasions depending on market conditions.

From April 2007 until it was reintroduced in January last year, all gains from property transactions have been exempted from the tax.

Under Budget 2010, the RPGT was brought back in January, albeit at 5% for all property sold within the first five years of purchase.

If the Government decides to reintroduce the RPGT in its entirety, property speculators will get the brunt of the “axe” as gains from property sales within the first five years of purchase will be subjected to a tax of 5% to 30%.

The maximum 30% is for disposal within the first two years; 20% within the third year; 15% within the fourth year and 5% within the fifth year. Profits earned from disposal in the sixth year and beyond will not be taxed.

As for bank borrowings, directives may also be given to banks to lend based on net income and not on gross income as the practice now.

With the world's antenna tuned in to unfolding news on the US and eurozone's debt crises, such prudent measures will help to ensure the market's sustainability.

Deputy news editor Angie Ng believes going back to basic fundamentals and prudence is the way to go in times like this. - By Angie Ng (The Star)


September 18, 2011 at 6:22 AMAmin

The fundamental of sustainable property market 101 - Price must be supported by rental yield.

Even the pretige area in Penang - Gurney Park is priced is at >600K but rental return is <2K/mth (after considering Maint fee & Misc cost).

They are people always wants to equal Penang to Singapore & Hong Kong on high property price.

But, the property price there is well supported by high rental yield. (rental yield in KL is also much higher than Penang)

September 18, 2011 at 10:00 AMRaymond Yap

600K property with 2K rental... that's 4% annual gain, which is better than 3% FD interest, not to mention capital gain from property.

For the cash rich people, 2% annual rental return is also considered a fair bet, due to the high inflation rate.

September 18, 2011 at 10:44 AMmax

If you manage to rent out...
If the tenant pays on time...
If the tenant does not damage the furniture/utility...

September 21, 2011 at 2:22 AMNewKid

Danga View apartment is best. Can still buy at 300k, rental 2000+

September 21, 2011 at 10:23 AMcondomana

Hi Raymond,

It's ok if the properties are bought by cash rich people, as they won't cause the bubble to burst badly during bad times (although it's quite dumb for them to park their money there when you can get far better returns else where, but then again, what do you expect..:)). There is high and low for everything in this "free market" world. You just have to know (or rather "guess" as only GOD "knows") when to buy and when to sell...:)

From a socio-economic point of view, the worry is on the highly leveraged, with multiple properties flipping here and there. The authority should monitor this closely. There would not have been a crisis in US if not for irresponsible lending and borrowing. The bubble was so bad that innocent people with only 1 property for their own stay got kicked out of their house because simply the value of the house is under water, they don't have money to top up, and the bank has to auction off the house. I'm sure it won't happen here, but just to give an illustration how things can get out of hand with high/risky leveraging + bubble.

September 21, 2011 at 2:54 PMRaymond Yap

I think the article below provides some hints on where Penang property is heading... it does carry some weight as it's said by our CM, and not from the biased industry players:

RM8bil Penang infrastructure jobs

GEORGE TOWN: Several foreign giants apart from China's Beijing Urban Construction Group (BUCG), namely Citic Group of China, South Korea's SK Group, as well as couple of Japanese conglomerates and one Singapore company have expressed interest to bid for some RM8bil worth of infrastructure jobs in Penang.

Penang Chief Minister Lim Guan Eng said the funding of these crucial road works would be done via a land swap.

“We will finance these projects by land swap as they are expensive. The land will be nearby reclaimed land, which means they will own a certain acreage. These companies appear to be interested (in these projects) even though they involve a land swap. We might as well use something to improve traffic,” Lim said in an interview after opening the one-day investPenang seminar organised by ECM Libra Financial Group Bhd recently.

The interested parties, according to Lim, had been told to submit their request for proposals (RFP) which would also include their recommendation on land usage by year-end.

In April, Prime Minister Datuk Seri Najib Abdul Razak and Chinese Premier Wen Jiabao witnessed the signing of a memorandum of understanding between the Penang government and BUCG for a proposed traffic-alleviation project. Even so, Lim said the RFP was open to other interested parties apart from BUCG.

The projects include the 6.5km tunnel job (from Gurney Drive to Butterworth) which takes up the bulk of the RM8bil cost, the 4.2km Gurney Drive-Lebuhraya Tun Dr Lim Chong Eu bypass, and 4.6km Lebuhraya Tun Dr Lim Chong Eu-Bandar Baru Air Itam bypass. The proposed tunnel project will be the third link between Penang and Butterworth.

“We need to find a way to disperse traffic and with these projects, we will complete the loop. We've revived the idea of a third link and want to get it done,” he said.

The pricing for the third link, said Lim, would be higher as “people still use tunnel as it's shorter ... about one quarter length of the second bridge.” He expects work on the project to start earliest by 2013 although he would like it to start the end of next year if he had his way.

Apart from congestion, the escalating property prices in Penang, largely due to land scarcity, is another issue of concern. Towards this end, Lim said the Government had set up the Penang Housing Board (PHB) to build affordable housing in the state. The board is largely modelled after the Singapore Housing Development Board (HDB).

“We are doing more than talking. We have visited them (Singapore) and they have come to do on-site inspection. In a few months' time, it should take off the ground,” he said.

The pilot project, the first of its kind in the country, will be located on a 60.7ha site in Batu Kawan. According to Lim, it would comprise 10,000 units of about 750 sq ft each and steps would be taken to ensure that only first-time genuine housebuyers qualifed. “We will try to curb speculation ... the buyers will only be able to sell after a certain time frame. We have to work out all these details.

“Most people's concept of affordable housing is like ghetto or slum. But we want to build communities fully equipped with amenities like football fields and green spaces. We are currently working out the mechanism and the project will be funded by the state government. However, we will outsource the actual building of these houses.

“The units will be HDB quality and style and not necessarily HDB. Penangites want to live on the island but you must appreciate that we try to provide where we can but land (on the island) is limited and expensive,” he said, adding that once the third link was up, the island would become so much closer.

September 21, 2011 at 3:32 PMRaymond Yap

The strategy of CM is to swap land at HIGH PRICE... and move the low-medium income earners to the mainland. Basically the island will be sold to foreigners & the rich for the sake of development.

September 21, 2011 at 4:45 PMcondomana

Brilliant strategy! Perfect formula for transforming Penang's economy!!

But LGE needs to build more than 750sqft flats in Batu Kawan, 2000sqft condos and landed homes with plenty of parks and recreational facilities (tennis, golf, horse-riding, water theme park etc) would make those entry level graduate engineers in Intel very happy. Make Penang a showcase for "Transformasi"!