Sanity creeps into property market

An investment banker snapped up two properties in Damansara Heights in the space of 18 months.

Both are bungalows and located along the same road. The first bungalow cost him RM800 per sq ft (psf) in mid-2014. The second purchase, which was last month, cost him about RM580 psf – about 28% reduction in price and in just a space of 18 months.

When it comes to property, the common saying is that, there would always be demand for property in prime locations. And prices will always be sticky downwards for landed properties.

The first part of the common belief actually holds water – in good and bad times. It’s the second part where prices of landed properties being sticky that is beginning to unravel.

In the current soft market environment, the owners of prime properties in prime areas such as Damansara Heights are still able to sell their properties as long as they are prepared to accept lower prices.

The owners who sold the second bungalow had purchased the property more than 10 years ago and they were looking to upgrade their home to a bigger property in the same area. They purchased the bungalow when prices were going at about RM350 psf. So at RM580 psf they are already sitting on handsome gains.

It is not only in Damansara Heights that prices are beginning to come down to more realistic levels.

Along Jalan Penaga, in the highly sought after Bangsar area in Kuala Lumpur, a bungalow that was being rented for RM8,000 per month to an expatriate had seen its rate down by 50% when the tenancy ended in November. The owners were aghast when their agent informed them of the new and lower rate the existing tenant was prepared to pay.

The agent highlighted to the owners of the increasingly declining rental market and the possibility of not getting another tenant for some time. Finally the owners accepted the new deal at RM4,000 per month.

The property market is seeing a lack of demand due to a combination of factors. People are increasingly getting insecure about the stability of their employment. Also, the current high cost of living impacts the purchasing power of people; they feel poorer now. The biggest fear is the possibility of interest rates going up, something that may become apparent only later this year or next.

The impact is most felt among the high-end condominium owners who purchased their property at the heart of the city centre, near the Petronas Twin Towers. Many are not able to secure tenants who are prepared to pay them the big bucks as they used to demand two years ago.

Nonetheless, there is hardly news of forced sales so far because the majority of the owners can well afford to absorb the cost of maintaining these high-end condominium units and service their bank loans religiously.

A retired journalist who bought a condo near the KLCC area has not had a tenant for the past one year but has maintained his property and had been servicing the bank loans. Now, he is looking into selling the property as he feels the money from the sale can fetch better returns if ploughed elsewhere, like a landed property in Bangsar or Damansara.

The reason this retired journalist is selling his high-end condo unit is neither due to monetary needs nor any difficulty in servicing the bank loans. He is only looking to reinvest his money in a property elsewhere.

For most high-end property investors, any excess cash goes into another property. It is a cycle.

If this trend continues, there may not be large-scale “fire sales” of high-end condominiums in the city centre as many are expecting. There will be a shifting of property portfolios holding as asset prices moderates and this would take place for the next year or two.

Certainly there would be the occasional “fire-sale” of a high-end condominium but it would not be prevalent. For instance, during the 1998 crisis, property agents often talked about the sale of a property in Bandar Utama for less than RM200,000. In truth, it was only one property by a desperate seller.

There would be downward pressure on prices until yields come to more sane levels.

The combination of cheap cost of funds and high commodity prices such as oil and crude palm oil between 2009 and 2014 has pumped up asset prices in emerging markets, Malaysia included. During those years, the cost of funds dropped to less than 1%, which is not normal.

Now sanity is creeping back into the financial system. Property prices are coming back to more realistic levels. It could take a year or two before the market adjust to the new norm.

It is only during this period that property can be bought for bargains. It is only during such times that the most amount of money can be made.

Back to the investment banker – he could be selling his bungalow near Old Klang Road for a third property in Damansara Heights. He knows that when the market recovers, which it would eventually, the landed property in Damansara would fetch the best returns. - By M. Shanmugam (The Star)

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