Demystifying the property market overhang

AN account­ant, who is tasked with pre­par­ing the books of a cor­por­ate, will always be guided by account­ing prin­ciples when it comes to how the fin­an­cial state­ments of the com­pany are presen­ted on an annual basis to ensure they are accur­ate and reflect­ive of the com­pany’s busi­ness affairs.

An aud­itor, look­ing at the same pre­pared accounts, will run through the num­bers and audit the key mater­ial items to ensure they are reas­on­able, reflect­ive of the com­pany’s fin­ances, and free from mater­ial mis­state­ments, includ­ing due to fraud or error, or applic­a­tion of wrong account­ing treat­ment.

In fin­an­cial state­ments, two of the most crit­ical items are receiv­ables and invent­or­ies.

In order to have proper account­ing treat­ment, account­ants and aud­it­ors used account­ing the­or­ies to describe what is deemed to be cur­rent, and those that have a longer-dated age­ing pro­file are either impaired or writ­ten off.

The reason for this is to ensure that the fin­an­cial state­ments reflect the status of a cor­por­a­tion’s cur­rent assets and are in no way doubt­ful.

There is also an applic­a­tion of gen­eral pro­vi­sion or spe­cific pro­vi­sion when it comes to how these bal­ances ought to be treated in the fin­an­cial state­ments.

Often, we see cases of over-inflated bal­ances and when it came to the crunch of the mat­ter, the man­age­ment would have no choice but to write them off.

The ‘real’ over­hang

At the recently con­cluded 15th Malay­sian Prop­erty Sum­mit 2023, the Dir­ector of the National Prop­erty Inform­a­tion Centre (Napic) presen­ted a paper on the status of the Malay­sian prop­erty mar­ket up to the third quarter of last year (3Q22), with some data points related to the per­form­ance of the mar­ket up to Novem­ber 2022.

The full mar­ket report is only expec­ted to be released in the middle of next month, where Napic will not only provide the usual annual update of the mar­ket’s per­form­ance but also provide more insight into some of the key data points that have been much dis­cussed among all stake­hold­ers, of which, one of them is the status of over­hang in the mar­ket.

As we are aware, the res­id­en­tial over­hang at the end of 3Q22 stood at 29,535 units worth some Rm19.95bil.

Napic’s web­site also provided the details of where these over­hang prop­er­ties are loc­ated and the three key states – Johor, Selangor, and Pen­ang – are the main hot­spots, account­ing for some 14,956 units or just over half of the coun­try’s total over­hang.

In terms of the type of prop­er­ties, the 3Q22 data showed that high-rises com­prise 18,962 units or 64.2% of the total over­hang.

In terms of price points, 23.8% of the total over­hang was priced at RM300,000 and below, 29.5% was priced between RM300,001 and RM500,000, 31.6% was priced between RM500,001 and Rm1mil and the bal­ance was priced above Rm1mil.

In terms of the total value, the res­id­en­tial over­hang is skewed towards the high-end seg­ment with prop­er­ties worth more than Rm1mil account­ing for 43.4% of the total over­hang value, while those priced between RM500,001 and Rm1mil accoun­ted for 31.9% of the total over­hang.

Prop­er­ties priced between RM301,000 and RM500,000 have a total over­hang value of just Rm3.5bil, while prop­er­ties priced below RM300,000 are worth some Rm1.39bil. These two rep­res­ent some 24.8% of the total over­hang value.

For the ser­vice apart­ments, the total over­hang in units stood at 23,688 worth some Rm20.21bil as at end of 3Q22, with Johor alone account­ing for 62.4% of the total.

Most of these over­hangs in the seg­ment are prop­er­ties priced between RM500,001 and Rm1mil, which accoun­ted for two-thirds of the total unit num­bers and 58.9% in value of the total over­hang.

For the longest time, Napic had not shared with the stake­hold­ers the key under­ly­ing age­ing pro­file of this over­hang, and that has led to a mis­lead­ing status of the mar­ket’s over­hang status. It was indeed an eye-opener to see what the real over­hang has been.

For example, as seen in Table 1, the key over­hang is prop­er­ties (both res­id­en­tial and ser­vice apart­ments across the four key states) that have been part of the stat­ist­ics for the last five years and they account for between 51% and 93% of the total over­hang units.

For example, as seen in Table 1, the key over­hang is prop­er­ties (both res­id­en­tial and ser­vice apart­ments across the four key states) that have been part of the stat­ist­ics for the last five years and they account for between 51% and 93% of the total over­hang units.

In total, these prop­er­ties accoun­ted for a whop­ping 75.7% of the mar­ket’s over­hang status while prop­er­ties that have been in the mar­ket for the last three years are just over 5% from the key states.

Spe­cific men­tion must also be made on ser­vice apart­ments loc­ated in Johor, and those that are in the five to 10 years bucket, as they account for 26% of the total mar­ket over­hang.

In terms of prices, most of the over­hang is seen in the same five to 10 years bucket across the board and they alone account for 71% of the total over­hang prop­er­ties in the mar­ket.

As seen in Table 2, prop­er­ties below three years account for less than 5% of the total mar­ket over­hang. Spe­cific men­tion must also be made on ser­vice apart­ments that are in the RM500,001 to Rm1mil bracket and are in the five to 10 years bucket as they account for 25% of the total mar­ket over­hang.

In the cor­por­ate world, when one is up against data that is dis­tort­ing the real pic­ture, the proper thing to do is to see whether the data is still rel­ev­ant or oth­er­wise.

Clearly, look­ing at the age­ing pro­file of the prop­erty over­hang, those above five years will likely remain unsold for a fore­see­able future, mainly due to either being wrongly loc­ated and without the proper or good infra­struc­ture to sup­port com­munity liv­ing, or untouched by prop­erty buy­ers for simply being too expens­ive, espe­cially those bey­ond the RM500,000 price threshold.

Clearly, look­ing at the age­ing pro­file of the prop­erty over­hang, those above five years will likely remain unsold for a fore­see­able future, mainly due to either being wrongly loc­ated and without the proper or good infra­struc­ture to sup­port com­munity liv­ing, or untouched by prop­erty buy­ers for simply being too expens­ive, espe­cially those bey­ond the RM500,000 price threshold.

Hav­ing iden­ti­fied the issues, reg­u­lat­ors and prop­erty developers would need to come out with strategies to address them and to attract buy­ers to these prop­er­ties via a rehab­il­it­a­tion exer­cise and with a sig­ni­fic­ant price reduc­tion.

The bot­tom line is to remove them from the over­hang data.

Let’s call a spade a spade

So what is Malay­sia’s real over­hang? Based on the data presen­ted by Napic, one can take com­fort that over­hang is not as ser­i­ous as it is made out to be mainly due to a lack of data and proper ana­lysis in terms of what is real over­hang pre­vi­ously.

While those more than three years but less than five years are part of stat­ist­ics, we should redefine them as core over­hang while those bey­ond five years can be redefined as hard­core over­hang.

As we have been able to slice and dice these num­bers, the real over­hang is only per­haps less than 5% of the mar­ket in terms of the num­ber of units and value.

Napic could also help stake­hold­ers to under­stand bet­ter the prop­erty mar­ket data bet­ter by break­ing down the data points as an over­hang that is mainly due to gov­ern­ment hous­ing schemes and those that are privately built.

In this way, we could also see whether the gov­ern­ment’s inter­ven­tion is needed to boost demand for these obscurely loc­ated prop­er­ties.

For the private developers, most of these invent­or­ies would have been impaired as the like­li­hood of the assets being real­ised in full value or even at 50% to 60% of the mar­ket value is seen as low.

Private developers too ought to think out­side of the box on how to over­come the prop­erty invent­or­ies sit­ting in their books as being part of the stat­ist­ics only res­ults in paint­ing the wrong pic­ture for the prop­erty mar­ket as a whole.

By Pankaj C. kumar is a long-time invest­ment ana­lyst. the views expressed here are the writer’s own. 

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“Residential property transaction volume and values are up year-on year in 1H22.” Datuk Siders Sittampalam >>

SINCE the resumption of economic activities and reopening of international borders, the residential property market has seen a pick-up in activity.

According to the National Property Information Centre (Napic), the residential property sector recorded 116,178 transactions worth Rm45.62bil in the first half of 2022 (1H22), which was an increase of 26.3% in volume and 32.2% in value year-on-year.

However, in light of prevailing uncertainties such as the upcoming Budget 2023, potential 15th General Election and macroeconomic headwinds, can the steady trend so far be sustained for the remainder of 2022?

PPC International managing director Datuk Siders Sittampalam says it’s “anyone’s guess” how the local residential property market will fare for the remainder of this year.

“With plenty going on such as the looming elections and global economic uncertainty, it could have an indirect effect on the property market,” he tells Starbizweek.

Still, Siders says the residential sub-sector has been off to a good start this year.

“Residential property transaction volume and values are up year-onyear in 1H22 and it’s been the highest increase since 2016.

“This can be attributed to latent demand, post pandemic. Many that held back purchases in the market are now back again (since January 2022),” he says.

Siders adds that loan approvals have also picked up, adding however that approval rates are still below pre-pandemic levels.

He also points out that the increase in interest rates so far this year has not had an impact on the market (in terms of demand).

“Going forward, I believe that volume and values should sustain, just like how they were in the first half of this year. It will be steady, barring unforeseen factors, be it domestically or externally.”

According to Napic, the property market performance recorded a rebound in 1H22, a reflection of normalising economic activity as the country moved towards endemicity.

“With the positive projection on economic growth by Bank Negara (at between 5.3% and 6.3% in 2022), supported by the implementation of various government initiatives and assistance, the property market performance is expected to be on track.”

Meanwhile, CBRE|WTW in its property market performance for 1H22, believes that moving forward, transactional activities should remain resilient in locations with good accessibility and comprehensive amenities.

“Developers are anticipated to remain prudent, focusing on established townships and mature locations. In addition, upcoming launches would see a shift towards more sustainable elements to meet buyers’ shift for cost-efficient and eco-friendly homes.”

As at the first quarter of 2022, CBRE|WTW says the Klang Valley landed residential sector remained encouraging.

“Average transacted prices rose 6.8% year-on-year while transacted volume increased 11.2% year-onyear (more than 9,100 units), but was less than the 10,000 units transacted in the fourth quarter of 2021.”

CBRE|WTW says new launches picked up slightly in the second quarter, despite developers maintaining a cautious approach.

“Landed launches continue to perform well and launch prices of terraced houses remained between RM500,000 and RM800,000, except for some priced above the Rm1mil mark in the City of Elmina, Setia Eco Templer and KL East.”

Meanwhile, locations such as Klang Valley South, such as Sepang, Salak Tinggi and Kuala Langat remain the hotspots, says CBRE|WTW.

It says these locations recorded consistent growth, encouraged by industrialisation and good road accessibility.

“Several areas located in the north of Klang Valley are also hotspots of new launches, typically in Rawang, Puncak Alam and Sungai Buloh.”

As for high-rise residential units, Siders says a market study needs to be conducted to ease the oversupply of such properties.

“Comparatively, landed properties tend to do well as there’s always demand,” he says.

Siders also believes that the government could consider bringing back the Home Ownership Campaign (HOC) to spur the market.

To help drive the sector, the government introduced the HOC in June 2020 under the Penjana initiative.

The campaign ended on Dec 31, 2021. Many industry observers and property players believed that the HOC was a huge help to the market and urged the government to extend the campaign period into 2022.

Meanwhile, CBRE|WTW says additional measures are still required to improve market activities for the high-rise residential sub-sector.

“The waiver of stamp duty should continue. A continual increase of the overnight policy rate (OPR) is expected in 2H22 amid the global high-cost environment.

“Since project launches have been limited, competition would also not intensify, with prices remaining stagnant. The cost of borrowing may further impact demand and prices if there is an additional OPR hike 2H22.”

CBRE|WTW adds that the upcoming launch of Mass Rapid Transit 3 may benefit property valuers along the route, including an increase in project launches, particularly in Mont Kiara.

“Moving forward, developers may shift focus to offerings emphasising exclusivity and low-density living with better facilities.”

CBRE|WTW says the existing supply of high-rise residential units stood at 68,555 units in 1H22, whilst 219,398 units are in the pipeline for completion by 2024.

“The bulk of incoming supply will be in central Kuala Lumpur, namely the golden triangle area (30%).”

On market activity, CBRE|WTW says both the average transacted value and asking rents are stable at RM779 per sq ft and RM3.80 per sq ft, respectively, supported by the increased interest from homebuyers and renters.

“The average occupancy rate also increased slightly to 64% due to improved market conditions. Following that, project launches have been limited and the focus is still on the sales of ongoing projects.

“Nonetheless, two transit-oriented development projects were launched in 1H22 in Pudu and Bukit Damansara, with unit sizes ranging from 480 sq ft to 1,080 sq ft priced from RM360,000 and units sized from 1,001 sq ft priced from Rm1.8mil and above.”

According to Napic, Penang, Kuala Lumpur, Johor and Selangor formed about 47% of the total national residential volume in 1H22.

“More than 10,000 units of new launches were recorded, down by 66.7% against 31,687 units in 1H21.”

Against 2H21, the new launches were lower by 13.3% (2H21: 12,173 units),” it says.

“Sales performance for new launches stood at 20.3%, slightly lower than 1H21 (20.6%) and 2H21 (28.1%).”

According to Napic, Johor recorded the highest number of new launches in the country, capturing nearly 23.8% (2,509 units) of the national total with sales performance at 31.8%.

Sabah recorded the second highest number (1,335 units, 12.7% share) with sales performance at 10.6%. This was followed by Perak (1,317 units, 12.5% share) with sales performance at 19.4%.

Terraced houses dominated the new launches. Single storey (2,047 units) and two-to-three storey (5,150 units) together contributed 68.2% of the total units with sales performance at 22%, followed by condominium / apartment units at 19% share (2,009 units) with sales performance at 12.4%. 

• By eu.ene MAHALIN.AM eugenicz@thestar.com.my

 

Positive 1H property market data trends

 

THE recently released property market data for the first half of 2022 (1H22) by the National Property Information Centre (Napic) showed that the Malaysian property market has found a firmer footing over the review period.

On a half-yearly basis, while transaction volume and value surged to a new record high of 188,002 units worth Rm84.4bil, what was most revealing is that the overhang market trend has finally eased, while future and planned supply was reduced.

For the past four years, this column has been calling for stricter measures to control the market’s oversupply situation and for property developers to be more mindful of the market’s overhang status.

The data for the 1H22 shows that finally, some sanity has set in. 

Having said that, as far as prices are concerned, the Malaysian House Price Index (HPI), as seen in Figure 1, continues to show a declining trend with the growth in the 1H22, slowing down to just 0.5% year-on-year (y-o-y), dragged by a 2.5% y-o-y drop in Penang HPI, and in terms of segment, detached homes and high-rises continue to dictate the downtrend with a 2.3% and 0.5% y-o-y drop respectively.

An improved picture

For property overhang, this column aggregates the supply in the residential segment and takes the data from both service apartments and the Soho sub-segment to gauge the market’s overall residential overhang status.

After all, it is the combination of the three that is the real market supply in the residential market segment as shown in Figure 2. 

In total, the residential overhang eased to 59,321 units valued at Rm42.59bil.

Although compared with a year ago, the number of overhang units and value increased by 3.8% and 2.5% respectively, the overhang situation for the residential segment improved as both the number of units and value dropped by 6.5% and 4.4% respectively compared with six months ago.

Nevertheless, the overhang situation within the high-rise segment (which includes residential high rise, commercial service apartments, and Soho units) remains elevated.

For the 1H22 period, Napic data showed that the overhang data is now at a new record high of 45,502 units against 44,800 units as at end of 2021.

Only in terms of value, the 1H22 figure is relatively flat at Rm33.22bil against Rm33.32bil six months ago.

Overall, this translates to 76.7% of the overall market overhang in volume and almost 78% of the total value.

The overhang situation within the high-rise segment has indeed increased as more than three out of four unsold properties are highrise units.

A steep drop

Figure 2 also shows the property market’s unsold units that are under construction.

From here, one would note that the 1H22 data showed a total of 108,826 units remained unsold valued at Rm60.95bil, down by 12.5% and 9.6% compared with a year ago, and lower by 9.7% and 6.4% when measured against the market’s position six months ago.

With the lower overhang and those under construction, overall, the market saw total unsold properties down to 168,147 units worth some Rm103.54bil.

Compared to a year ago, when the figure was 181,460 units worth Rm108.93bil, the data for 1H22 saw a drop of 7.3% in volume and 4.9% in value respectively.

When compared with the 183.918 units worth Rm109.69bil as at end of 2021, the 1H22 data showed a reduction of 6.4% in volume and 8.6% in value respectively.

For the residential segment by state, the key overhang is located in Kuala Lumpur and the states of Selangor, Johor, and Penang as they account for 59% of total overhang units worth some Rm16.2bil, which translates to 74.5% of the total overhang value in the residential segment.

In terms of price points, properties marketed at above RM500,000 account for 43.4% of the market’s overhang.

For service apartments, Johor, Selangor, and Kuala Lumpur are key geographical areas with the most overhang with a total of 96.8% of the segment’s overhang in terms of units and 97.5% in terms of value.

Johor alone accounts for 68% of the segment’s total number of units and nearly 69% of the segment’s total value at Rm13.34bil.

Interestingly, in terms of the number of units, 89% of service apartment overhang in Malaysia are priced at RM500,000 and above, valued at Rm18.36bil, and they represent 95% of the total service apartment overhang valued at Rm19.32bil. As this column has repeatedly highlighted in the past that Malaysia has a serious overhang issue, we are now finally seeing some light at the end of the tunnel as the market has now seen a drop in future supply.

For easy reference, the data in Figure 3 for future supply includes starts, incoming supply, planned supply, and planned new supply. 

Overall, other than a 34% jump in purpose-built office space to 2.59 million sq m, all other segments are seeing a downtrend in future supply with a reduction in the total number of units by between 8.1% for the industrial segment to as much as 26.2% in future hotel room supplies. The residential, service apartments and the Soho segment saw a reduction of 16.3% in the total number of units to 1.196mil units from 1.430mil units six months ago.

As a percentage of total in-stock, the future supply is lower by between 0.8 percentage points (pps) for the industrial segment to 21.1 pps for the residential segment.

A word of caution though. Despite the reduction in future supplies, the incoming supply for both the service apartment segment and Soho remains significant at 104.4% and 92.8% respectively.

Despite the positives, the property market remains challenging as we are still saddled with a high overhang as well as incoming supply. While the positives are there based on the 1H22 data, it is not time to pop the champagne just yet as it will still take a while (three to five years) for a more positive trend to emerge.

Overall, the Malaysian property market is still up against a massive over-supply situation and prices too are not expected to improve much, as evident from the flattish growth or worse, negative, in the Malaysian HPI.

Given the higher borrowing cost with an increase in the overnight policy rate, homebuyers are expected to remain cautious.   

  StarBiz PANKAJ U. KUMAR 

 

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