The right property mix

Making housing affordable, avoiding a property bubble and ensuring there is no over or under development are some key issues.

FOR the vast majority of people property means getting a respectable roof over their heads with proper amenities in a decent neighbourhood, and getting it affordably.\

For others, it is about getting a second or third property or more for the sake of investment – a good return eventually for the price they paid and as a hedge against inflation because property prices mostly continue to rise in the long term much faster than inflation.

The most sophisticated of them don’t just restrict their investments to the residential market but dabble as well in commercial and industrial space such as shops, offices and factories, wherever they may be located.

Socially, there has to be regulation of property development not only to ensure that it is done up to certain standards but to ensure a proper mix between the various kinds of development such as residential, commercial and industrial and the various segments within these broad sectors.

It would be a mistake to micromanage however and within broad guidelines, it is often best to leave it to the market place to adjust things. But it does take a long time for things to adjust in property because of the gestation period before a property can be brought to market.

Ideally, property development should take place under the aegis of a broad master plan which has been formulated after intense study and research, taking into account projected population growth and other demographics. It should be dynamic to take into account changes.

Unfortunately we don’t stick to a plan in terms of development and even when there is a master plan it is often overruled by those in authority for other reasons which are often not compelling from an economic viewpoint.

In residential development, the greatest challenge is, of course, providing decent housing at affordable cost to the vast majority of the population. Unfortunately that is also a function of income – if people are poor, they won’t be able to afford nice houses no matter what.

But we are a middle-income country and we can do some things to keep prices of properties within reasonable levels. The best gauge of that is in relation to our own income level instead of making comparisons with countries with much higher incomes (eg Singapore) or those where special situations make property expensive (eg Mumbai).

Prices are always a function of demand and supply. Some moves simply increase demand, often without a fundamental increase in demand for actual occupation. Opening up property purchases to foreigners often result in a spurt in demand at the time of sale but properties may not get occupied. Look at some high-end properties in Mont’Kiara and around the twin towers area in Kuala Lumpur for illustration.

Also, making a leveraged property purchase easy encourages property speculation. If you pay 5% down and if your next payment is two years later and if the property appreciates just 10%, you have made 100% (before transaction costs) in two years or 50% a year roughly. That is powerful incentive for speculation, creating an artificial demand that can collapse two years out.

To curb such kinds of speculation which lead to temporary surges in house prices and a potential bursting of the bubble in future, it will be necessary to curb foreign property purchases and easy financing schemes.

Meantime, the state and federal governments and their agencies must be more circumspect about handing out their landed assets to developers at very low cost to develop. Developers naturally want to maximise their returns and high-end, high-density properties offer the best returns.

Instead governments and their agencies should develop a master plan for the land they have and allocate the areas meant for low-cost, medium and high-end residential as well as commercial and industrial. Then they can invite the developers to bid for the parcels they will develop.

All that would take a lot of work, yes, but nothing worthwhile comes without proper effort. Examples to emulate for low-cost to medium-cost housing might be the Singapore Housing Development Board which has strict criteria for purchase of property, resale and standards.

Examples not to emulate would be Singapore again which has adopted a free and unfettered stance as far as sale of property to foreigners is concerned which has priced high-end property beyond the vast majority of Singaporeans to become the domain of multi-millionaires.

Incidentally, this is one of the major complaints of Singaporeans who otherwise have little to complain about in terms of economic development and living standards given their tiny space and resources. That has been reflected in voting trends too, leading the government to descend from its mighty perch of “I know it all” to re-examine its policies.

In commercial development, the trend in Malaysia has been to cramp it all in as little space as possible to maximise development profits. Abetment comes from authorities who give approvals with little or no thought of proper planning considerations such as availability of parking, public transport and whether it will cause congestion.

Many developers are willing to take the plunge into commercial development because of high profits. The danger of over-development is the greatest here, especially with plans to set up a new financial district called the Tun Razak Exchange, which will result in plenty of commercial space coming on stream in Kuala Lumpur city. Developers in this area have been granted tax exemption which will cause market distortions by giving them an advantage over others.

Under the circumstances, authorities have to be extra-vigilant to ensure that there are no untoward pressures on the property market, both in terms of a boom or a bust.

Speculation and ill-considered development can cause a volatile, mercurial mix which if it explodes can cause years of agony. Better a sensible, more stable brew that stands the test of time and ages gracefully.

A QUESTION OF BUSINESS By P. GUNASEGARAM starbiz@thestar.com.my

P Gunasegaram (t.p.guna@gmail.com) is an independent consultant and writer. He believes strongly in the old adage that prevention is better than cure.

Credit-tightening cooling down property market

 Loan approvals for home purchase decline

The banks' tighter lending rules have slightly diminished the actual sales in the residential property market, according to real estate consultants as well as Bank Negara Malaysia data.

Bank Negara's website revealed that the percentage of loan approvals for houses have declined to 46.8 percent in 1H2012 from 50.1 percent over the same period last year.

The amount of mortgage applications for home purchases rose by 2.9 percent year-on-year to RM96.7 billion in 1H2012. However, the value of loans that were approved fell from RM47 billion to RM45.26 billion.

Paul Khong, Executive Director of CB Richard Ellis Malaysia (CBRE), noted that residential property prices could be affected if the mortgage approval rate continues to decline.

"In order to conclude transactions, residential property sellers may now need to realistically adjust their selling prices as many of the buyers cannot get their loan applications approved," added Khong.

CBRE's recent report on Kuala Lumpur's housing market also noted a decline in the percentage of loan approvals in Q2 2012. The report revealed that the rate "was as high as 60.5 percent during the first five months of 2008, and has declined steadily since."

The report also highlighted that the lower rate could be due to the central bank's new lending guidelines.

Anthony Chua, Director of KGV International Property Consultants, commented that although the demand for homes continues to be high, the tougher lending measures have somehow cooled the market.

"We are still monitoring the situation. There is less transactional activity in the market this year for both new property launches and the secondary market compared with last year," said Chua.

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Loan demand remains stable

 Actual sale of residential properties declining

PETALING JAYA: The residential property market may be cooling down in terms of actual sales due to credit-tightening measures by banks, according to real estate consultants and Bank Negara data.

Bank Negara's website showed loan approvals' percentage for residential properties in the country declined to 46.8% in the first half of this year from 50.1% during the same period in 2011.

The number of loans applied for purchases of residential properties increased by 2.9% year-on-year in the first half of this year to RM96.7bil.

However, the number of residential property loans approved during the six-month period declined to RM45.26bil from RM47bil in the same period in 2011.

It is also worth noting that the loan approval percentage for non-residential properties was stable at 52.3% in the first half of this year, compared with 52.4% during the same period in 2011.

The number of loans applied (RM50.35bil) and approved (RM26.35bil) for purchases of non-residential properties was also stable in the first half of this year.

CB Richard Ellis (Malaysia) Sdn Bhd executive director Paul Khong said if the housing loan approval rate continued to decline, it will affect residential property prices.

“In order to conclude transactions, residential property sellers may now need to realistically adjust their selling prices as many of the buyers cannot get their loan applications approved,” he said.

KGV International Property Consultants director Anthony Chua said although the demand for residential properties continued to be high, the credit-tightening measures by banks had resulted in the market “cooling somewhat”.

“We are still monitoring the situation. There is less transactional activity in the market this year for both new property launches and the secondary market compared with last year,” said Chua.

Property consultancy CB Richard Ellis (M) Sdn Bhd had, in its recent report on the Kuala Lumpur residential market for the second quarter of 2012, also noted that there was a significant decline in the loan approval percentage this year.

“The loan approval rate was as high as 60.5% during the first five months of 2008, and has declined steadily since,” said the report.

The CBRE report said that the lower rate of loan approvals this year could be attributed to the implementation of new lending guidelines by Bank Negara.

Effective this year, banks have started using net income instead of gross income to calculate the debt service ratio for loans.

“Anecdotal evidence from real estate agents suggests that transactional activity has also declined as a result.”

The property consultancy also pointed out that despite the lower loan approval rates, buyer interest in new property launches, typically of smaller housing units in secondary locations, during the second quarter remained strong with developers continuing to offer attractive incentives to the purchasers such as the developer interest bearing scheme (DIBS), early bird discounts, free built-in cabinets and free legal fees.

“We expect 2012 to be a period of stabilisation especially within the luxury residential market, with transactional activity depressed by uncertain economic conditions and the reduction in loan approval percentage, which remains well below 50%.”

The CBRE report also said speculative property purchases were expected to be reduced for the rest of this year, as a result of tighter lending conditions, uncertain economic outlook, and concerns about the outcome of the upcoming general election.

Meanwhile, another property consultant said the tighter lending conditions had taken a visible toll on the secondary residential property market.

“Newly-launched properties are selling well thanks to better financing access, especially with the DIBS offered by many property developers.”

The consultant said slower sales activities in the secondary residential property market had resulted in innovative offers from marketing agents.

“This includes transactions where buyers sign the sales and purchase agreement but take the bank loans only a year or twolater. In effect, the buyers lock in the unit price now (perhaps in anticipation of further increases in market prices) and defer payment until much later. This works just like an informal DIBS,” he said.

In a recent report, Kenanga Research also said based on its channel checks, the secondary market appeared to be very weak and prices of secondary and primary products have diverged further.

The research unit opined that buyers were more focussed on new launches due to financing and promotional schemes.

“From a bank's perspective, we think there is a preference to lend to the primary market as it means better asset quality whilst banks can get all-in' deals with developers (for example, end-financing to bridging to land financing) to ensure a more balanced systems loans growth.”

Kenanga Research also opined that as a result, property developers can continue to grab greater market share and chalk-up high sales, although it expected Malaysia's overall residential transaction value growth to be relatively unexciting at 5% year-on-year.

It was noted that despite the tighter lending criteria, Malaysia's total residential transaction values have remained stable in the first quarter of this year.

It said buying interest remained strong, due to residential property buyers hedging against inflation and the lack of alternative investments, but this will be reigned in by more prudent lending criteria and the banking system's fear of real-estate tightening measures such as higher real property gains tax.

By THOMAS HUONG huong@thestar.com.my/Asia News Network

Malaysia's loan growth strong in sight

Analysts still bullish on strong loan expansion

PETALING JAYA: Despite slower banking loan growth indicators for June, analysts and industry observers are still bullish of a double-digit loan growth this year.

 Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias said on the whole, the rating agency still foresee a relatively strong expansion in loans this year, notwithstanding the recent dip in loan applications and approvals.

Strong corporate demand would likely offset the moderation in household demand for loans, he said, adding that the agency envisaged loan growth to moderate slightly to about 10% to 11% this year amid the weaknesses in the external environment.

Nor Zahidi: “Loans have expanded at a relatively strong pace.’

“The banking sector's loan growth has remained resilient despite a slowdown in the country's economic activity as reflected in slower GDP growth in the past few quarters. Overall, loans have expanded by double-digit rates in the first six months of the year, after reaching the peak of 13.8% in September 2011.

“At the end of June, loans expanded at a relatively strong pace of 12.6%, supported by strong corporate demand for loans which grew by 13.6% year-on-year, offsetting the slower pace of loans to the household sector. Household sector's loan growth had softened to 11.8% in June from a cyclical high of 13.9% in November 2010, Nor Zahidi told StarBiz.

Based on Bank Negara's latest banking statistics for June 2012, loan growth was stable at 12.6% year-on-year versus 12.5% in May the same year. The growth was slightly higher for both consumer and business loans at 11.8% and 13.6%, respectively, in June.

The growth in loan applications moderated from 15.1% in May to 10.5% in June, while approvals contracted by 2.1% year-on-year, versus an increase of 18.2% in May. On an annualised basis, loans grew by 12.7% in June compared with 11.4% in May.

The pace of loan applications and approvals has been volatile partly due to the responsible lending guidelines. In the first six months of this year, the average growth in loan applications fell to 14.9% year-on-year compared with an average expansion of 25.5% recorded in the similar period last year. The average growth rate in loan approvals during the period shrunk to 2.8% against 22.6% average expansion in the first half of last year.

RAM Ratings head of financial institution ratings Wong Yin Ching said the total banking system's year-to-date loan growth was 6.4% in the first half compared with 13.6% for the whole of last year, adding that the growth was driven by lending for purchase of residential properties, working-capital financing, as well as financing for purchase of non-residential properties.

“We expect the growth momentum to be sustained in the second half of this year supported by stronger financing demand from the corporate and commercial sector, as the rollout of projects under the Economic Transformation Programme (ETP) and 10th Malaysia Plan gradually gains traction. In recent months, we have observed a pick-up in loan applications from the business and services sectors,” she noted.

Wong expects household loan growth to moderate following the various prudential measures introduced since late 2010. To this end, she said it had seen a sharp slowdown in loans extended for personal use, which only grew by 3.2% in the first half of 2011 (full-year: 20.1%).

Loan growth for residential mortgages also moderated slightly to 6.3% in the first half of 2011 (full-year: 13.2%). She said the rating agency also noted a slight shift towards lending for the purchase of non-residential properties following the tighter criteria for residential property financing.

Meanwhile, Alliance Research Cheah King Yoong said the brokerage was maintaining its forecast of 11 % domestic loan growth this year, for now. Nonetheless, he said it foresaw there was increasing likelihood of an upside risk to its 11% domestic loan growth forecast in view of the strong pick-up of loans in June.

Should the loan growth momentum continue to be sustained in the second half with ETP related loans gaining pace, Cheah added he would not be surprised if this year loan growth could match last year's growth of 13.6%.

Based on the latest statistics, although property loans remained the key driver, where loans to purchase residential and non-residential properties constitute 46% of the annualised 12.7% loan growth for June, he said loans for “other purpose” and working capital had been gathering pace, contributing 28.8% and 22.3% of the loan growth drivers respectively.

He said business loans had recorded a commendable annualised growth of 15.9%, ahead of household loans' annualised growth rate of 10.1%.

Cheah said this reaffirmed Alliance Research's expectations that despite having a slow start in early 2012, overall domestic lending activities were picking up, with stronger growth of business loans stemming from the roll out of ETP's Entry Point Projects, which filled up the vacuum left by the moderation in property loans.

Kenanga Research said despite the lending indicators showing a slowdown, it still believed loan growth would be able to outperform its industry forecast this year.

“Having already achieved a 12.6% loan growth this month, we believe that the banking industry will be able to outperform our industry loan growth forecast of 11% to 13% despite a slightly weaker set of lending indicators,'' it noted.

A banking analyst with a bank backed brokerage felt it was too premature to indicate whether loan growth for the second half would pick up solely based on slower loan indicators alone. Loan growth may slow down in the second half but much would depend on how the results season pans out, he said, adding that, nonetheless, he still expected loan growth this year to be around 10.5%.

By DALJIT DHESI daljit@thestar.com.my

Nightmarish hunt for a home ?

Property consultants forecast the property market to remain slow for the rest of the year. Will the average middle-income earner be able to afford the house of their dream now?
 
COMMUNICATIONS executive Michelle (not her real name) has been house-hunting for a while now but has yet to find a property that suits her budget.

Having been in the workforce for nine years, Michelle, 33, feels it is time to buy her own house. But with the prices of residential properties in Malaysia skyrocketing over the last two years, her prospect of getting her dream home looks bleak.

“Back in 2009, my friends were telling me to buy my own place but at that time, my priority was to travel. Around last year, when I was finally ready to commit to getting a house, prices weren't what they used to be any more.

“A decent 1,000sq ft (93 sq m) apartment that used to cost around RM200,000 to RM300,000 is now RM500,000 to RM600,000. That is far beyond what I can afford,” she laments.

Soaring interest: Prospective house buyers at a property launch. — Filepic

 

From early 2010 up to the end of last year, residential properties in good locations within the Klang Valley have seen a sharp spike of between 20% and 40% in price, a trend which has caused grave concern for potential house-buyers.

But how is the scenario looking in 2012?

According to KGV International Property Consultants executive director Anthony Chua, the first half of the year has been generally quiet.

“There seems to be a breather in the residential market. It's definitely not as busy compared with the same period last year. (The number of) inquiries with us have also lessened significantly,” Chua says.

He explains that inquiries in 2012 with KGV on high-end properties (above RM2mil) have gone down by about 30% compared with the first half of last year. Inquiries on other segments (between RM1mil and RM2mil, and below RM1mil) have also gone down but not as drastically.

Reasons for this could include tighter lending guidelines set by the banks and buyers taking a more cautious approach on their investments this year.

(Following Bank Negara's new lending guidelines, which came into effect on Jan 1, loans are now approved based on net income compared with gross income previously, in addition to the need for more documentation. The new guidelines are intended to help keep household debt in Malaysia to reasonable levels.)

Chua: ‘While interest in property purchase has waned, prices are still going strong for landed property.’

Chua adds that there was a lot of speculation in the property market in the past two years, and that the market is due for a correction.

“The economic scenario is not as rosy and people are expecting things to worsen, which could be why they are hesitant to invest. And to a lesser degree, it could also be the coming general election, which is causing some uncertainties,” Chua says.

Paul Khong, executive director of property consultancy CB Richard Ellis (M) Sdn Bhd, shares similar sentiments.

“The number of buyers (for properties above RM3mil) has dropped by about half with the stricter bank-lending guidelines, which has eliminated the speculative group (of buyers).

“For properties below RM2mil, the market is relatively active with more real transactions. With the new lending guidelines in place, many investors have disappeared from the radar,” Khong says, adding that those who want to purchase their third property now will need 30% in cash for downpayment.

“So, to buy a RM3mil property, they'll need RM1mil in cash if it is their third property. Previously, RM400,000 was enough,” Khong says.

Interestingly, Chua notes that while interest in property purchase has waned, prices are still going strong for landed property.

However, sellers are seen to be less aggressive this year.

“They seem to be less demanding and more willing to accommodate. Last year, they would have said this is my price', and would have refused to budge,” he says.

Property consultants forecast the property market to remain quite slow for the rest of the year.

Khong: ‘The number of buyers (for properties above RM3mil) have dropped by about half.’ >>

Even so, for average middle-income earners such as Michelle, the current prices of properties in various locations within the Klang Valley (refer to chart) leave her with few options.

“I don't even dare look at landed property any more. Even apartments at relatively good locations cost RM400,000 and up.

“For my budget, an apartment around RM200,000 to RM350,000 would still be quite comfortable,” says Michelle, who currently lives with her family in Petaling Jaya.

A mass communications graduate from the United States, Michelle draws a salary of about RM5,000 a month, which goes into paying for her car loan, household expenses, utilities, and credit card bills.

“Household expenditure doesn't just cover grocery shopping. I also have to pay for medical bills, car maintenance and repairs as well as give my parents some money too,” she says.

“As banks are now looking at net income, the loan amount I qualify for is unlikely to be enough for me to even afford an apartment in the Klang Valley.

“Sure, you can still get cheaper houses in places like Bukit Beruntung, but it's just too far away. My life is here. At the rate property prices are going, the thought has crossed my mind that I may never be able to afford a place of my own.”

It's not just within the Klang Valley that property prices have escalated.

Early last month, it was reported that residential property prices in Penang have shot up by more than 25% over the past five years.

Condominium units in Batu Ferringhi, Tanjung Bungah and Gurney Drive, with sea-front views, are being sold at astronomical prices, in some cases beginning with RM2mil for a 1,000 sq ft unit.

Houses which cost about RM500,000 in 2007 now cost RM800,000 an increase of about 30%.

Chang: ‘An entire generation of young adults could be locked out of property investments.’

Raine & Horne Malaysia director Michael Geh was reported as saying that the increase was among the steepest in the Pulau Tikus, Gurney Drive, Tanjung Tokong, and Tanjung Bungah residential neighbourhoods, which experienced a 25% increase in prices of condominium units.

Other areas where prices of condominium units and terrace and semi-detached houses have shot up by at least 25% are Bayan Baru, Sungai Ara, Minden Heights and Batu Maung.

Medium-range housing schemes in George Town neighbourhoods of Perak Road, MacCallum Street, Jelutong Road and Sungai Pinang have also not been spared an apartment located in such a neighbourhood cost RM180,000 in 2007 but is now RM250,000.

It is precisely with this concern in mind that the National House Buyers Association (HBA) has come up with a 10-point proposal to the Government, to find solutions which it claims will hopefully bring prices down.

Among the proposals are for the Government to unlock its land banks in various locations and give priority to affordable housing projects rather than high-end properties.

The HBA is urging the Government to take the lead in developing affordable homes and not leave it to property developers.

It has also proposed that those who buy homes under the affordable housing projects (with a proposed price range of RM150,000 to RM300,000) be barred from selling their property until after 10 years. Before the 10-year period is up, they should only be allowed to sell the house back to the Government.

The association has also proposed that the Government impose a higher stamp duty and real property gains tax as well as tighter mortgage rules for those buying a third and subsequent properties.

HBA secretary-general Chang Kim Loong notes that with the way prices are climbing, the majority of young working adults will not be able to afford to buy a home.

“I'm talking about young people from around the age of 25 to 35 years old, with an average income of about RM3,500 per month.

“The rule of thumb is that a third goes into paying for your home.

“But with RM1,000, many will still not be able to afford it. The consequence of this could be that an entire generation of young adults could be locked out of property investments,” he explains.

A question that needs to be asked, however, is whether HBA's proposal for “affordable housing scheme” by the Government will be able to meet the needs of the urban middle-income earners such as Michelle.

“There are several factors to consider. The location, for example,” Michelle says.

“If the design and quality is decent, then yes, I am willing to consider it. But this doesn't mean we have to settle for bad quality homes, with cheap construction materials.”

BY LISA GOH lisagoh@thestar.com.my

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