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University of London’s department of economics PhD candidate Giovanni Cozzi has warned that there could be a property bubble in certain parts of Kuala Lumpur(KL) because banks had been over-lending to the sector, which the banks had deemed less risky compared with the manufacturing and technology sectors.
This is certainly alarming for property speculator in KL as KL and Perak's property prices have increased by 44.8% and 35.6% respectively for the past few years. This will raise the concern whether KL will follow US's footsteps in terms of real estate bubble.
Cozzi has further suggested that BNM should increase the interest rate in order to curb bank's over-lending.
Does Cozzi imply that "Cash is King" now since stock market and property market are in the edge of bubble?
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Softer market as buyers take cautious stance
MARKET demand for top-tier luxury condominium and serviced apartment units is expected to soften as purchasers become more selective and discerning while developers become increasingly cautious over over-supply concerns, leading to slower sales.
CH Williams Talhar & Wong Sdn Bhd (WTW) senior executive director P’ng Soo Theng said factors that led to such a weak market could be attributed to the country facing a great deal of uncertainties this year. They include:
·The 12th general election in March which was met with unprecedented results;
·A 41% petrol (63% diesel) price hike in June;
·The consumer price index in June hit a 26-year high of 7.7%
P'Ng Soo Theng
·Rising defaults on subprime mortgages in US which triggered a global crisis leading to a gradual withdrawal of investment funds in the region.
Under such circumstances, affordability is now of great concern as daily living expenses, particularly so for the middle to lower income group, form a larger portion of their disposable income and the sales of “big ticket” items are cautioned.
The KLCC area represents the top-tier condominium and serviced apartment market in the country. In the last two years, prices have doubled breaching the RM2,000 per sq ft benchmark.
Foreigners (from Singapore, Hong Kong, South Korea and the Gulf nations) make up about 30%-40% of purchasers, as prices are still considered affordable by regional standards.
The exemption of real property gains tax and lifting of the need for approval from the Foreign Investment Committee are factors attracting foreign investors.
With the global financial situation still unsettled, the current political climate in the country and imminent key interest rate hike, many are now adopting a “wait and see” attitude.
Possibility is greater that purchasers will refrain from buying rather than cancelling their bookings or purchases.
With the uncertainty from spiralling costs, pressure on building materials and electricity tariff hike, purchasers would probably switch to purchasing units in prime locations as landed properties in prime locations are considered a hedge against inflation.
KLCC condominium properties have not gone up in price in the last two months. There actually have been no new launches within the KLCC area in the first half of 2008.
“We believe that buyers are in a position to 'pick, choose and negotiate' in the current scenario,” advised Png.
“The immediate response to the current scenario has already been observed during the first five months of 2008 where fewer developers are launching residential units.
“Having monitored the daily print media on new residential schemes advertised for sale, our findings reveal that from January to May 2008, some 3,333 residential units were launched in the Klang Valley.
“These include terraced, semi-detached and detached houses as well as town villas and condominiums or apartments in areas extending to Shah Alam, Semenyih, Klang, Sungai Buloh, Bangi, Rawang, Puchong and Putrajaya.
“In contrast, about 10,780 residential units were launched from January to June 2007.”
Malaysian real estate still on foreign investors’ radar despite being low key
THERE is still interest in Malaysian real estate, especially in the KLCC area, among foreign buyers.
According to Henry Butcher Marketing Sdn Bhd chief operating officer Tang Chee Meng, investors are now more cautious in view of the current political and economic uncertainties.
Investors are also concerned about the large number of units that would be completed within the next 12 months and the possible impact on the rental market and yields.
In a regional context, prices of Malaysian top-end condominiums are still cheap, being only 20% that of Singapore and about 12% that of Hong Kong.
Tang Chee Meng
Cancellations
Tang said foreign investors were still keen to invest but the level of interest was low compared with the strong surge in foreign interest in the second and third quarters of 2007.
A filepic shows the night skyline of Kuala Lumpur. Condo prices within the KLCC area are still the cheapest in the region and prices are very unlikely to fall
“After the results of the general election, we had a couple of purchasers who cancelled their bookings for one of the projects that we were marketing.
“However, we suspect that they were probably only using the election results as an excuse. Once things settled down and people accepted the results, we had no more issues. Sometimes it’s a knee-jerk reaction.
“On the whole, we have not heard of situations where a developer faced a significant increase in the cancellation of bookings.”
Some investors were adopting a wait-and-see attitude, said Tang. The impact was felt more strongly in the low and medium-cost sector as the target buyers were more adversely affected by the rise in the cost of living.
Well-heeled investors were, however, still investing in the upper medium-cost and high-cost sectors but they were now more selective over the location, pricing and developer’s track record.
There had been no increase in KLCC condominium properties but prices had remained stable, said Tang.
Tender difficulties
Tang said he had not heard of any specific examples of developers falling behind or being unable to meet their construction schedule. But from market talk, he understood that some developers faced difficulties in getting contractors to tender for their projects.
There had also been cases where the contractor turned down the award after being informed that they were successful in the tender exercise.
“I also heard of a developer whose contractor stopped work after the project was 80% completed and the developer had to continue the construction work on his own.”
At this point in time, investors who still keen on buying KLCC properties ought to look out for projects that stood out from the rest, advised Tang.
Look for distinguishing factors, for example, branding, architectural features and design. “In that sense, you would have no competition and therefore, you would be in a position to dictate your own price and rental,” he said.
Second, unless it was a project undertaken by a financially strong developer, it would be safer to invest in a completed project. “You would not have to worry about the project being abandoned and whether the workmanship was of the right quality,” said Tang.
“Third, if you are investing in a project not yet completed, choose a developer with the financial capability and track record in handling similar projects,” he added.
Lastly, the investor would obviously have to do his homework thoroughly to make sure he is paying is a fair price and that his desired return on investment is achievable.
Although the property market could see a reduction in the volume of transactions compared with 2007, Tang believed that property prices were unlikely to go down due to the significant rise in construction costs.
As the current fixed deposit and savings rates of banks were below the real inflation rate, it would be pointless to keep money in the bank.
Property has always proven to be a good hedge against inflation, so it would be a good move to look for outstanding buying opportunities in the property market. However, investors would have to choose wisely.
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