June 30, 2014
On June 28, M Shanmugam of The Star wrote about an interesting topic. His article reads, ‘Property Bubble Still Growing’. I am very sure he has done sufficient research as well as relevant property sector experience to have such an attention grabbing title. Normally, these ‘bubble’ title, if you go online would point to a few other markets such as China, Australia, London just to name a few and his article is pointing at Malaysia. He said, while it’s true that the transactions are going down but the elements of a bubble brewing is very much intact. Some of the reasons he stated include:
1) No major property projects have been shelved or delayed in Kuala Lumpur and Johor Bahru which indicated the confidence level of developers. This is still happening despite the slowdown in demand.
Before he gave the second reason why he felt that the bubble is brewing, he touched upon the facts from Bank Negara which showed the Malaysia House Price Index dropping. Sales and new property launches continue to drop and borrowers with three or more mortgages declined to 4% from nearly 16% in 2010. Some 84% of all borrowers are only having one property. Banks also have a better buffer for any slowdown because proportion of outstanding housing loans with a loan-to-value of above 70% had declined to 46.6% from 50.1% in 2012.
2) However, he said that a slowing down market does not mean it is not going to cause damage to the financial system. He said all these slowing down was because of the government’s tough measures such as RPGT of up to 30%. Then, he said that even with all these measures, the over-building situation in KL and JB continued and he said the massive launches by developers from China have gotten even the government agencies worried. In fact he said that ths over building of commercial space in the city are coming from government-owned developers. One specific project was highlighted, the Tun Razak Exchange (TRX) which is under the 1Malaysia Development Bhd and this was because it got the land on a silver platter.
3) He further compared the TRX to the development of KLCC project in the late 1990s. The TRX is a 15-year development and by the end, 30 million square feet of commercial space would be coming into the market. If we divide this using a simple calculation, it means on a yearly basis, around 2 million square feet of commercial space would be coming online every year. (For the benefit of everyone, the office space available in Klang Valley is estimated to be 100 million square feet by Jones Lang Wootton (JLW) in 2013.) BesidesTRX which is an oversupply, there is also the Menara Warisan which I think has been ‘changed’ name to KL118 and from 100 storeys, it is now 118 storeys. Anyway, this is still considered a rumour without any formal announcement by PNB.
4) He mentioned that though Country Garden Holdings Ltd announced that 6,000 out of 9,000 units have been sold, there has been no news about the remaining units. There are up to 30,000 new units of apartments to be launched very soon in Johor Bahru. He also said that a government strategic investment arm revealed in a study that the number of apartments and commercial space coming into Johor Bahru within the next few years is 30 times that of Mont Kiara. (I am not sure if JB which is right next to Singapore and has 100,000 people commuting to and fro everyday for work is a good comparison to Mont Kiara.)
5) He said that many of the cooling down measures taken by central banks from Asia in the last four years have helped to reduce speculative demand and over-building. However, he questioned the effectiveness of these measures in curbing property bubbles. Then, he said that the RPGT has had an effect. However, how long can the effect be no one knows. In his last conclusion, he finally stated that over-building by developers are still continuing and thus it will fuel a property bubble. His suggestion is for more conventional tools such as tightening monetary policy to curb speculation. (One tightening monetary policy is the increase of interest rate)
Personally, my opinion about commercial office development is simple. For older buildings, the maintenance better be good or the newer buildings will take over your customers. For newer buildings, with the probability of occupancy rate dropping to 73.82% by 2016 (as per Zerin Properties CEO Previndran Singhe, also reported by The Star in March 2014), please be very efficient in controlling your costs and effective in selling your office space. Seriously, there has not been that many new commercial properties in Penang but you can still find office space rental for just RM1 psf. However, in Klang Valley even in so called newer areas which was not looked highly upon, Bangsar South (Kerinchi), the rental is RM5 psf when I heard about it last year. As an office worker, I seriously mind old buildings.
In terms of comparison, my view is, isolate the necessity from the luxury. In an article I wrote about affordable property just few weeks ago about the latest condo in Penang at RM300,000, there were a total of few thousand views within few hours. We can see transactions going down a lot when compared to 2011 or 2012 but if you are a developer and you launch a decent sized condo below RM450,000, even in an area known for jams, rest assured, it will be fully taken up. The recent statistics has shown clearly, the 16% who bought more than three properties previously, has been reduced to a mere few % today.
Oh yeah, how can you actually know if there’s a bubble? Even if you are just a nobody like me? You can read a bit here: How to spot property bubble?
One thing I cannot understand until today is why has the luxury properties bubble still not yet burst. If there is indeed a bubble, the luxury ones should be the first to burst. You can already see so many empty units for those condos above RM1 million. Even in Penang, so many of the new units completed are empty and dark at night. If only the bubble for these units can burst first, perhaps I get to buy one of these luxury units at medium high end condo price. Oh yeah, one thing not mentioned by M Shanmugam was how much would prices drop when the bubble burst. I would love to read his next article on this. I also hope that majority of the younger population who has not own a property yet would get ready to buy once the bubble bursts. Such opportunity, if it materialises does not come often.
written on 30 June 2014
Next suggested article: After 4 years of BULL, this year is BEAR (for how long?)