Property market in Malaysia may peak in 2020

Malaysia High Rise ApartmentsDemand for high rise apartments in Malaysia is expected to wane in 2016. PHOTO: Vanitha Nadaraj

By: Vanitha Nadaraj

The year 2020 may see the overall property market in Malaysia peaking. Until then, investors and property owners will have to put up with a bit more gloom this year, and look forward to the property market rising slowly in 2017.

This is according to Siva Shanker, an expert in the property market in Malaysia. He has been in real estate for 35 years, observing trends and studying property demand and supply. What he says may sound too good to be true for some, particularly since the property market appears to have lost the vibrancy of a few years back. There seems no semblence of recovery yet.

The bleak picture was further reinforced by Maybank IB Research report last month. The says overall property sales are likely to stay weak due to slower economic momentum and the incoming supply of new properties.

Not for long, says Shanker, the immediate past president of the Malaysian Institute of Estate Agents. He told Asean Today that the property market in Malaysia is bottoming out later this year and will start picking up.

Property market in Malaysia to pick up

The property market in Malaysia is a cyclical industry, he said. “The next property high is in 2020. The year 2017 will see the market slow climbing back, very gradual, and move into positive market.” For this year, he expects the first half of the year to see a “downward slick in terms of volume and value”.Property-Transactions-in-Malaysia-450x328

This is a continuation from last year when for the first time in a long time, both the number of transactions and the value of the properties were down. Investors and owners would have been concerned, with some thinking the property market would collapse.

In previous years, it was the volume that was down but not the value. “The government’s cooling measures slowed the volume but not the prices,” says Shanker. In 2012, Bank Negara Malaysia introduced pre-emptive measures to limit the number of outstanding housing loans to cool the property market in Malaysia.

Mid-range residential properties hardest hit

The ones most affected are high-rise residential properties in the RM500,000 to RM1 million (US$120,480 and US$240,962) price range, according to Shanker. It is the mid-range ones that are affected due to weakening buying power of the middle-income population and also the effect of the Bank Negara Malaysia cooling measures. He sees less effect on high rise homes worth RM2 million (US$483,000) and above houses worth RM500,000 (US$120,000) and below.

This is a great time for bargain hunting, according to Savills Malaysia executive chairman Chris Boyd in an article in The Edge’s The State of The Nation – February 2016. He says properties close to the iconic KLCC and the more affluent areas of Bangsar and Mount Kiara are looking like good hunting ground.

“This is because some property owners who are facing liquidity problems could be prepared to let their property go at more realistic prices in exchange for cash at hand,” he was reported as saying.

Residential properties near KLCC or in the heart of Kuala Lumpur have a sizeable number of expatriates as tenants. These properties are not at the most desirable locations for locals because the surroundings do not support the lifestyle and needs of a family. There are very few local schools and tuition centres and other facilities that suburbs offer.

Local investors were keen on these properties at the height of the 2009-2010 boom when businesses relocated to Kuala Lumpur, bringing along with them expatriates. Now that expatriates have started to leave due to companies downsizing and reducing their international staff size, these properties are available for tenancy and sale.

Office property market

The challenges faced by the oil and gas industry is reflected in the local office property market. “The oil and gas is a big sector in the office market. If O&G shrinks, the office market will shrink as well,” says Mr Shanker.

“There is an overhang in the office space. It is not a glut, but an overhang. It is taking a lot more time than usual to fill.” There is another scenario that is emerging. “As tenants become more discerning and more affluent, they’ll abandon the older buildings and move to newer building as rent becomes more competitive because of oversupply situation. Older buildings will carry high vacancy,” says Shanker.

We may see the principle of natural selection in action in the office property sub-sector. Older office buildings would now have to be demolished, refurbished or reinvented.

Market correcting itself?

The value of residential properties doubled during the golden years or 2009-2011. The value of a single-storey house in Petaling Jaya rose from RM220,000 (US$53,000) in 2002 to RM500,000 (US$121,000). The scarcity of landed properties and those located in Kuala Lumpur and Petaling Jaya, caused the demand and prices to rise erratically.

With property value now dropping slightly, there is a possibility that property prices are correcting. 

The Developer Interest Bearing Scheme (Dibs) is another reason for this sudden and huge increase in prices a few years ago. This is a scheme where a house buyer need not pay a down payment upon signing the sale and purchase agreement. The developer bears the other expenses like stamp duty, legal fees and also interest on finance during the project construction period until the handing over of the keys.

The buyer thinks he is paying less for a property but the value of properties sold under Dibs are actually marked up. This artificially hikes the property value and has caused the property market to rise unnaturally. Dibs was scrapped in Malaysia Budget 2014. Bank Negara Malaysia was forced to take this measure when household debt soared to 86.8 percent of gross domestic product in 2013.

Pressure on Bank Negara Malaysia

The property industry has been putting pressure on the central bank to reintroduce Dibs as a stimulant to keep the industry going and so far the present central bank governor Tan Sri Zeti Akhtar Aziz is not budging. She is also not budging on the cooling measures.

The cooling measures have helped avoid a bubble in the property market in Malaysia, but there is scepticism in the market as to whether these measures have outgrown their efficacy. The industry players say the strict restrictions on loans are affecting sales and this can cripple the industry.

Property loan rejection rates are presently at a staggering 50 percent in Kuala Lumpur and up to 70-80 percent in Johor’s Iskandar region.

The question is will the new governor of the Malaysia central bank, who will take over from Zeti once she steps down in April, undo a lot of these policies or put in place fresh ones to stimulate the industry and at the same time ensure household debt does not escalate. Should BNM step in, then property market prices in Malaysia may start rising earlier than predicted.