A development hotspot: Steadily growing housing market offers opportunities for investment

Long a solid performer, the Malaysia property market has avoided the speculative booms and busts of some regional markets such as Singapore. This is at least partly due to the conservative policies adopted by the central bank and government which seeks to reduce high-risk lending. Major developments in the Klang Valley (KV) and Iskandar Malaysia are giving developers reason to be excited. The next few years could see a transformation of Malaysia’s urban environment, as shifting residential hotspots and new transport options help build out the KV. The challenge will be to make sure that property growth is inclusive, and that the next wave of developments does not leave behind millions of Malaysians in the lower and middle classes.

RESIDENTIAL: The total supply of residential units in Malaysia grew at a modest rate of 2.3% year-on-year (y-o-y) to reach 4.57m units in the second quarter of 2012. Growth in the KV, Malaysia’s most population urban area, was even lower, at 1.9% in 2011, with supply reaching 1.74m units as of quarter two 2012. These rates were significantly lower than the high growth seen in pre-crisis years, such as 2007, when residential supply in the KV increased 7.7% per annum.

However, the trend of declining supply is likely to be reversed in the next few years as housing projects that are being rolled out in 2012 are delivered to the market. According to data from the National Property Information Centre, housing starts were up 13% y-o-y in Malaysia in the first half of 2012, with growth primarily concentrated in the KV. The KV saw 27, 819 housing starts in the first half of 2012, a 61% increase over the previous year. Meanwhile, the slowdown in supply for the past several years has contributed to the appreciation of house prices, with the Malaysia House Price Index rising by 6.1% between quarter 1 2011 and quarter 1 2012, down from 8.9% growth in 2011.

In the second quarter of 2011, the sales price of condos and apartments, which represent around 27% of housing supply in KV, rose 5.4% to hit an average sales price of RM515,867 ($166,419), while prices in Selangor shot up 17% to reach RM263,000 ($84,844) on average. Finally, property sales kept up with the price increases through the end of 2011, with transaction volume and value increasing 18.9% and 22.1%, respectively.

There are multiple drivers for the renewed investment in the housing sector. The high population growth relative to GDP is a contributor to baseline housing growth, as ever more young people seek to move from home.

One key driver in the year-to-year differences is the major investment seen under the Economic Transformation Programme, particularly with public transport in KV and greenfield development in Iskandar Malaysia.

SIGNS OF BUBBLES: There are growing fears that a supply increase of this magnitude is driven in part by speculation. Unlike more well-financed markets such as Singapore, where bubbles represent a temporary influx in capital that is removed at the first sight of trouble, sector participants told OBG that Malaysia’s brand of speculation is domestic, based on individual investors who buy units in new developments with the intent to sell them later for a capital gain profit.

This trend is sustainable for developers as long as speculation continues, which produces a cycle of overbuilding. “Developers are building more and more of the same type of housing – mostly high-end – despite a proven oversupply,” Siva Shanker, vice-president of the Malaysian Institute of Estate Agents (MIEA), told OBG. “They are speculating that buyers will speculate and buy, and many times they’ve been proven right.”

According to CB Richard Ellis, a global real estate firm, the supply of luxury condominiums in Kuala Lumpur (KL) costing more than RM8611 ($2778) per sq metre was expected to nearly double between 2010 and 2012, rising to 13,198 units, and increasing from 17% to 21% of total residential units. This supply has contributed to a residential overhang of unsold properties, which grew from RM4.21bn ($1.4bn) to RM4.92bn ($1.6bn) in 2011, even as the number of unsold units declined. This led the value of an average unsold property to increase from RM182,000 ($58,713) to more than RM250,000, ($80,650) indicating that most of the excess supply is in high-end properties. Speculators are not the only ones responsible for propping up demand – some unscrupulous and overeager developers have helped to inflate supply by selling projects that they would walk away from later. The Ministry of Housing and the local government found that at least 177 private housing projects had been abandoned, cumulatively, likely affecting upwards of 30,000 homebuyers over recent years. Over 1000 developers have been blacklisted for offences related to project delays and cancellations. The government has been forced to spend money on revitalising the projects to safeguard homeowners’ investments, but has responded with measures intended to curb excessive developments.

REINING IT IN: Amendments to criminal law that passed in May 2012 increased the fine for abandoning projects to RM250,000-500,000 ($80,650-161,300), while adding jail time. The RM200,000 ($64,520) deposit required for developers to conduct a housing project has also been replaced with the requirement that developers pay 3% of the total project as a refundable deposit. The government also announced that it would be move toward the build-then-sell model for residential development by 2015. Under this regulatory framework, homebuyers are only required to pay a 10% deposit to developers, with the rest due on handover. This rule change, which forces property developers to fund their projects through loans or pre-existing cash flow, would certainly safeguard homebuyers, while also making it difficult for small developers to get financing.

Meanwhile, Bank Negara Malaysia (BNM), the central bank, is implementing rules on the demand side aimed at minimising speculative investment. The first to be implemented, in late 2010, was the loan-to-value cap, which limits the size of housing loans to 70% of the value of a property for individuals who already own two homes, or 60% for non-individuals. This should have little impact on first-time homebuyers except by potentially reducing the supply that depended on speculative buyers. The options available for circumventing such restrictions – like using a relative’s name on loan applications – have led analysts to suggest the rule is not having a major impact. BNM also began requiring banks to calculate home buyers’ net incomes, inclusive of their debts, rather than their gross income when buying a home. This is both a response to worries about speculation and a recognition of growing Malaysian consumer debt. Household debt, nearly half of which is in housing loans, reached 76% of GDP in 2011.

The government, beginning in 2012, also increased the real property gains tax (RPGT) from 5% to 10% for properties disposed within two years after their purchase – another move aimed at discouraging the buyand-flip purchasers without impacting affordability. The 2013 budget, announced in September 2012, proposes to sharpen the effect on speculators, raising RPGT to 15% within the two-year window. The budget would also add a 10% tax for capital gains on properties sold between two and five years after purchase. The effect of these new regulations on the property market is unclear. Kumar Tharmalingam, the CEO of Malaysia Property Incorporated, a government initiative to boost investment in the country’s real estate sector, predicted a moderate slowdown, telling OBG, “BNM’s recent moves will slow down speculation, but the demand for limited-supply properties will still create a bubble in certain areas.” The loan approval rate has fallen over the past decade, from more than 70% to just 46.6% in the second quarter of 2012, according to CB Richard Ellis. Sector figures also suggested in mid-2012 that the tide of increasing prices was receding, with many transactions falling through due to a large price gap between sellers and prospective buyers.

The weakened economy and the new restrictions on lending may keep transaction growth low throughout 2012 and into 2013. There are also concerns that as regulators are tightening lending rules and imposing new requirements for developers the government may be making houses unaffordable for ordinary Malaysians. The trend of middle-class workers being priced out of urban areas is not a new one, a product of limited space, investor speculation, high land prices and low incomes. Making houses more affordable will rely on government programmes to increase the supply of cheaper housing, as well as attention by developers to the real demands of the market (see analysis).

DECENTRALISATION: In response both to high prices and to congestion in central areas of KL, developers are aiming new projects away from downtown KL. Malaysian property agency C H Williams Talhar & Wong (WTW) has highlighted areas such as Shah Alam, Petaling Jaya South and Cyberjaya as development hotspots.

One factor influencing the extent and direction of developers’ suburban expansion will be the KV mass rapid transit (MRT), which kicked off construction in July 2012. For example, the placement of the MRT1 terminus in Kajang – nearly an hour’s commute from downtown KL – has accelerated a property boom that was already under way. The projects include both high-end developments that aim to undercut similar projects in the city, such as Sentosa Heights, which had a pre-launch take-up rate of 70% of its RM1m+ ($322,600+) bungalows. There are also several more affordable projects, such as TTDI Grove from small developer Naza TTDI, which recorded 90% sales of its two-story link homes costing RM290,000-450,000 ($93,554-145,170).

On the other end of the MRT1, a parcel of land that also houses the Rubber Research Institute of Malaysia in Sungai Buloh will be developed by the Employees Provident Fund. The project is expected to include housing units ranging from affordable to high-end, as well as retail and hotel properties. Overall, according to David Jarnell, the senior vice-president at Jones Lang Wootton Malaysia, houses within 5 km of MRT stations may appreciate as much as 20% in value.

Cyberjaya, the Selangor township once designated as Malaysia’s “Silicon Valley,” is also experiencing something of a rebirth. The home of the ICT industry has long been dominated by office parks and staffed with a transient population commuting back to residential areas in KL and Selangor in the evening. But developers, always on the lookout for a growth opportunity, have poured more than RM10bn ($3.2bn) into Cyberjaya projects that offer the residential and retail amenities previously lacking. RM2.4bn ($774.2m) of the RM3bn ($967.8m) invested in projects in 2011 went to residential development, according to Emkay Group, which expects Cyberjaya’s population to nearly double from 54,000 to 100,000. The potential snags for the development include cost, which is high for property so far away from the city centre, and transportation. The township is connected to KL via an Express Rail Line, but developers have called for a light-rail extension which would better connect the burgeoning area.

DOWNTOWN: The fact that developers are increasingly looking for bargains outside of the city centre has not impacted demand for downtown KL properties. For example, the luxury Banyan Tree hotel/residence in the KLCC/Bukit Bintang area saw a take-up rate of 80% after its launch in July 2011, despite a RM21,528, ($6945) per sq metre price that makes its serviced apartments some of the most expensive in KL. The sector is also expected to benefit from government-led projects such as the Tun Razak Exchange (TRX). Infrastructure for TRX may cost RM2bn ($645.2m), boosting revenues of construction companies, but real estate in Bukit Bintang, Pudu and Kampung Pandan should appreciate as well. Additionally, downtown properties may see some kind of halo effect from the River of Life programme, a RM400m ($129m) attempt to transform the muddy Klang River into a vibrant waterfront.

The oversupply of high-end housing has helped drive down occupancy in KL, with condominium occupancy rates falling from over 80% in 2008 to 68% in 2012, although the decline moderated in 2011. Rental rates saw a similar trend, dropping from a pre-crisis peak of more than RM53.80 ($17.40) per sq metre in KLCC to RM41.30 ($13.30) per sq metre in 2012, according to WTW. Mont Kiara rents have dropped from nearly RM43 ($13.90) per sq metre to RM30.90 ($10) per sq metre, while the asking price of Bangsar condominiums was stable at around RM34.90 ($11.30) per sq metre.

Renting is generally not a popular choice among Malaysians, according to Tharmalingam, who stressed the importance of improving rental offerings, so the young graduates which the country is working to produce have affordable places to live.

OFFICE: The divergence between high-end supply and demand is even more noticeable when it comes to commercial real estate. Office vacancy rates in the city centre peaked at more than 20% in the last quarter of 2011 before moderating to 15.4% in the second quarter of 2012, although they may rise with the launch of new supply. “Over the next nine months, up to 631,741 sq metres of office space could come onto the market in the Klang Valley,” Jarnell, told OBG.

Expected arrivals in the second half of 2012 include 182,090 sq metres in the KL CBD, at major towers such as Integra Tower @ the Intermark, Menara Darussalaam, Menara Binjai and Menara Felda. Another 176,516 sq metres will arrive in the second half of 2012 in KL Sentral, which is classified as “fringe” KL.

Rental rates have not suffered much, as landlords generally prefer keep the same headline rate while offering promotions to new tenants. According to Cushman and Wakefield, a global real estate consultant, average effective net gross rate in the KL CBD grew slightly from RM80.30 ($25.90) per sq metre to RM80.51 ($26) per sq metre. Location is still a key factor for tenants. Despite higher prices, the CBD has just 16% vacancy rate compared with 25% in KL fringe areas and 22% in Selangor. Cyberjaya and Putrajaya together have a whopping 40% vacancy rate, suggesting that supply may have outstripped demand in planned cities.

RETAIL: The gleaming malls of the KV are a regional tourism attraction and a strong driver of the real estate market. Retail spending has tracked GDP closely for the past decade, although sales growth of 8.1% outpaced the economy’s 6.5% expansion rate in 2011. Tourist spending at Malaysia’s malls accounts for around 10% of its RM180bn ($58.1bn) total. The past few years have seen a steady rise in retail space, with total lettable area growing from around 3.3m sq metres to 4.3m sq metres between 2006 and 2011.

The take-up has been equally strong. Vacancy rates stayed below 10% for much of that time, and only recently ticked upwards to 11.6% in the first quarter of 2012. This is likely to be anomalous, a result of vacancies at newly opened centres. Indeed, two newly opened shopping centres in the Klang Valley – Setia City Mall in Shah Alam and The Paradigm in Kelana Jaya – saw strong response when they launched in May 2012, notching 99% and 91% occupancy rates, respectively.

The launch of more suburban malls such as these goes hand in hand with the push of new residential properties into Greater KL and Selangor. The outlook for the next several years is uncertain as an incoming 929,030 sq metres in supply through 2016 could put pressure on occupancy rates, but analysts also expect upward rental revisions of 10-15% in 2013-14.

REITS: The steady rental income of retail properties is a major factor driving their popularity for inclusion in real estate investment trusts (REITs). Malaysia is home to sixteen REITs – investment vehicles for real estate that can be listed on stock exchanges – which collectively have a market capitalisation of around RM23bn ($7.4bn). Eight of these include some retail, of which four are pure retail plays, incorporating some of the KV’s biggest malls. The latest is IGB REIT, which listed with RM4.6bn ($1.5bn) in assets, including Mid Valley Megamall and The Gardens Mall. The IPO for IGB, which became Malaysia’s biggest retail REIT, was 21 times oversubscribed despite offering lower yields than Pavilion REIT had in its 2011 launch, indicating the sector’s dynamism. The big fish, however, will be the listing of KLCC Property Holdings, which owns more than RM12bn ($3.9bn) of real estate, including Suria KLCC and the Petronas Twin Towers. KLCC announced at the end of November 2012 plans for a stapled REIT or two-in-one structure. The outlook for REITs is strong, given their exposure to retail growth and the large portfolio of retail properties available for acquisition.

FOREIGN INVESTMENT: REITs have thus far failed to gain much currency with foreign investors, thanks in part to a 10% withholding tax on foreign individuals. Sector figures have urged the authorities to remove the tax, arguing that the change would make Malaysian REITs competitive with those of Singapore, which has no such tax. Overall, however, the Malaysian property sector is open to international investors. “Malaysia offers the most liberal scenario for foreign ownership of real estate in the entire ASEAN region,” Shahril Ridza Ridzuan, the former group managing director of Malaysian Resource Cooperation, said. Consistent and clear policies on property acquisition, a strong legal system, contracts are all reasons cited to emphasise the country’s friendliness to outside property buyers.

One major wrinkle, however, is recent restrictions against foreigners buying property worth less than RM500,000 ($161,300) in Malaysia. Government officials have recently proposed raising the threshold to RM1m ($322,600), while Penang’s Chief Minister Lim Guan Eng has moved to enforce an RM2m ($645,200) minimum for homes on Penang Island. The move is designed to help prevent foreigners from driving up property prices for Malaysians, even though sales to non-citizens represent just 2% of transactions. The impact is likely to be minimal – most foreigners buy houses over RM1m ($322,600) anyway, although if the change goes through there may be a temporary spike in houses costing between RM500,000 ($161,300) and RM1m ($322,600) before the law takes effect.

A government initiative called Malaysia My Second Home (MM2H), which is designed to attract foreigners looking to retire or keep a vacation home in Malaysia, has drawn 18,524 expatriates since its launch in 1996. The scheme offers foreigners 10-year visas and the duty-free import of one car, along with other incentives, though notably it does not provide for or permit holding a work visa. Despite the recent uptick in arrivals – a record 2387 people qualified for MM2H in 2011, and 1321 through the first five months of 2012 – many are still dissatisfied with the response. “MM2H has attractive conditions for drawing expatriates, with a low cost of living and many highlights for tourists,” Yeow Thit Sang, the president of the International Real Estate Federation Malaysia, told OBG. “So why are people not coming in droves?” Others hold out hope for the growth of Iskandar Malaysia, whose cheap properties and proximity to Singapore could draw Asian retirees.

BEYOND KLANG: Iskandar Malaysia is set to be one of the major new hotspots of property investment for both foreign and local investors. The project is an attempt to upscale the southern city of Johor Bahru, which sits across a narrow causeway from Singapore. The hope is that warehouses and industries that need a lot of land will migrate from Singapore to cheaper Johor, while workers will be drawn to live in Johor and commute to Singapore. Iskandar Malaysia master plan calls for five flagship zones, including several industrial zones, a commercial zone around Johor’s airport and a property development zone known as Nusajaya. UEM Land is the major developer in the 9662-ha Nusajaya complex, with five major development projects and an additional 3237 ha of undeveloped land. Its competitors, including SP Setia and Mah Sing, have also been buying into land banks to get in on the action. Real estate represented some RM30bn ($9.7bn) of the cumulative RM95bn ($30.6bn) investment recorded in Iskandar Malaysia. While much of the focus is on greenfield development, the massive investment has driven up prices two- or three-fold in the once-depressed city.

VENTURING ABROAD: Even as Malaysia looks to attract foreign capital to its real estate market, its developers are seeking to export their own capabilities to foreign markets. The most notable venture overseas is the purchase of the Battersea Power Station in London by a consortium of Sime Darby, Employees Provident Fund and developer SP Setia. The RM1.97bn ($635.5m) deal, finalised in July 2012, is expected to have a gross development value of RM40bn ($12.9bn). This will include 3500 homes, as well as retail and office space, with the development taking place over 10-15 years. The deal represents not only one of the biggest-ever outward investments by Malaysia but a golden opportunity for SP Setia, and Malaysian developers overall, to prove themselves in advanced markets.

OUTLOOK: Among the reasons that makes Malaysia attractive to foreign investors, according to Jarnell is that “Malaysia’s a fairly predictable, steady market without the peaks and troughs of, say, Hong Kong and Singapore and genuinely offers opportunities for long-term investors.” The idea of stability and steady growth generally holds true of Malaysia’s property sector, whether one is an investor, developer or home buyer. Where trends emerge – be it the shift away from central KL, or the rise of new regions such as Iskandar Malaysia – they are usually spotted ahead of time and unfold gradually. Addressing one of Malaysia’s a longest-running and most visible trends – home affordability for the middle class – will remain a challenge in the coming years.