Malaysia Real Estate Market 2012: Boom or Bust
As the debt crisis looms over the United States and Europe, investors are searching for alternative investments especially within the Asia-Pacific region.
Property Propaganda
A US-based advisory group Alternative Asset Analysis (AAA) claims the Asia's commercial property market is heading for growth with the top three locations for real estate investment being Hong Kong, Singapore, and Kuala Lumpur. The Senior VP Leslie Chua of AAA believes Malaysia is enjoying wage growth leading to more retailers settling into the capital city while Singapore sees a rise in visitors due to their resort developments, which has lead to growth within their real estate market.
A recent property exhibition hosted by The Star newspaper showcased key property developers around the Penang area. The Star mentions there is “Good demand for Penang property.” However The Star newspaper itself is a media outlet owned by a component of the Malaysian government and may only present positive views of property markets for the government’s best interests.
However another local Malaysian paper The Malay Mail took a survey of first-time and multiple home buyers’ reasons for not buying property in Malaysia under the article "Real Estate Blues." The survey uncovered 36% consumers believe properties are too expensive while another 33% lack the capital to purchase properties. Another interesting finding in the survey is that one-third will wait until after the Malaysian General Election.
Some complaints by home-buyers include "homes are snatched up by unscrupulous property agents who then resold them at exorbitant prices." One cannot help but wonder whether the Malaysian properties have more speculators than legitimate home-buyers. Any market having more speculators than legitimate buyers are foretold to collapse.
Meanwhile Malaysia-based Genting Group paid $236 million for Miami Herald’s headquarters in May citing Florida’s growing population, tourism, and nonstop flights from Asia to Miami. If Malaysians are investing in overseas real estate especially in the United States then it is time to reevaluate the current status of real estate climate within Malaysia.
Economic Analysis
In 2010 the Malaysian Government revealed three major development initiatives including the New Economic Model, the 10th Malaysian Plan, and the Economic Transformation Programme (ETP). The ETP alone will cost $444 Billion USD with 60% coming from the private sector. These initiatives seek to achieve an average of 6% GDP growth per year over the next ten years. Majority of these plans are dependent on political push to achieve the expected goals which will only be revealed after the General Election.
The FTSE Bursa Malaysia KLCI Index consisting of the 30 largest companies in Malaysia hit an all-time high above 1500 in 2008. Now three years later the index is still hovering around the same region. In 2010 Malaysia registered stronger-than-expected real Gross Domestic Product (GDP) growth of 7.2% according to the International Monetary Fund. Malaysia is expected to grow slower at 5.2% in 2011 according to the Malaysian Institute of Economic Research (MIER). While Research and Markets a leading source on market data expects Malaysia to grow 4.9% in 2011 and 4.2% in 2012. The downward projections of real GDP between 2010 and 2012 could lead Malaysia into a recession.
The three main economic risks affecting the Malaysian Economy are inflation, weakening export growth, and the budget deficit. The Malaysian Government is committed to reducing the fiscal deficit to 5.4% of GDP this year compared to 5.6% in 2010. The weakening export growth is affected by two major factors including the decline of the global economic recovery and the appreciation of the ringgit against the US Dollar.
The inflation rate was 2.3% in 2010 as the Bank Negara Malaysia raised their Overnight Policy Rate (OPR) three times last year (March, May, and July 2010) to curb inflation and is currently adopting a neutral stance. However inflation has peaked to 3.8% in June 2011 driven by high electricity and gas prices as reported by MIER.
Another reason for rising inflation is due to the unemployment rate which decreased between 2009 and 2010 from 3.6% to 3.3%. As more people become employed, prices for necessities tend to rise. While inflationary pressures are rising, the Bank Negara Malaysia may hike the Overnight Policy Rate (OPR) currently at 3% by 25 basis points later this year and another 25 basis points next year.
Property Analysis
Residential property prices rose slower this year compared to the first quarter of 2010 according to the Valuation and Property Services Department. This is mainly caused by slower exports due to the appreciating ringgit and slower economic growth caused by rising inflation.
According to the 2011 Property Market Report, the office sector is becoming a competitive market which will largely depend on the success of the Malaysian Government implementing their ETP initiative. Luxury condominiums in Kuala Lumpur city centre indicated a slight decline due to sluggish demand and increased supply in 2010. While service apartments accommodating guests on business trips to Kuala Lumpur have falling occupancy rates. The occupancy rate between 2009 and 2010 declined from 70.7% to 64.6% and it is expected to fall further when faced with large incoming supply which stands around 19,000 units by the end of 2013.
Examining Rental Yields
One of the prime attractions of owning property is receiving passive income however the gross rental yields have fallen over the past year. The Global Property Guide reported 120sq.m condominiums has a better yield ranging between 5% and 7% compared to a bungalow which has lower yields just over 4%. Last year the same 120sq.m condominiums averaged over 8%. The decline could be attributed to disadvantage of owning rental property.
The rental income tax is a flat rate of 26% for nonresidents receiving Malaysian-sourced income. There is also a Real Property Gains Tax of 5% for nonresidents holding Malaysian property for less than five years. Nonresidents looking to invest in properties become unattractive and difficult with these two deterrents.
Malaysia is a pro-tenant rental market even if the law is pro-landlord due to the inefficient, costly, and slow court system. Recovering unpaid rents is a major problem as there is no specific landlord or tenant law in Malaysia. Owning property in Malaysia for the basis of rental income becomes expensive and a hassle when rental income tax is high and the rental market are unregulated.
Malaysian Real Estate Realization
New supply of offices, luxury condominiums, and serviced apartments will affect supply over the next three years. As these projects near completion, the supply will inflict downward pressure on occupancies and rental prices. Prices tend to increase when there is limited supply. Certain areas in Malaysia should be immune to falling prices due to limited land like Penang and prime areas will continue to grow as communities saturate their existing supply.
The current Malaysian real estate market may be riding on last year’s real GDP growth of 7.2%, which is expected to decline over the next two years. Many Malaysians and foreign investors would rather wait until after the General Election which is due no later than March 2013 to assess whether it would be best to purchase properties. The results of the election will determine whether the 2010 development initiatives will progress forward to upgrade existing infrastructure such as roads, ports, and airports or create a slowdown which will also have an affect on the real estate markets.
The disadvantages are now outweighing the advantages of owning property in Malaysia. The appreciating ringgit has slowed the demand for exports and has made properties more expensive for foreign investors. While rising inflation pushes commodity prices higher and squeezing profit margins, the declining rental yields has made owning properties a bit risky with the high rental income tax diminishing their returns. As property prices are rising beyond fundamentals, an abrupt shift in home buyers’ optimism, rising costs of ownership and borrowing could cause significant price corrections downward.
Next year marks the Year of the Dragon which is considered the best year in the Chinese Zodiac calendar where couples get married and find homes to raise their families. This will certainly push Malaysia properties higher next year however the demand will eventually be lower as 2013 approaches
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