Jan Yong explores several factors that can bring property prices in Malaysia to more sustainable levels.
As a result of restructuring measures by the new government which took over on May 9th, many people expect the pent-up demand for property to spike by next year causing prices to increase. Here are 10 arguments to the contrary:
The National Property Information Centre (Napic) 1Q2018 property market status report released on June 22 showed that there were a total of 144,927 unsold residential units under construction and those that haven’t started construction yet. For completed residences, including serviced apartments and small office, home offices (SoHos), the total was 34,532.
Add to this is the recent announcement by the Ministry of Transport (MoT) which plans to develop affordable housing projects on Railway Assets Corp’s (RAC) 9,192 acres of land to generate better returns for the company.
On the same note, China’s Agile Group has said that it is planning to launch projects in Malaysia with GDV of RM12.6 billion in the next three years (presumably high end projects).
Furthermore, the new government has in its manifesto, pledged to build 1 million affordable houses within 2 terms (10 years). Whether this is achievable or not is not an issue – the big concern
is its impact on the market. It will add more supply to the affordable housing segment especially those below RM500,000.To meet demand where it’s most needed, many private developers are also aiming to go into that segment.
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Hence, regardless of which segment – residential, commercial, or industrial; high end or affordable housing, a glut is inevitable and will worsen in the following years. As it is, the oversupply situation has worsened from last year. It would definitely take some time for the market to absorb all this supply.
DISMANTLING CORRUPT PRACTICES AND MONOPOLIES
The new government has pledged more transparency, good governance and the dismantling of corrupt practices and monopolies. One action that will definitely be done is to review all big projects that did not go through open tenders but instead through direct negotiation. Anthony Loke, the Transport Minister has given an assurance that the government will review all approvals for property developments worth “hundreds of millions” of ringgit that had not gone through the process of open tender. Examples he gave were land in Pudu, Batu Tiga and Bangsar, all in the Klang Valley.
With better governance, ‘compliance costs’, always cited by developers as one of the factors causing high prices, will be reduced, hence reducing prices overall. Compliance costs which are passed on to buyers include conversion premium, development charges and infrastructure contribution funds; and can eat into 15% to 40% of developers’ gross development value (GDV).
Currently, developers have to pay for the laying of utilities such as electricity, water, telephone and sewage for the “last mile” of a housing project, the cost of which is passed on to the housebuyer. Private and public utility companies should instead take over this portion of the development.
BAN ON LAND HOARDING
If the new government implements its manifesto to prevent land hoarding by developers through setting a time limit to build, then developers might have
to sell their land or be forced to develop within the time limit. This will make available more land, some in prime location, to other developers. With more supply of land, and presumably more developments due to the time limit, supply will further increase.
REMOVAL OF GST
The removal of the (Goods and Services Tax) GST on June 1st will help reduce prices particularly for commercial properties. Although residential property is exempted from GST, the supply chain was not and have added up cost. Developers were paying 6% GST for all building materials including bricks, cement and roofing materials; as well as services of engineers, contractors, etc. This is also one of the factors developers have cited as having increased prices of property.
FASTER AND SEAMLESS TRANSPORTATION
Transportation in the foreseeable future is expected to become faster, seamless and probably cheaper – so people can live further away from the urban core. When residential areas are more spread out and
are further away from the core districts due to the availability of the MRT and LRT, prices may fall to more sustainable levels in core districts.
Moving forward, the development of the High
Speed Rail (HSR) that can reach speeds of up to 1,500kph (China-made) or 1,220kph (US-made, also known as Hyperloop) means that one can stay in KL and commute to Singapore in about 15 mins time! Location will lose its significance as they allow people to stay in cheaper locations abroad and commute
to business hubs. Remote workers who can work anywhere in the world will increase in number.
At the speed of 350kph, the current KL-Singapore HSR will be obsolete by 2026 (its expected completion date), if the project proceeds based on the current contract.
REVISION OF QUOTAS
Although a contentious issue, if all Malay reserved land comprising over 25% of land in Malaysia is degazetted and converted to freehold status, this will add to the land supply, hence rendering land, one of the major cost factors in the price of property, cheaper. Owners will also get a chance to participate in the real estate sector through joint ventures with developers.
Another contentious issue is to revise the Bumiputera Quota Policy for housing – this again will add more supply to the market, with the effect of reducing prices. Also, the controversial proposal to impose price controls on affordable housing, if implemented, will stabilise prices to more sustainable levels.
ADOPTION OF TECHNOLOGY
Technology, for example, prefab manufacturing and modular construction, robot workers, 3D printing, will all make the cost of construction cheaper. If developers can build faster, employ fewer human workers, use cheaper materials, surely the price of property will fall. An example is a single storey house with built-up of 800 sq ft which was recently unveiled in Texas, US. The cost of construction is only USD4,000 due to the use of 3D printing.
Although robot labour only makes up about 1% of each project, based on current technology, it won’t be too far in the future when robots tackle more complicated jobs other than repetitive work like welding, and other basic tasks. Robotic arms are already being used in some work sites in the US to reduce the impact of repetitive tasks on the job.
In Colorado recently, a bricklaying robot named SAM, short for Semi-Automated Mason was deployed. SAM can lay 3,000 bricks in an eight-hour shift using a conveyor belt and robotic arm. There are also self-operating excavators, backhoes, and other construction vehicles as well as drones that have been deployed. A more intelligent roving robot is currently being used in a site to monitor whether construction projects are proceeding according to schedule, keeping projects within budget.
Additionally, startups and large tech companies like Facebook and Google are getting into the real estate industry, and are advancing a variety of ways the industry designs, builds and operates. For example, they are coming up with innovative construction methods to build ambitious projects that reimagine everything from the materials used to how the space is used, from offsite prefabrication, standardization of design elements, to creating efficient economies of scale in materials sourcing.
For example, Katerra uses building information modeling (BIM) to produce design scripts for
its projects that plug into its global supply chain, integrating design and materials sourcing. The company estimates that eventually it will be able to build a three-storey suburban “workforce housing” 40% faster than the industry average.
Retrofitting existing buildings for greater residential efficiency by transforming them into co-living spaces where residents rent smaller individual spaces and share common areas such as kitchens and lounges is another way to bring down cost. With more people spread out through co-housing, there will be less demand for individual housing units.
Proptech in the form of apps and websites can cut out the middlemen such as agents thus the commission saved can translate into cheaper prices for property buyers and savings for developers. This is already happening in Singapore.
According to the Malaysian Department of Statistics, the population grew at a rate of 1.6% to 31.6 mil in 2016. In 2017, the population growth rate slowed to 1.3% yielding a population of 32.0 mil. Out of that, 10% are non-citizens (another source puts it as high as 20%) comprising migrant workers including illegals/undocumented workers.
The percentage of elderly (above 65) in 2017 (6.2%) has increased by 0.2 percentage points compared to 2016 (6.0%). The median age has also increased from 28.1 in 2016 to 28.3 years old in 2017. What this means is that an ageing society is slowly creeping into Malaysian society and the fertility rate is declining. End result – fewer productive workers
and even fewer taxpayers. It will cause deflationary pressures like in Japan which will affect property prices in general.
The department expects Malaysia to be an ageing nation by 2035, where 15% of the population will
be classified as senior citizens, bringing the ageing population to 5.6 million; and by 2050, it is projected that the number will increase to 9.6 million, or 23.6% of the population, which is roughly where Japan is now at a quarter of its population.
So although there is population growth in Malaysia, the rate is marginal resulting in declining demand for property in the future.
Having said that, with increased confidence, people will want to buy but these are genuine buyers and investors,
so prices will be more sustainable. The government will continue to put in place measures to discourage flipping and speculation while loosening measures for genuine first time home buyers with the capability to repay.
In the long-term, Malaysia will be more transparent; there will be good governance and hopefully more equality. Productivity will go up and incomes will rise; resulting
in higher purchasing power. Better governance and transparency will also likely result in more FDIs coming in – barring any external shocks such as a trade war between the US and China.