2005 REAL ESTATE OUTLOOK
by Lim Lay Ying
Property Times, New Straits Times
1st January 2005

See also, A Golden Age for Lifestyle Projects

After a year of robust performance in the housing market which saw sales surging 39 per cent year-on-year in 2Q 2004 and absorption rates for new housing launches jumping to 41 per cent from 20 per cent three months earlier, the question now is whether the momentum can be sustained.

During 2004, the housing price index had maintained an impressive growth rate of 5.6 per cent nationwide, with Kuala Lumpur leading the pack by recording a 13 per cent rise (source: NAPIC 2Q 2004). Loans to the property sector continued to grow, registering a 15 per cent increase year-on-year into October 2004. Concurrently, the banks’ non-performing loans to the sector steadily declined to 8.1 per cent (as at October 2004).

Despite the rise in the stock of unsold residential properties (up 10 per cent in the country in the first half of 2004), the remarkable showing by the top end of the market helped to boost overall confidence amongst industry players and investors.

Healthy economic growth numbers had spurred consumer spending to accelerate to 9.9 per cent in the first six months last year from 6.6 per cent in 2003. Positive sentiment was also obvious amongst those in the business community where investments jumped 15.3 per cent in contrast to a miniscule 0.4 per cent in 2003.

The country as a whole was enjoying healthy job growth and declining unemployment – a rapidly expanding services sector owing largely to the jump in tourist arrivals was creating numerous jobs. This showed up in rising hotel occupancy rates, increasing hotel profitability, as well as a strong retail, restaurant and entertainment sector.

While the overall economic outlook still appears to be in good shape and analysts are expecting demand in the broad property sector to hold up – at least through the first half of this year (2005), there are however some headwinds that may weigh down current optimism and cool the frenzy that had been driving prices so far. These are:

– The threat of higher inflation

With the rise in crude oil price by almost 40 per cent over the past one year, the country’s inflation rate hit a five-year high of 2.2 per cent in November 2004 after averaging 1.1% in the first eight months (the rate had been creeping up since September: 1.6 per cent and October: 2.1 per cent).

This year, inflation is expected to rise to 2.5 per cent (from 1.4 per cent estimated for 2004).

– Rise in interest rates

One of the most critical factors that directly affect sentiments towards the real estate sector is the banks’ lending rate. The threat of higher inflation is likely to trigger a rise in interest rates as the government begins to address budget shortfalls. And as interest rates gradually rise accordingly, property buyers and investors can be expected to be more lukewarm towards big ticket item purchases such as real estate.

– The nagging over-supply issue

Aggravating the already burgeoning supply of unsold stock of completed properties in most of the major sub-sectors is the huge incoming supply and planned projects where building plans have been approved but construction have yet to commence. Future excess supply may worsen when the 1,160,718 units (601,429 units categorised under “incoming” plus 559,289 units of “planned” supply) are put into the market.

– External uncertainties

Concerns that will continue to weigh down 2005 include the possibility of China’s economic growth slowing down as its government acts to prevent its economy from “overheating”, and the repercussions that may arise should the global electronics industry decelerate further.

– Calamities that are either natural or man-made

Growth patterns could be temporarily derailed by calamities such as the recent huge tsunamis that battered Southern Asia and terrorist attacks in New York, Bali, and Jakarta, which caught many off-guard.

Together with imbalances prevailing in economies throughout the world, these calamities could bedevil growth in the property industry as well from the boom of the mid-1990s.

Nevertheless, despite these headwinds and with economists indicating cautious optimism towards continued growth of the national economy through 2005 (albeit at a slower rate), the real estate industry, likewise, should be able to maintain its steady-growth path – at least into 2006, with the housing market growing the fastest and the Klang Valley still the epicenter of development activities.

The positive vibes supporting this optimism include fundamentals such as:

– Malaysia, being a crude oil exporter, which helps to boost the Government’s coffers should oil prices surge.

– Minimal “direct exposure” to China because of Malaysia’s relatively low share of total exports and foreign direct investment (FDI) to the country, compared to other global and regional economies.

– Fiscal consolidation by the Government is expected to be gradual as it does not wish to dampen domestic demand.

– Bank Negara Malaysia’s likelihood to keep domestic interest rates stable, at least in the first half of 2005, in order to sustain the monetary stimulus on the economy through to 2006 to spur private sector domestic demand.

– Consumer spending can be sustained because interest rates are deemed to remain low in the first half of the year.

– Private sector/business investment will continue to be driven by steady foreign direct investment (FDI) and the capital expenditure of small-and-medium scale enterprises (SMEs).

– Analysts are predicting that the stock market will maintain its upward trend on the basis that corporate fundamentals are still very strong, the country’s economic growth will out-perform its neighbours in ASEAN (aside from Thailand) (see Table), and liquidity outflows from the US equity market could benefit the Asia Pacific region.

With such positive undertones, market fundamentals in the property industry have remained balanced and could improve this year – for some sub-sectors at least.

The Office Market: Turning bullish

NAPIC’s Q2 2004 Property Market Status Report confirmed an improvement in the overall occupancy of purpose-built office space in the country. Vacancies declined by 1.2 per cent from Q4 2003’s statistics. Both Kuala Lumpur and Selangor which supply the largest amount of space, reported stable demand and rental rates.

Investor interest in the office market, especially in the capital city, has remained high with several deals reported. This interest has come from several sources, ranging from local companies to offshore capital. Newly-formed real estate investment trusts (REITS) have also been indicating much interest in this sub-sector.

Overall, the local office market looks healthy for 2005 with vacancies likely to decline gradually, absorption to rise steadily, and rents to remain stable or even advancing moderately. Development will be active but still controlled, and investor interest should continue to be strong – fueled by the good local office market dynamics and the city’s position as the focal point for the nation’s economic growth.

The Retail Market: Transformation in Progress

Consumers and tourists have continued to spend their money in the Klang Valley, and retail real estate has been the beneficiary. Retail rents have remained strong on the back of steady demand for space.

Leading shopping centres have announced expansion plans to reinforce their positions in the market while now ones are emerging in various new and untested retail formats. Meanwhile, stalled centres are being revived by new owners. Outside of the city, similar development trends – although targeted toward shoppers from around the residential neighbourhoods – are changing the retail face of older centres.

Looking forward, the retail market should still be stable but rental and occupancy performance will likely vary depending on the strength of centre operators and locations. Rising interest rates towards the second half of 2005 and increasing debt burdens may slow consumer spending, but not to the point of causing the market to collapse. Retail should remain a bright spot in the local property markets.

Housing Market: Rising Prices, Strong Demand

The housing market is robust and most types of housing have seen rising prices resulting largely from the rise in cost components such as fuel, steel, cement, and aluminium, which constitute about 5-10 per cent of overall building costs.

Supported by low interest rates, ownership has spread more deeply into the population. In the capital, pricing in the high-end market has been aggressive and new construction has been brisk. Highly publicized sales of superluxury units gained widespread attention while those in superior locations commanded strong investor interest.

The outlook for the housing sector is strong, although the recent run-up in luxury condominium prices is a cause for caution. Rising interest rates and slower economic growth may substantially slow the price appreciation in 2005, but with employment and the economy expected to continue growing, demand is unlikely to cool off abruptly.

The Industrial Market: Transforming dramatically

The country’s industrial market is largely tied to SMEs, light and heavy manufacturing, and logistics and distribution activities. The latter – the distribution market, is growing fast and expected to generate more demand for warehouse space. The sustained economic growth should improve overall demand for industrial space, albeit on a selective basis determined primarily by type and location.

Overall Outlook

The country has weathered the effects of terrorist threats elsewhere in the world, the SARS epidemic, and the bird flu scare, as well as their impact on the economic recovery path. The recent tsunami tragedy is not expected to affect growth patterns drastically and business travel should remain strong. Tourism travel however is likely to take a dip, but should recover just as quickly as it did after the SARS epidemic ended. Construction opportunities should surface in those areas which experienced tremendous devastation caused by the deadly tidal waves.

The anticipated slowdown in the country’s GDP growth in the second half of 2005 would probably only be felt in the real estate market some six to nine months later – that is towards the later part of 2006 (allowing for the lag as witnessed in previous cycles).