IT’S CHECKLIST TIME
by Lim Lay Ying
Property Times, New Straits Times
02nd October 2004

Every year after the Minister of Finance presents the Government’s budget for the following year, people (investors included) scuttle back to their desks, sharpen their pencils, and take a fresh look at the outlook for investment vehicles such as stocks and real estate.

September historically is the Malaysian market’s month of anticipation, because investors have their eyes (and ears) glued on whatever things that could slam the business climate, and this year the anxiety level is above average.

Is the economy strong enough? Will there be major changes affecting the-man-on-the-street? Can the real estate sector expect further push in the form of more incentives? And – this year – how will terrorism and politics affect the equation?

People have money and want to invest it, whether in stocks or in property – but they don’t have the nerve.

A mix of hope and doubts was evident the weeks before Budget Day, as the Kuala Lumpur Composite Index (KLCI) edged up marginally while real estate developers held back their launches.

What eventually surfaced was a mixed bag of policy changes – some more welcoming than others. Smokers and drinkers moaned about the hike in excise duties, while retirees and would-be retirees raved about the tax relief of RM6,000.00 on retirement benefits for every completed year of service.

And while many companies heaved a sigh of relief at the thought of a faster repayment of their overpaid taxes, those in the real estate industry had little to either cheer for or groan about. Why? Because there weren’t much to shout about – no reintroduction of stamp duty waivers for homebuyers, no changes (i.e. reductions) in the Real Property Gains Tax (RPGT) structure, and nothing to help offset rising construction costs.

Whatever doled out for the industry were received at most, with lukewarm response: such as the exemption for developers from paying the Construction Industry Development Board (CIDB) levy if they embrace the industrial building system method, and the RM2.5 billion fund allocated for the construction of the East Coast Corridor.

Then again, despite the unexciting outcome from the latest announcements, real estate players should really be looking at the bigger issues if they want to make money. Here are some that should be on their lists:

• The Economy
  
  Will business investment further kick in to correspond with consumer confidence in spending?
  
  The Economic Report 2004/2005 maintained a favourable stance in the outlook for 2005 in view of expected sturdy domestic demand and broad-based growth. Gross Domestic Product (GDP) growth forecast, though lower at 6 per cent compared to the 7 per cent rate predicted for this year, is seen more as a healthy phase of economic deceleration than a slowdown – and hence, harmless.
  
  The country’s economy is expected to continue to expand healthily over the next couple of years, and in the process, raise incomes and prosperity throughout a wide segment of the population.



• External Forces
  
  It’s however worthwhile, to watch out for some forces which may derail a smooth deceleration. There are four key ones: global interest rates, demand from China, the technology cycle, and short-term constraints on capacity.
  
  The slowdown in economic growth next year could be much steeper if global interest rates are raised heftily to curb inflation, if China’s high-flying economy falls with a hard landing, or if global demand for technology goods comes to an abrupt halt.



• Interest Rates
  
  During the course of 2005, interest rates are expected to inch upwards in order to defend the nation’s currency peg and to prevent a destabilising outflow of short-term capital – or hot money, as it is more commonly known. And once they (interest rates) start to rise, corporate borrowing costs will also increase and the natural incentive to invest could start to erode.



• Mortgage Lending
  
  Loans and advances made by banks to cover the purchase of residential properties are growing faster than any other type of loan in Malaysia at present, jumping by 16.8 per cent in 2003 (17.2 per cent in 2002). Meanwhile, the number of mortgage loans classed as non-performing has surged by almost 60 per cent since the beginning of 2002.
  
  While it is a concern that the banking industry is sitting on a housing bubble, the situation nevertheless is still under control. Collateral for the loans is adequate, property prices are fairly stable, and risk-management techniques among most banks continue to improve. Besides, banks’ lending decisions have been helped (to a certain extent) by the much-improved Central Credit Risk Information System (CCRIS) maintained by the Central Bank, according to Finch Ratings – an international ratings agency.



• Business Environment
  
  Malaysia remains one of the easiest places in Asia in which to conduct business. Starting a business is simple and quick with few restrictions. Foreign companies (at least the manufacturing ones) are welcomed with open arms, with the government offering lavish tax breaks and concessions.
  
  Moreover, since the Asian financial crisis during the late 1990s, standards of corporate governance have improved – much more than in the neighbouring countries. This helps to instill confidence amongst foreign investors.



• Joblessness
  
  The country’s unemployment rate has not worsened further from its peak of 3.6 per cent in 2001. From this year on, joblessness in fact, is envisaged to fall – albeit marginally, to 3.4 per cent next year and 3.3 per cent in the subsequent year (forecast by (Business Monitor International Ltd (BMI)). For 2004, a level of 3.5 per cent has been estimated by Bank Negara Malaysia.



• Demographics
  
  More than 81 per cent of all working-age males and approximately 51 per cent of working-age females in the country, are economically active. Though lower than the regional average of 88 per cent and 75 per cent respectively, the average wage is however distinctly higher. In the manufacturing sector, the average wage at RM1,531 per month in 2001, was four times higher than in the Philippines and seven times the figure earned in Indonesia.
  
  Malaysia’s per capita income is projected to rise by 8.5 per cent to RM16,098 this year, from RM14,838 in 2003, and by a more moderate 3.7 per cent next year to RM16,693.
  
  Adult literacy rate in Malaysia is 92 per cent for males and 85 per cent for females, while youth literacy rate stands at 97 per cent for both sexes (source: World Bank).

While there is little reason for terror fears to fade, especially given what happened in Jakarta recently, the repeated media focus will keep terrorism at the front of people’s minds. But just as after the 1962 Cuban missile crisis when the risk of nuclear war didn’t go away and stocks went back up once investors calmed down, 2005 could offer some goodies for the country’s real estate industry if no major incidents erupt.

On the back of an expanding economy and a stable political environment, the general outlook for the sector is good. Developers can therefore count on this optimism and need not fret about the lack of inducements from the 2005 Budget.