The push and pull of housing prices

It has been over a month now since the Sales and Services Tax (SST) was reintroduced in lieu of our former Goods and Services Tax (GST), and all eyes are now on the housing sector as eager Malaysians await for a potential reduction in housing prices.

According to the Pakatan Harapan government, the main reason for reintroducing the SST is to ease the burden of the increasing cost of living from Malaysians by doing away with the heavy GST in favour for the lighter SST.

Theoretically, the SST – which is comparatively less extensive than the GST – is expected to lower living costs for the average Malaysia, from food to clothing to housing – everything in theory should be lower.

According to analysts at international ratings house Moody’s, our GST revenue in 2017 was RM44.3 billion or 3.3 per cent of our gross domestic product (GDP) while our SST revenue was around 1.6 per cent of Malaysia’s GDP before it was replaced by the GST back in 2015.

Based on this, Moody reckons that with the switch, the SST revenue for the government should narrow down to 1 per cent of our GDP for 2018, a significant reduction from the previous GST regime.

With revenue generated by the SST for the federal government expected to be significantly lower than the GST, logically it is expected that these savings would be passed onto companies and consumers.

Big ticket items like residential properties are especially anticipated by consumers to showcase price reductions as industry analysts and observers have pointed out that the structure of the SST and its exemptions would yield savings in terms of building materials and construction for developers.

Penang leads the pack with reduction

Overall, while there has not been any official figure of how much these savings translates to, property developers in Penang have announced that they have agreed to reduce prices by 6 to 10 per cent.

While this is good news for Penangites, analysts, industry observers and developers have questioned whether the 6 to 10 per cent reduction would be feasible and applicable in the rest of Malaysia given differing circumstances in each area’s property sector.

Disagreeing with this, Finance Minister Lim Guang Eng believes that the SST reintroduction and its exemption on construction services should be able to yield savings for developers regardless of their development’s location within Malaysia, and that those savings should be passed onto consumers.

“I think it is only fair that if the government is collecting less from them (property developers), we want to see these savings being passed on to consumers. If they do not reduce house prices, then I think there is no point for the government to exempt construction services from SST.

“Why should we give these exemptions and savings (if the housing industry players are not going to reduce house prices) – we might as well impose the SST so that the government can have its revenue and not lose money,” he argued during a recent Rheda conference.

However, that being said, analysts at Kenanga Investment Bank Bhd (Kenanga Research) reports that based on their channel-checks and simulations, the SST reintroduction and exemption on key building materials would result in less than a 4 to 5 per cent reduction in prices as opposed to a 6 to 10 per cent expected by the federal government.

“This is based on the key assumption that developers’ margins are kept unchanged,” said the analyst.

Similarly, Vincent Lau who is the vice-president of research at Rakuten Trading Sdn Bhd shared that their estimates for housing price reductions would also be lower than the 6 to 10 per cent, hovering nearer at 2 to 3 per cent, while savings are also at 2 to 3 per cent.

According to Kenanga Research, the lower-than-expected price reduction in housing prices is multi-factorial but based mainly on the fact that margins for developers are already severely strained.

“Developers are already offering freebies, discounts and rebates over the SPA prices, which effectively help with the issue of the ‘low margin of financing’ issue. But, as a result, toplines or sales are there but margins have been severely compressed.

“Larger size businesses like the ‘big-boy’ developers, also have fixed cost structures stemming from the heydays of the property sector back in 2010 to 2014. Which during this time, many of the big players invested in new infrastructures and man-power, particularly for sales and marketing to accommodate the rapid growth in sales.

“But sales volumes are much lower currently and thus, many developers have lost the ‘economies of scale’ effect,” said Kenanga Research.

Plagued by construction issues

Additionally, construction sector woes are also a continuing issue in the housing sector as the need to secure skilled foreign labour supply amidst new legislation to increase minimum wages and foreign worker levies are driving up operation costs.

“There are anecdotal evidences indicating that developers need to reward contractors with a higher margin to circumvent late deliveries. Note that late deliveries of residential properties are charged penalties of 10 per cent per annum, which are borne by the developer,” the research arm commented.

All in, Kenanga Research reckons that expected 6 to 10 per cent price reduction is currently unfeasible as the current return on equity (ROE) in developers are already on par, if not weaker, than that of contractors.

“This does not commensurate with the higher risk profile of a developer,” the research arm argued.

Should it be forcibly implemented though, the research arm expects that there will be an initial positive effect for first-time home buyers but the reduction of house prices may affect the secondary market (second hand residential properties) and our overall banking system’s asset quality as 33 per cent of loans in the banking system are housing loans.

At this point it might sound like a lost cause in our goal for reduced housing prices, but in reality, this is far from the truth as the SST reintroduction and its exemptions are only one part of the equation.

And with the unveiling of our National Affordable Housing Plan (NAHP) 2.0, perhaps there will be much more for us to look forward to in our housing sector.

What local developers are saying

While, our Sarawak Housing and Real Estate Development Association (Sheda) has yet issue an official statement on the matter of SST savings and potential lower housing prices, the sentiment from the ground seems to be mixed opinion on the matter.

According to Joseph Wong, managing director of Kintown Development Sdn Bhd, the reintroduction of the SST and the its waiver on construction materials and services will ultimately reduce the cost of constructing residential building and related infrastructure by 2 to 3 per cent.

“For example, if the selling price of a house is RM500,000, then the cost saving for the construction of the house will be about RM10,000 to RM15,000 per house,” Wong explained.

That being said, Wong cautioned potential property buyerss that the potential price reductions will likely not be witnessed so soon as it will depend on whether a particular developer has already commenced ground work or not.

“If the project is completed or near completion, the developer has already incurred most of the construction material cost which included the 6 per cent GST input tax. Thus, it would not be viable for the developer to lower the selling price of the houses in that particular development.

“On the other hand, if the developer has not commenced the construction works at site, there is definitely a cost saving on building materials equivalent to 6 per cent GST abolished.

“In this scenario, I advocate that developers should consider lowering their selling prices by 2 to 3 per cent or even more as our current property sector is highly competitive,” said Wong.

Regarding the suggest of a 6 to 10 per cent reduction proposed by Penang developers and Minister of finance Lim Guang Eng, Wong detailed that the proposal would not be very feasible for housing developers in Sarawak still as the current compliances faced by Sarawakian developers are very different than their counterparts in West Malaysia and Sabah.

“Besides just building material cost, some other major costs in property development are land cost, labour cost and compliance cost, especially on density control.

“These costs were never subjected to the GST earlier so we are still struggling with these rather high costs, and such the lowering of selling prices of houses by 6 to 10 per cent in my opinion is just not feasible at the moment yet for us,” said Wong who is also the immediate past president of Sheda.

On the other hand, another local developer who wishes to not be named stated that they felt the SST savings could potentially be negated entirely due to the rising challenges seen in the construction and developer sectors.

“As developers, competitive pricing is always the key to capture market share, especially for affordable housing projects. However, translating SST waiver savings directly into cheaper house prices will not be a straightforward equation, as there are many other contributing factors
like land cost, manpower cost, compliance cost and capital cost involved as well.

“It is now more financially risky to operate a development project as more capital is required than before.

The SST waiver benefit could possibly be evened out by rising operating and business cost, under the current challenging business environment,” said the source.

No need for regulations on house prices

While there is merit to this argument, other industry observers have also commented that developers may very well take advantage of the SST savings by increasing their profit margins and to combat this, some have advocated for some regulations in terms of housing prices.

To this, Wong argues that there is no need as property prices are driven by market forces.

“It is a game of supply and demand, if there is not enough supply of a similar or equivalent product on the market then it would be impossible for developers to lower the prices of the houses.

“In other words, a developer will not be willing to lower the price of a house if there is a high demand for the type of house they are selling, even if the cost to build has already been lowered by 2 to 3 per cent from the SST waiver.

“But in saying that, I would still encourage Sarawakian Developers to lower their prices by 2 to 3 per cent to pass on the savings to home buyers,” he said.

Agreeing with this, Ling Lai Kiong the general manager of local developer Hock Seng Lee Bhd explained that the high competitiveness of the local property sector would ensure that housing prices would always remain equitable to its buyers in terms of its worth.

“Developers like us plan new projects based on market surveys and forecasts. We plan out what product types such as terraces, semi-detached, single storey or double-storey are in demand currently and proceed with that.

“Because the only way to sell is to suit the affordability of our consumers, especially on large-scale projects,” he said.

Instead of relying on savings from the SST, Ling suggested a different route to achieving lower property prices in the state by indicating that government policies have the biggest impacts on housing prices and that more favourable policies could potentially lead to significantly reduction in housing prices.

“For instance, when the state government increased the density of landed properties from eight to 10 units per acre a few years ago, that helped keep prices in check.

“And from a buyers’ point of view, that policy has had a large positive impact on housing prices, including properties that were already on the market,” he detailed.

To keep prices affordable, Ling advocated that policymakers, industry players and consumers need to be looking at the big picture of macro policies rather than just SST waivers of constructions services and materials.

“Whatever policies the government sets, the private sector will find a way to optimise,” he said.

Property takeaways from New Dawn conference

Following a sustainable infrastructure and housing panel session at the ‘Malaysia: A New Dawn’ conference, insights were given as to what can be expected in terms of the widely anticipated Dasar Perumahan Negara 2.0 or the National Affordable Housing Policy (NAHP) 2.0.

The panellists present were Minister of Housing and Local Government Zuraida Kamaruddin and Minister of Works Baru Bian.

During the panel sessions, both ministers highlighted that the NAHP 2.0 included several changes and new initiatives that would set out to make affordable housing more readily available for our B40 and M40 and potentially restructure our current housing market for the better.

The main points discussed in the panel sessions were that the solution to affordable homes would not be a blanket solution for every area in the entire country, instead affordable homes would be classified in 3 tiers and will be dependent on the median house price transaction as well as the median income of a particular area; this would be those priced below RM150,000 per unit, RM150,000 to RM350,000 per unit and RM350,000 to RM500,000 per unit, depending on areas or state.

Additionally, the liveability of these affordable homes was also discussed, and it was highlighted that the minimum house sizes would be set at 850 with certain basic facilities.

“They (panel) are also cognisant that these accommodations tend to be poorly managed and maintained, resulting in poor occupancy and deterioration of the asset and leading to creation of ‘slums’.

“KPKT is also looking to better integrate the affordable housing components into normal developments to avoid ‘slums’ formation in the future, which of course poses challenges for developers; clarity on this matter is required as not much further details were given.

“However, there are several proposals being considered including private developers paying a decent levy to KPKT in the absence of meeting this obligation. We hope to get more details on this once the NAHP 2.0 is out,” said Kenanga Research in a Recent property sector update report.

Changes to the developers

While the PH government has previously stated that they plan to roll out one million affordable homes over a 10-year period, this influx of homes is not expected to be in direct competition with our private sector.

According to Kenanga research, the panel indicated that the government will not be a major driver of this supply as they intend to drive the affordable homes agenda via mechanism which will not be too burdensome on government coffers.

“An example of this is government land joint ventures with private developers. KPKT was clear that these land JVs will be done on an open tender basis to ensure competitiveness. In fact, it was just reported that KPKT requires that all states submit a list of potential sites for affordable housing projects before the month-end, citing that states that fail to submit will not be entertained for affordable housing requests (Malaysian Reserve). It also mentioned that a size of at least 10 ac for each project is required for such affordable housing projects.

“Another example is using alternative financing like crowd financing to finance government housing for rental purposes and RTO schemes,” guided the research arm.

In the past, such JV’s were not the norm as many developers were deterred by low profit margins. To encourage private developer’s participation, Zuraida also commented during the panel that certain compliance costs currently borne by developers will be removed to reduce overall costs.

While a full list of compliance costs was not revealed during the session, it is understood that compliance costs such as utility agencies now having to construct their own amenities instead of developers and land premiums would be under review.

“This is only applicable for affordable housing projects. To recap, compliance costs tend to eat up 3 to 6ppt of developers’ margins. Additionally, SST will be exempted on building materials for these affordable homes and thus, better cost savings to the buyers.

“This means that there is less risk on developers’ current margin trajectory, which has already suffered compression due to lower economies of scale, discount or rebates given to clear inventories and higher A&P activities,” said the research arm.

It was also indicated there will be more stringent enforcements on developers’ responsibilities and deliverables, including policies, which address developers holding on to unsold units for extended periods.

“If so, we opine this will improve the quality of houses as developers will have to ensure that these houses are both saleable and liveable, which will essentially weed out the weaker developers,” added the research arm.

“Considering our population size of 32.0 million, we have always opined that there are just far too many developers in Malaysia, both publicly listed and private, as the barrier of entry to this business is considered low.

“We note that many non-land-related driven sectors have delved into property development resulting in an overcrowding of developers.”

Addressing the issue of financing

While it is easy to point fingers at developers for high prices, one of the main issues that still stands in our housing issue is the difficulty for home buyers to obtain sufficient financing for their purchases.

In the past banks have been seen to be extremely conservative in their home loans approvals due to fears of our rising household debt levels, however in the panel Zuraida guided that Bank Negara Malaysia (BNM) and a few major banks will be now considering a more accommodative approach towards first-time home buyers.

This may involve extension of the maximum loan tenures, introduction of flex loans that allow repayment to better correspond with the growth of the borrower’s income, and a potential 100 per cent financing for households with incomes below RM2,200 per month.

Should these measures come to fruition, Kenanga Research recons that it will allow the developers a breather in terms of achieving sales targets.

However, that being said, the research arm cautioned that banking loans would need to be monitored closely as the current level of residential and non-residential property loans are at an all-time high at 46 per cent of
the total banking system term loans.

“If not managed properly, a significant drop in overall property prices, particularly residential, may weaken the banking asset quality which may consequently result in a ‘domino’ effect across the stock market, property market and the economy,” the analyst warned.

Local efforts

While the NAHP 2.0 is a country wide initiative, locally our own state government have taken their own steps in helping our own citizens secure their first homes.

According to Wong, the state government has recently issued a circular on the ‘Sr Pertiwi Affordable Housing Scheme’ whereby selling prices are capped at RM270,000 for landed and intermediate terrace houses in the scheme and RM295,000 for landed corner terrace houses and apartments with a minimum floor area of 900 sqft and 3 bedrooms and baths.

The scheme is targeted towards the M40 households within Sarawak that bring in a monthly household income between RM4,000 and RM10,000 per month.

“The margin for this type of affordable housing scheme is substantially lower than conventional schemes but with the SST savings of 2 to 3 per cent on building costs, more private developers might be swayed to participate. We hope that this is the case as it is estimated that 120,000 units of this type of housing is needed in major towns and cities across Sarawak,” Wong said.

So far, there are currently 32 local developers who have shown interest in building the 40,000 slated
units of the Sri Pertiwi affordable scheme.

No ‘one-fit-all’ definition of affordable house price

While Kenanga Research awaited further details on the NAHP 2.0, the KPKT minister did highlight that affordable homes will be classified in 3 tiers and will be dependent on the median house price transaction as well as the median income of a particular area; this would be those priced below RM150,000 per unit, RM150,000 to RM350,000 per unit and RM350,000 to RM500,000 per unit, depending on areas/state.

KPKT is looking to consolidate PR1MA, UDA Holdings Bhd, SPNB, PPR (Housing program for B40 group) and PPAM (Civil Servants Housing) under one roof to streamline operating costs and ensure consistency in dealing with the private developers using the right guidelines.

This will form the new NAHP council which will be chaired by the Prime Minister and will allow the government to better monitor the housing situatio in this segment as well as create volume from a single source which will allow the use of IBS (Integrated Building Systems) to be more feasible from a cost and time perspective.

“We are also glad that the government is looking into the liveability of these PPR accommodations as many are no longer “liveable” by today’s standards; examples include setting a minimum house size of 850sf and certain basic facilities,” the research firm said.

“They are also cognisant that these accommodations tend to be poorly managed and maintained, resulting in poor occupancy and deterioration of the asset and leading to creation of ‘slums’.

“We are glad to hear that KPKT has already started a pilot project in Lembah Subang 2 to work on a facility management model which will be rolled out to others.”

Integrating affordable into ‘normal projects’

It recognised that the KPKT is also looking to better integrate the affordable housing components into normal developments to avoid ‘slums’ formation in the future, which of course poses challenges for developers; clarity on this matter is required as not much further details were given.

However, there are several proposals being considered including private developers paying a decent levy to KPKT in the absence of meeting this obligation.

“We hope to get more details on this once the NAHP 2.0 is out,” it said, adding that this will not be in “direct competition” with developers.

“It was also touched upon that the government-driven affordable housing supply should not be in direct competition with the private sector.

“Recall we had concerns on the aim to roll out one million affordable homes over a 10-year period. However, in recent news flow, which was also reinforced today with more clarity, the government will not be a major driver of this supply.

The government intends to drive the affordable housing agenda via mechanisms, which will not be too burdensome on the government’s coffers.

An example of this is government land JVs with private developers. KPKT was clear that these land JVs will be done on an open tender basis to ensure competitiveness.

In fact, it was just reported that KPKT requires that all states submit a list of potential sites for affordable housing projects before the month-end, citing that states that fail to submit will not be entertained for affordable housing requests.

It also mentioned that a size of at least 10 ac for each project is required for such affordable housing projects. Another example is using alternative financing like crowd financing to finance government housing for rental purposes and RTO schemes.

Affordable housing versus margin compressions

Zuraida did say that to improve affordability, certain compliance costs currently borne by developers will be removed to reduce overall costs.

It relates to utility agencies (which will now be required to construct their own amenities instead of developers) and land premiums. It was reported by The Edge that this has been ‘principally agreed’ upon at the ministerial level.

This is only applicable for affordable housing projects. To recap, compliance costs tend to eat up 3-6ppt of developers’ margins.

Additionally, SST will be exempted on building materials for these affordable homes and thus, better cost savings to the buyers. This means that there is less risk on developers’ current margin trajectory, which has already suffered compression due to lower economies of scale, discount/rebates given to clear inventories and higher A&P activities.

Leaning towards an income approach for housing needs. In terms of the Bumiputera quota for affordable housing policy, Minister Zuraida said that the NAHP will look at the income level of house buyers which will override the race consideration; however, in terms of the Bumiputera quota itself, she will be seeking industry feedback but appears to still be leaning towards an income level approach.

Many developers are saddled with high unsold Bumiputera units, which have strained their balance sheet as releases of these units takes time and also incurs more holding costs for the developer.

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