KUALA LUMPUR: Property developers will continue to emerge as key winners next year, driven by rising demand and improving economic outlook, according to a recent research note from Malaysian Industrial Development Finance (MIDF).It said industrial players would continue to ride on the sector’s buoyant recovery based on the improving number of property sales coupled with declining number of overhang units since the first quarter of this year.
Further, it was an unanticipated recovery story for the year as the sector had outperformed expectations in becoming one of the leading segments in the stock market. Share price of property companies, which is measured by the Kuala Lumpur Property Index, had actually outpaced the benchmark FBM-Kuala Lumpur Composite Index (FBM KLCI).
“Despite encouraging sales demand and improving economic sentiment, the fear of demand sustainability, upon the withdrawal of cheap credit, absence of attractive promotions and favourable regulations may take its toll on the property sector,” the research noted.
However, next year’s growth drivers would include favourable regulations, continuous governmental support, a thriving property market as indicated by an improved economy and the ability to draw foreign direct investment (FDI) flow.
“Sales demand for residential properties are expected to remain buoyant as investors continue to deem it as one of the more liquid hedging asset. Speculators are also taking advantage of the current market sentiment to lock-in on gains,” the research mentioned.
A survey across key property players revealed that none was slowing down their pace of project development, with many taking advantage of the current discounted valuations to replenish land banks and were not holding back new launches.
The research said key players have indicated that take-up rates of residential properties have remained strong between 80 per cent and 90 per cent in the last quarter. As such, it was expected that residential property sales will remain buoyant, at least within the first half of next year, with estimation of at least 25,000 new units to be launched over the next quarter.
On the retail and shopping complex as well as office front, it was expected that the oversupply of units, notably in the Klang Valley, will continue as many have been under construction over the past two to three years.
Additionally, many corporations and businesses had been holding back relocation plans until the end of the financial crisis.
Meanwhile, issues that may dampen the sector’s recovery include the reintroduction of the Real Property Gains Tax (RPGT) that included a potential pullback in sales demand due to withdrawal of cheap credit, unanticipated rise in raw material prices. These factors were expected to raise average selling prices and delay launches as well as approvals.
“We do not expect any immediate impact from the reintroduction of the RPGT and it was mainly to control the secondary sales market. On the flipside, it may discourage foreign investments in commercial properties,” the MIDF’s research said, adding that the tax was introduced too soon as the economy was still on the verge of recovery.
However, it also pointed out the rationale for the reintroduction to curb another asset bubble.
To note, Prime Minister Datuk Seri Najib Tun Razak announced last week that RPGT of five per cent will only be applicable to properties that are sold within five years of their purchase.
Prior to that, the tax would be imposed on all properties sold regardless as stated in Budget 2010.
The measure would see the government foregoing RM200 million in revenue, in line with its objective to achieve stronger growth in the property sector next year.
On real-estate investment trusts (REITs), the MIDF analysis revealed that although it would not be the key performer for next year, the segment would likely to incite some interest among investors.
Throughout the year, average rental yield for offices and commercial properties was exhibiting a downtrend, with rental for offices falling 1.9 per cent year-on-year (YoY) and 1.35 per cent year-to-date (YTD), within the Klang Valley.
However, the recovery in the property market coupled with an exemption from RPGT and stamp duty will see rising interest in REITs, which currently yield an average return of between eight and nine per cent in Malaysia.
On the status of Malaysia’s property market, there would be no expectations on any property bubble in the immediate term, the research said. It added that appreciation of property prices have been modest so far, with a slow recovery in demand that is in line with improvement in investors’ confidence.
Prices of properties nationwide declined 9.8 per cent YTD due to the economic crisis, but gained 1.40 per cent YoY due to renewed interest emerging in the second quarter of the year.
“Nevertheless, assuming the presence of cheap financing, attractive promotions and favourable regulations continue into 2010, coupled with new launches and delivery in 2010, property prices may face an upsurge,” the research noted.
It also added that despite the Dubai’s debt crisis, Malaysia would still be able to attract Middle Eastern investors who still reaped positive yields from investing in the country’s property market.
The main challenges in the property market will be demand fundamentals, whether it can be sustained and what else can be offered, by both property players and financial institutions to support the growing demand.
“One would be cheap cost of fund (credit). Assuming overnight policy rates are raised back to pre-2006 days of 3.50 per cent, can demand be sustained? Secondly, assuming a second dip does occur, can the property segment take it in its stride?” the research said.
In a related note, the MIDF’s analysis said residential properties will continue to be favourites amongst investors who still demanded mid-to-high-end properties, of which fell between the RM250,000 to RM500,000 and RM500,000 to RM1 million price-per-unit brackets.
Residential properties have historically proven to be good hedge instruments with attractive capital appreciation, while commercial and office properties may see a dip in demand against a backdrop of new launches, barring those Grade-A offices located in sub-urban areas.
Demand for properties around Kuala Lumpur City Centre is recovering as prices within the vicinity improved in the third quarter with stable rental yields. As for industrial properties, the segment would move in line with the nation’s economy.
The MIDF’s research also stated that the property market needed a boost in the form of incentives that included tax reduction for sub-urban developments, cheap credit, continuous efforts to draw FDI and for local small players to have joint-ventures opportunities with state governments.