Of property overhang and mounting household debt — Dr Dzulkefly Ahmad
November 25, 2010

NOV 25 — Property Overhang as reported by Napic (National Property Informational Centre) for the third quarter of last year was supposedly a cause for alarm.

Then there was an overhang of 20,286 residential, 5,450 shop and 619 industrial units worth a whopping RM5.3 billion.

Of the 6,401 new residential units launched during the third quarter, which was a far cry from the 14,588 units launched in the previous corresponding quarter, only 20.2 per cent found buyers.

If the RM5.3 billion overhang failed to deter the enthusiasm of the NEM planners, let’s consider what is in the pipeline.

The Finance Ministry reported another 44,954 residential, 4,605 shop and 794 industrial units were under construction as of the third quarter. Projects approved but yet to be implemented comprised another 14,993 residential, 1,011 shop and 872 industrial units.

The massive overhang constitutes not just a financial burden to the developers and their financiers, most of whom are financial institutions, but is also a waste of resources, much worse, contrary to the 40 per cent carbon emission reduction as vouched by the Prime Minister in Copenhagen.

More recently, Napic’s Property Overhang reports show that unsold properties in Malaysia rose to 22.6 per cent of new launches in the second quarter of this year, from 19.5 per cent in the fourth quarter of last year.

For Kuala Lumpur, unsold properties rose to 16.1 per cent from 15.8 per cent, while for Selangor it rose to 14.6 per cent from 12.4 per cent.

Quite ironically while a glut is emerging, prices of residential property have surged by as much as 35 per cent in the past year, far above income growth and giving rise to concerns that the market is becoming unsustainable.

Napic’s Property Overhang reports show that unsold properties in Malaysia rose to 22.6 per cent of new launches in the second quarter of this year, from 19.5 per cent in the fourth quarter of last year.

For Kuala Lumpur, unsold properties rose to 16.1 per cent from 15.8 per cent, while for Selangor it rose to 14.6 per cent from 12.4 per cent.

Checks on developments completed this year also show that vacancy rates remain at 50 per cent or higher.

While the notion of property is usually resisted by developers and the KPKT, valuers and observers may have to nod when it come to property in Penang and Kuala Lumpur.

While prices keep going up, the economic returns decline. This, in return, contributes towards distorting the economy and plunging the country ever deeper into a frightening economic bubble.

On the back of the emerging property bubble, the revelation of a ballooning household debt, comprising mainly house mortgages, cars loans and personal financing such as credit cards, debit cards which stood at an all time high of RM560 billion as at Aug 31, 2010 from Bank Negara Malaysia data is surely a cause for alarm.

The rapid growth in household debts now poses a threat to the economy and exacerbates the vulnerability and instability to the financial sector.

It is worth noting that our household debt to GDP ratio shot up to 76 per cent between 2004 and 2009 and is the highest in Asia, except for Japan.

But as a reminder, Japan’s per capital income of US$32,700 or about RM8000 per month in 2009, while Malaysia’s average income per capital is less than RM2000 per month.

According to a note by CIMB Research, the ratio of household debt to personal disposal income hit 140.4 per cent in 2009- higher than Singapore 105.3 per cent and the US 123.3 per cent. This means Malaysians own double the amount they earn.

According to Credit Counselling and Debt Management Agency (AKPK) of the total 50,361 cases that enrolled in debt management program, 10.6 per cent could not pay their credit card debt while 74.3 per cent had repayment problem with housing loans, car loans and credit cards outstanding.

Credit Counselling and Debt Management Agency (AKPK) CEO Mohamed Akwal Sultan says some 44 per cent of the individuals who join the programme belong to the 30 to 40 age group. Some individuals start to have repayment issues when they are even younger because many of them do not have salaries that commensurate with their lifestyle. The problems worsen when they hit their 30s and beyond.

Since Malaysians tend to have short memories and have a penchant for the denial syndrome, it’s pertinent to remind our political leaders and planners of the costly deflation of the property bubble in the aftermath of the 1997/98 regional financial crisis.

When the property bubble burst, the banking system was left with RM51.8 billion worth of non-performing loans (NPLs), forcing the government of Tun Dr Mahathir Mohamad to form Danaharta Bhd to assume the NPLs and Danamodal to help recapitalise the banks.

Danaharta subsequently assumed NPLs worth over RM50 billion and overnight, became the largest real estate owner in the country with assets valued at RM3.63 billion while Danamodal injected RM11.7 billion to revitalize and recapitalise the banks.

Going by the orgy of real estate developments in recent years, it is clear that both the regulators and the developers have forgotten the 1997/98 lessons or have not learnt much. The government is discouraged to put a higher real property gains tax (RPGT) and restrictive loan-to-value (LTV) caps as it will be a deterrent to foreign direct investments and high net worth individuals. Besides, a higher LTV for second and third home buyers and in specific hotspots areas, of say

70:30, may not be complied with after all, by the financial institutions.

On the back of a burdening household debt, though arguably not-so-high NPL as yet (3.7 per cent of GDP), the oblivious attitude of the government, the prolonged low-interest rate regime, the ‘greedy’ developers and the less-than-prudent practices of the financial institutions, are

doubtless, ‘fodders’ that fuelled the formation of a ‘property bubble”.

Quite evidently, the property and construction sectors are again leveraged to the maximum as the top contributors to economic growth.

It is all so easy for the government to take a short-term approach to realize targeted growth numbers, visibly at the risk of jeopardizing and short-changing the long-term well-being of the economy.

Despite all the avowed big sounding slogans on performance and competitiveness, very unfortunately, nothing has changed in Malaysia Bolehland. — drdzul.wordpress.com

KUALA LUMPUR, Oct 31 — Kuala Lumpur is facing an impending surge of new office and retail space that could further depress rental yields already under pressure from the current oversupply, said CB Richard Ellis (CBRE) Malaysia today.

The international real estate service firm said the residential market is also beginning to ease as capital appreciation has reached its peak, and rent in some high-end areas of the city have come down by almost 50 per cent.

A combination of a squeeze on rental yields and stagnant capital values could put pressure on over-leveraged investors.

Christoper Boyd, executive chairman of CBRE, said rent for some luxury condominiums in oversupplied markets such as KLCC and Mont Kiara have almost halved, while the office space sector is also looking at an oversupply situation over the next 18 months with the rental market becoming more competitive.

CBRE managing director Allan Soo said KL is set to overtake Singapore in terms of retail space per capita as new malls near completion.

He noted that the Klang Valley currently has 7.1 sq ft of retail space per person, which is equivalent to Singapore, but is set to overtake the city state when approximately 10 million sq ft of planned retail space comes online by 2014.

Soo pointed out, however, that while Singapore’s retail market was strong, KL was a tenant’s market with some malls resorting to paying clients to take up space.

“Here we have to beg tenants,” said Soo.

Figures provided by Soo show that KL’s total retail space is set to grow from 43.7 million sq ft, currently spread out among 149 malls and hypermarkets, to 53 million sq ft by 2014.

“Our analysis shows that only 43 or one third of the retail centres and hypermarkets are performing,” he said. “You must build grade A; building ‘grade B, me-too’ malls won’t work.”

Boyd said that over four million sq ft of office space had come online this year, far in excess of normal demand.

He said that more than six million sq ft of office space is also expected next year, while 25 million sq ft is expected by 2015 — excluding the mega-projects of KL Metropolis, PNB’s 100 storey Warisan Merdeka and the Kuala Lumpur International Financial District.

“We’re looking at the supply outstripping demand with a likely impact on rental values,” said Boyd.

He also said that the residential market could see some potential buyers drop out due to issues of affordability.

The Malaysian Insider had earlier reported that investors and home buyers have moved to the sidelines as worries of a global economic slowdown, government cooling measures and uncertainty due to the upcoming general election start to bite.

The consensus among analysts and industry veterans appears to be that sales have slowed as the market enters a cooling phase and will continue decelerating as buyers take a “wait-and-see” approach, although a hard crash landing of the property market is not expected unless the economy plunges first.

Property analysts contacted by The Malaysian Insider expect sales to dip from last year’s high of 21 per cent growth to between zero and five per cent growth next year or even contract if the economy takes a turn for the worse.