Cover Story: More Properties, Fewer Bidders

This article first appeared in City & Country, The Edge Malaysia Weekly, on April 9, 2018 - April 15, 2018.
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Buying a property put up for auction comes with its own set of rules and potential snags, putting off many risk-averse Malaysians. But as inflated house prices and limited household income growth make owning a house unaffordable for many, the auction market may be an alternative for those hoping to find a good deal that is 10% to 20% below the market price. The current lacklustre market is likely to see more properties go under the hammer and fewer qualified bidders, meaning less competition.

For Lim, 50, his first attempt recently at buying a property at an auction was a success. “I had been driving around residential estates before I finally saw the house I wanted, with many signboards hanging on the walls and gate. It was love at first sight. The agent I called told me the property was going for auction for a third time so I assumed the price would be at least 20% lower than the original reserve price.”

He purchased the 24ft by 75ft 2-storey terraced house in Damai Perdana, Cheras, for just over RM700,000. The property is fully built up and has not been lived in.

“There were many concerns but it was a good first experience buying a property at auction. Upon checking, I found similar properties in the area are asking for around RM900,000 to RM1 million,” Lim says.

According to VPC Alliance (KL) Sdn Bhd managing director James Wong,  auction properties are increasing compared with previous years and are expected to rise further this year.

For perspective, he points out that of the 1,367 commercial properties auctioned in 1H2017 — mostly retail units and shopoffices — 833 were repeat cases. “This shows that the property market is still weak,” he adds, attributing it to stricter lending rules, the poor economy and a cautious sentiment before the 14th general election.

Property Auction House Sdn Bhd executive director Danny Loh says commercial lots will be the hardest hit. “They are doing the worst at auctions because of the general slowdown in economic activity and reported glut, especially of office premises and retail lots. Many of these units are difficult to rent out,” he says. The rental yield is also declining, making commercial properties less feasible for investment, he adds.

The oversupply also makes capital appreciation difficult, says Loh. The many new projects ready for occupation have resulted in stiffer competition for tenants. Investors are taking a back seat and would not buy something that will not generate revenue so easily as they need to service their loan commitments. “Hence, most buyers are buying for their own occupation.”

Loh says bidders are also lamenting the difficulty in obtaining loans from financial institutions. “If the economic conditions persist, banks may see an uptick in non-performing loans, resulting in more foreclosures.”

While he notes that the number of property foreclosures has declined from 62,260 cases in 2011 to 19,140 cases in 2017, Loh maintains that the number of properties going under the hammer is still trending upwards on a quarterly and half yearly basis. “2011 was a difficult year to sell auction properties. Subsequently, banks have been more stringent in processing loans and debt management agencies have helped restructure loans, resulting in fewer cases.”

Based on data from AuctionData.com.my, Loh notes that in 2017, about RM9.46 billion worth of properties were put up for auction, compared with RM8.8 billion in 2016. “The increase is more prevalent for industrial and commercial properties. In 2017, there were 2,071 industrial and commercial cases compared with 1,708 cases in 2016.”

Meanwhile, AuctionGuru.com.my executive director Gary Chia observes a massive increase in auction properties in Johor and Melaka last year. The number of auction cases in the two southern states in 2017 increased by 43.2% from 2016, and by 14.8% from 2015. The total value of auction properties, meanwhile, grew 64.6% and 137% correspondingly.

The central region — Kuala Lumpur, Selangor and Negeri Sembilan — continued to record the highest number of auction properties in the country with more than 15,000 cases, valued at RM7.57 million, in 2017, based on AuctionGuru.com.my data. That amounts to 50% of the total properties put up for auction, says VPC’s Wong. Land only made up a small percentage — less than 5% — of properties under auction, Wong notes.

Nationwide, AuctionGuru.com.my recorded 28,262 auction cases — residential and commercial properties as well as land parcels — valued at RM12.2 billion in 2017.

Chia says the value of transactions was significantly higher in 2017 than in the previous two years — by 24% and 60% respectively.

He sees a decline in the number of bidders in the past five years mainly due to cautious sentiment, subdued property values, negative business sentiment and constraints in household income growth.

“The headwinds in the regional and local economy and recent interest rate hikes may further impede buying interest and momentum,” he says.

Nevertheless, he believes deeply undervalued properties will emerge and resuscitate buying interest. “For example, we recently had an auction for a property in Klang, Selangor, put up for auction for the third time at a reserve value of RM53,000. There were a total of 18 registered bidders and the property was sold at RM155,000.”

City & Country talked to Mohd Shahrin, 35, and Hassan Shari, 40, who turned up for an auction by Ng Chan Mau & Co at the end of last year. They have been attending auctions in the hope of getting a property priced under RM100,000 for investment and were looking to bid for the same low to medium-cost apartment in Rawang with a reserve price of RM35,000.

“I am opting for auction properties because of their lower starting prices. I can then bid up to the price levels I can afford,” says Mohd Shahrin.

Ng Chan Mau & Co Sdn Bhd business director Low Chee Hian believes there is demand for properties under RM500,000 and landed units. “Sentiment has dropped across all property segments on auction, especially for condominiums priced from RM500,000 to RM1.5 million.”

While the Klang Valley market remains saturated, he says the auction market in other regions, particularly in Sabah and Sarawak, is picking up. “We see a pick-up in landed properties in those two states.”

 

New units up for auction

There has been an increase of new and higher-value residential properties, especially condominiums and apartments, going under the hammer of late. AuctionGuru’s Chia says about 5% to 7% of residential properties under auction are new. The number will continue to grow due to the lacklustre secondary property market and abundant supply.

More and more owners and investors are intending to offload their properties and restructure their investment portfolio, he says. “Amid the current glut in the residential market, it is difficult to dispose of property. Consequently, those who encounter financial constraints may eventually be forced to abandon their monthly financial commitment to their leveraged properties.”

Recently completed residential developments that went under the hammer last year, he says, included those at The Elements and M City serviced apartments in Ampang, Kuala Lumpur; Empire City Damansara office units and studios in Damansara Perdana, Selangor; Mirage by The Lake, Verdi Residence and Mutiara Ville condominiums in Cyberjaya, Selangor. In the southern region, new units put for auction in Johor included those at Imperia Puteri Harbour serviced apartments, One Medini condominium and Impiana @ East Ledang apartments in Iskandar Puteri; Tropez Residences serviced apartments at Persiaran Danga Perdana; and The Rafflesia Suites serviced apartments in Skudai.

Residential properties made up the bulk — about 86% — of auctioned properties in 2017, says Loh of Property Auction House. He anticipates an increase in the number of foreclosed properties due to the many high-rise projects built in the past few years, especially those under the developer interest-bearing scheme.

Many of these new projects, which were recently handed over, usually required a low initial capital outlay or whose buyers were given rebates. “Problems arise when loan repayment commences and the borrowers are unable to meet their financial commitment or rent out the property. Many bought the properties to flip them but in the current market, they are unable to sell them for a higher price,” says Loh.

It is difficult to get buyers for some of the bigger units but they are usually sold from the third auction onwards, he says.

One of the most expensive residential properties put up for auction last year was a 2-storey bungalow measuring 1,206 sq m, with a reserve price of RM1 million, he highlights.

He expects the volume of auctioned properties sold to decline. “Nevertheless, they will eventually be sold if prices continue to drop.”

Properties not sold during an auction will be pushed to the next auction. Typically, prices of auction properties are reduced by 10% at the discretion of banks or the courts until they are sold, he explains.

According to Chia, an average of 2,043 units of residential properties valued at RM638 million go under the hammer each month. The volume of residential properties on auction increased by 7% in 2017 year on year, while the value rose 22%.

Due to their lower entry cost and higher rental yields, high-rise residential properties are normally more sought after at auctions than landed properties, says Chia.

Low of Ng Chan Mau & Co says the increase in high-rise auction properties is attributed to projects completed and handed over between 2015 and 2017. “Upon handover, owners have to service the principal amount plus interest — a significant amount compared with progressive interest savings when the properties were under construction. Assuming the non-performing loan rate remains the same, it is normal to see a higher number of new properties being auctioned.”

Most new properties for auction, Low says, are condominiums, small office/home office and small office/versatile office units. On average, 20% or 400 units are sold each month, he adds.

The value of properties that have gone under the hammer of late is also higher compared with previous years, Wong observes.

The high-end residential property segment further increased the total value of residential auction properties in 2017, according to Chia. “This segment is vulnerable from an investment perspective as the rental yield return is relatively low while capital appreciation takes much longer to materialise. Thus, it is highly susceptible to the risk of a default in repayments.”

 

Auctioneers moving into the online marketplace

The digital revolution has fundamentally changed the way we do business and online marketplaces have become more common. At the end of last year, Ng Chan Mau & Co auction house has started its first hybrid auction for properties, in collaboration with Maybank, allowing bidders, or e-bidders in this case, to bid via the internet using electronic devices in real time at the actual auction where “on-site bidders” are physically present.

According to Low, hybrid auctions make it more accessible and convenient for bidders nationwide and at the same time encourage competitive bidding. “We believe Malaysia is ready and bidders don’t have to travel far as they can now bid online using their smartphones. This helps to fetch a far better value for the property as it is an additional channel to attract more bidders,” he says, adding that Ng Chan Mau & Co is planning to hold its hybrid auctions monthly.

Also, the High Court of Malaya recently introduced e-Lelong, an online public auction of immoveable properties for foreclosure proceedings, which will allow bidders to bid online without having to go to court in Peninsular Malaysia.

Chia believes the high court moving towards online auction will gain traction in the long run when the public has familiarised itself with such online procedures and may eliminate dependence on auction houses. “However, the traditional auction method should not be put aside as the sentiment and atmosphere of attending an auction is completely different compared to online auctions.

“Therefore, auction houses should maintain the traditional auction method as the auction market is still able to cater for dual services,” he says.

Meanwhile, up-to-date information on auction properties will be easily accessible via numerous online auction websites. “Prior to having online auction platforms, there was difficulty in obtaining up-to-date auction information and the lack of awareness of auction procedures has contributed to the negative impression of the auction market in the country,” says Chia.

“We then decided to transform public perception of auctions by setting up (AuctionGuru.com.my), a one-stop online platform, compounding all the latest auction information nationwide for the general public. Information is now made transparent and updated daily.

“We also conduct talks and interviews to share our knowledge and experience on auctions with the public. The perception seems to have improved and we will continue to promote the auction market as an alternate property market.”

 

 

Caveat emptor

Since, in most cases, bidders at auctions are not able to view the property, the purchaser has to accept it, warts and all. Therefore, prospective bidders should perform due diligence ahead of the auction — inspect the property, conduct land searches in both an official and private capacity, make enquiries with the developer, landowner and appropriate authorities, as well as obtain a copy of the conditions of sale from the auctioneer.

Ng Chan Mau & Co’s Low says bidders can inspect the property externally and gauge the internal condition from the outside as best as they can. He cautions that banks do not usually provide vacant possession of the auction property, which means all costs to evict squatters are borne by the purchaser, and successful bidders may also have to pay the outstanding quit rent, assessment taxes, maintenance and service charges, utility bills and sinking fund fees for stratified properties.

After the auction, successful purchasers have to settle the balance purchase price within 90 to 120 days from the date of the auction, depending on whether it is a loan agreement-cum-assignment (LACA) auction or non-LACA auction. They are advised to prequalify for a mortgage, if needed, and purchasers should appoint their own lawyer to execute the transfer of property ownership.

“Prospective bidders are advised to get prequalified for financing ahead of the auction as there is no refund of the deposit if the balance purchase price is not settled within 90 to 120 days. So do not overbid based on your financial capacity,” Chia advises.

Despite the risks involved, bidders are generally motivated by the opportunity to get a property at a fraction of the market price. Low says the reserve price of auction properties determines the number of bidders for each lot. “On average, our auctions with 100 properties up for sale will see 180 to 200 bidders. A sought-after property may attract 20 to 30 bidders.”

The local auction market comprises over 90% foreclosure properties as opposed to private auctions. “Private auctions are still very much in their infancy here compared with countries like the US, Australia, Hong Kong and Taiwan. The general perception of the auction market here is still rather conventional,” says Chia.

“However, we do see the number [of private auctions] increasing and the perception improving as we are continuously creating awareness of this segment of the market and we hope to see more this year.”

Property Auction House has in the past organised some private auctions in Malaysia but the response was lukewarm. A private auction, Loh says, is held when the property owner puts up their property, encumbered or unencumbered, for auction.

In contrast, buying a property at auction in Australia, for example, is common, popular and competitive. It was reported last month that a 217 sq m warehouse over two levels occupying 124 sq m of land in Sydney’s Surrey Hills was sold for A$2.7 million in an auction that lasted about three minutes.

According to Knight Frank Australia head of metropolitan sales NSW, Eugene Evgenikos, auction properties in Australia are typically sold within four weeks, plus two weeks of marketing and contract preparation. According to him, auctions in Australia are typically conducted through real estate agents and inspections of the building are allowed.

Given the long extended cycle of low interest rates, Evgenikos notes that the number of foreclosures is low in Australia. “The auction market [in Australia] has been experiencing a strong performance and it is likely to remain so in the future due to local market conditions.”

There are many advantages to putting a property up for auction, which include: (i) auctions give sellers an additional option to sell the property and may exceed the desired price as auctions generate excitement; (ii) it saves time and eliminates unscheduled previews to unqualified prospects; and (iii) allows the seller to set the terms and conditions of the sale and maintain control of the property throughout the auction.

On the other hand, buyers can purchase a property at a fair market value in a shorter time as it eliminates long negotiation periods.

Auction houses in the country are continuously trying to create awareness of the auction market and how it works. “More awareness equals more bidding. We want more people to get to know auction properties,” says Low of Ng Chan Mau & Co auction house.