The Edge Investment Forum on Real Estate 2018: Prices driven by secondary market, time to consider renting

This article first appeared in City & Country, The Edge Malaysia Weekly, on April 16, 2018 - April 22, 2018.
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Property prices are no longer driven by the primary market, CBRE|WTW managing director Foo Gee Jen said in his presentation, “Market Outlook: Which sectors are expected to perform better this year?”

“In the last five years, prices were marked up at every subsequent launch. That was the strategy. But last year, prices were driven by the secondary market, which I think is a good thing as prices should be dictated by the consumers and buyers rather than solely by the developers,” he remarked.

As at 1H2017, the secondary market accounted for 85.4% of transaction activity for residential properties priced at RM500,000 and below, compared with 73.1% in the primary market, he said.

The overall property market is projected to see a slight drop in terms of transaction volume, he added. “Despite that, we may still see a small growth of about 5% to 8% in terms of prices.”

Foo noted that the overall market, which has been on a downward trend since 2015, has been flattish with the office and retail segments not performing well. To recap, there was a sharp increase in transaction volume from 2010 to 2014, driven by the developer interest-bearing scheme as well as easy loan approvals, among other factors.

So, will property prices go down? Foo does not think so. “Interestingly, the only time in the last 25 years that property prices went down was during the Asian financial crisis from 1997 to 1999. But fortunately, we had a V-shaped recovery. And even during the global financial crisis in 2008 to 2010, property prices were on an upward trend.”

According to him, the residential segment is still seeing an undersupply, especially of affordable units. “We have 5.1 million residential units for a population of around 30 million, which is growing at a rate of around 1.3% annually. Each year on average, we require around 97,500 houses for a household of four. And in the last five years, 78,216 houses were built annually.”

The overhang situation, said Foo, is due to the mismatch in prices, location and product type. “These factors are very important to consider. Even in places like Kuala Muda in Kedah, there are houses priced at RM400,000. That is definitely a mismatch in terms of prices and location.” He noted that in terms of prices, almost 60% of the overhang units were priced at RM400,000 and above, and in terms of property type, over 30% were stratified properties.

Based on research by Khazanah Research Institute in 2015, residential properties in Kuala Lumpur are considered severely unaffordable at a median multiplier of 5.4 and in Selangor, moderately unaffordable at a median multiplier of 4.0.

“As investors, we need to understand the market demand, find out which property type is in undersupply and locate opportunities in the market.” He advised the audience to consider which property type is in undersupply. Where are the preferred locations? And in terms of the rental market, what are the optimum unit sizes?

Asked whether the possibility of an interest rate hike post-election would affect the property market, Foo said elections in the past 15 years have not done so, but as it is a challenging time, uncertainties are bound to impact sentiment. While those with very high gearing of 90% to 95% loan could be impacted, he foresees minimal impact in the long term as most buyers are looking at a long-term repayment period of 25 to 30 years.

To another question on how prices will fare in the residential segment, Foo replied that stratified units, SoHos, SoVos and high-end condominiums are likely to see a downward price correction in both the primary and secondary markets whereas the mid-range residential segment is still seeing strong support, especially landed houses priced from RM500,000 to RM1 million in the Klang Valley. The affordable housing segment could hit a snag as perhaps far too many are being built at wrong locations, he added.

Foo also cautioned investors not to buy based on herd instinct but to do their own research. “You should be aware if a property is overpriced or if there is no demand for such property.”

 

When renting is sensible

According to Foo, renting can be a sensible option under certain circumstances. “As we know, this is going to be a challenging market and we are going to need a long period of adjustment between the mismatch in property price growth and household income growth.”

He believes that when the market and economy as a whole see a long-term correction, it could present a good opportunity for the rental market as renting requires lower financial commitment and gives immediate and easier access to accommodation. There is still big growth in the rental market compared with the owner-occupier market, he said.

Of the 2.08 million households in the Klang Valley, 68% or 1.4 million own a property while 29% or 600,000 are renting a property. Homeownership in the country, according to the Department of Statistics Malaysia, was at 72.5% in 2010 against 76.1% in 2014. This is higher than in Australia (68.1%), the UK (67.4%) and the US (66.5%), according to Foo.

“At the moment, we have a very soft market. And when the appreciation in value has tapered off and is slower than the growth in rental, perhaps it is the right time to consider investing for rental,” he suggested. He noted that the current rental yield return for residential properties is low at 3% to 5% as property values have moved up much faster than rents over the years.

It may also be worthwhile to consider transforming vacant and under-utilised or aged units for rental use, he said, adding that there is a lot of office space, especially under-utilised upper floor shophouses that can be adapted for residential use. “There will be a lot of unsold property that can be bought and invested in for rental purposes.”

As a vibrant population and dynamic employment sector are crucial to support the rental market, Foo hopes the authorities can look into the movement of foreign labour, especially among professionals and higher levels, and attracting them to work in Malaysia. “Cities like London, New York and now, even Shanghai, are very vibrant because of the high numbers of expatriates.”

 

Build-to-rent and rent-to-own schemes

In his presentation, Foo also discussed the pros and cons of the build-to-rent (BTR) and rent-to-own (RTO) schemes.

To support the BTR scheme, a public-private partnership structure and legal framework need to be in place, said Foo. “Such schemes would generally require big capital investments by government agencies and local authorities.”

According to him, the BTR scheme offers developers and investors longer lease terms and steady and stable revenue in the form of rent. Such schemes are also attractive to institutional investors that need reliable recurrent returns.

The scheme offers tenants the security of a longer lease and the assurance of quality as purpose-built homes are professionally managed and specialised for renting. “Units can cater for the lifestyle of millennials or young families who seek on-site services and facilities.”

As for the RTO scheme, Foo says this can only work in a market where capital values are on an upswing. “Otherwise, developers could run a risk when no one exercises the option to purchase.”

Two RTO schemes in Malaysia he mentioned are rental housing by PR1MA, which offers the option to purchase on the 5th or 10th year of tenancy at a price set by PR1MA, and the #HouzKEY RTO scheme by Maybank Islamic Bhd, which offers the option to purchase or sell after one year of renting at a pre-agreed price. When a tenant opts to sell under the latter scheme, the profit between the pre-agreed price and the sale value goes to the tenants, said Foo.

The longer lease terms of RTO schemes guarantee accommodation for tenants. There is certainty in rent increment, usually stated in a contract. It also locks in the property price for future purchase and allows time for tenants to build up their financial capacity, save for the downpayment, and accumulate a credit score. “It gives an easier entry to homeownership with low initial financial commitment and an opportunity to assess the property and its surroundings prior to purchase, which appeals to genuine buyers,” Foo explained.

Some disadvantages of RTO schemes are that they could be more costly depending on the rental rate and contribution to option money (a one-time, usually non-refundable fee paid to the seller for the option to purchase the house in the future) and could incur big financial loss for the tenant if the property purchase is aborted or forfeiture is exercised.

Meanwhile, key criteria for rental hot spots in Kuala Lumpur include having a public transport network, proximity to commercial areas, and quality of the property to justify the rent, said Foo. Popular areas for renting include Setapak, Mid Valley City and Bukit Jalil.

Some future growth areas linked to rail infrastructure Foo highlighed in his presentation include Kwasa Damansara/Sungai Buloh, Kelana Jaya/Kota Damansara, Kuala Lumpur, Kajang and Putrajaya.

“The rental market will be catalysed by rail connectivity, more so than road connectivity. Sungai Buloh, Kajang and Putrajaya are the end-terminals for MRT. Both LRT and MRT are running along and serve Kelana Jaya and Kota Damansara. Kwasa Damansara is an upcoming township integrated with transit points such as MRT stations. And Kuala lumpur will remain popular as the centre of activities and a transport hub.

“Perhaps it is time to consider a change in mindset as home ownership is not the be-all and end-all. Moving away from the typical Asian mindset, the absence of homeownership does not imply welfare deprivation. The ultimate priority is to have a roof over one’s head, be it rented or owned,” he concluded.