The State of the Nation: A tale of two states

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THE two property hot spots outside the Klang Valley are Penang and Johor.

While Penang has historically been the second biggest market after the Klang Valley, interest in Johor has been strong only over the last four to five years with the state attracting many developers, local and foreign.

The stock market too got all excited about property companies with Johor exposure, such as UEM Sunrise, Iskandar Waterfront Holdings, Sunway Holdings, Tropicana Corp and many others, including Singapore-listed firms.

Iskandar Malaysia was to be to Singapore what Shenzhen is to Hong Kong.

Hence, developments such as Medini, Legoland, EduCity and Pinewood sprang up in Iskandar. Land prices doubled and then tripled. The prices of some condominiums in Puteri Harbour, another development in Iskandar, exceeded RM1,600 psf, supported by speculative demand.

Meanwhile in Penang, investment interest grew after the 2008 general election. Singapore companies, led by Surbana, made their foray into the state. Renewed local confidence was reflected in the mushrooming of locally owned boutique hotels and restaurants, especially in restored heritage buildings. The granting of Unesco World Heritage Site status to George Town also kicked off a tourism boom.

Unfortunately, every party must come to an end and the catalyst for it was Budget 2014, unveiled in October 2013.

In the budget, the federal government took several tough measures to cool down the property market. Household debt had shot up from 60% of gross domestic product in 2008 to 86.8% in just five years. The fear was also that banks were overexposed to mortgages. The escalating property prices worsened wealth inequality as well.

The main measures announced and subsequently implemented in January 2014 are the reintroduction of the Real Property Gains Tax, the abolition of the developer interest bearing scheme and the hiking of the limit on foreign ownership of properties from RM500,000 to RM1 million.

The cooling measures stabilised property prices in Malaysia from 3Q2013 (see chart). On a quarter-on-quarter basis, prices continued to rise, but barely. While they had previously grown between 2% and 4% q-o-q, growth slumped to 0.5% and 0.3% in 4Q2013 and 1Q2014 respectively.

What is interesting is the contrast between Johor and Penang (see Table 1).

In Penang, the growth in property prices slowed after the cooling measures were announced, but it remained healthy and above the national average. In Johor, however, growth fell between 4Q2013 and 2Q2014.

Why is this so and what can we expect going forward?

The residential property statistics for Johor and Penang tell the full story (see Table 2). We tracked the total housing stock, new starts and completion of construction during the year and unsold units at the end of the year.

In Penang, unsold units were stable up to the end of 2013, at about 2,200 units or 0.5% of total housing stock. This was in line with the historical average. New starts up to the end of 2012 remained below the historical annual take-up rate. This means new completion up to the end of 2015 will be below demand and the stock of unsold units will remain low. This explains why Penang property prices continue to be on an upward trend.

The number of new starts in 2013 is a slight concern because it may lead to oversupply in 2016, but it is still marginal. At worst, unsold units may be around 1.5% of total housing stock.

It is not just about supply but also demand. While demand fell in most of Malaysia, especially Johor, last year, Penang saw a big increase. Whether the high demand is sustainable will be seen in the years ahead.

The key to this lies in the economic consideration of job creation, which Penang has done well recently. The annual take-up rate of new housing in Penang has risen from 0.4% to 0.5% of the population. By comparison, the rate in Johor is 0.3%, both historically and in recent years.

The stronger growth in Penang is due in part to a quicker decline in the average number of people per household, faster job creation since 2012 and an unemployment rate that is half that of Johor.

The trend is the opposite in Johor (see table 2). First, annual demand for new homes peaked in 2011. In terms of momentum, demand remained unchanged at 0.3% of the population. In other words, there is no significant shift yet in the underlying fundamental demand for housing.

On the supply side, the signs of trouble are everywhere.

The growth in new starts is frightening — from just about 12,000 units a year, which was roughly equal to demand, the years 2011 and 2012 saw 20,000 new starts, which expanded further to 29,405 units in 2013.

What this means is that unsold units will reach almost 50,000 by the end of 2016, translating into 7% of existing housing stock in the state. By comparison, unsold units were historically always below 2%.

In fact, of all the states in Malaysia, Johor is the only one where the number of unsold homes in 2013 was higher than in the year before (see Table 3).

This adverse market condition obviously reflects the weak property prices in the state. Worse still, an even greater supply of new homes is expected in the coming years.

The two projects of R&F Properties and Country Garden alone will see 40,000 homes being built. And this excludes the controversial reclamation projects. Forest City, one of the reclamation projects, with a gross floor area of one billion sq ft, could potentially supply 480,000 homes, assuming 80% efficiency and a 75% residential component with an average unit size of 1,250 sq ft.  This is equivalent to 40 years of annual new home demand.

There is also abundant supply coming on stream in Danga Bay, Medini and Johor Baru.

The outlook for the property market in Johor is precarious unless supply is kept in check or demand is boosted through strong employment creation and better connectivity with Singapore.

Economics dictate that supply will fall as prices fall and unsold inventories build up.

But what are the social consequences of entire buildings being left unoccupied, of banks having to auction off properties and of buildings left uncompleted? 

Are we ready to face these harsh realities? It is time the government looked at ways to manage future supply and increased the attractiveness of Iskandar Malaysia as a place to live and work.

Do the governments, federal and state, and the major stakeholders, including developers, have a clear strategy to achieve the much- needed objectives?  More critically, will they be able to execute a strategy effectively?

Failure to do so could result in a messy state of affairs that nobody wants.

This article first appeared in The Edge Malaysia Weekly, on October 06-12, 2014.