Friday 29 Mar 2024
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This article first appeared in City & Country, The Edge Malaysia Weekly on March 28, 2022 - April 3, 2022

One of the constant challenges in the property industry is the rising cost of construction, which could lead to higher property prices. According to a survey conducted by the Real Estate and Housing Developers’ Association Malaysia (Rehda), construction costs are anticipated to increase by an average of 19% this year. But how this would impact property prices going forward remains to be seen.

According to Rehda acting president Datuk N K Tong, some of the developers who responded to the survey expect prices to increase. “But to be fair to the broad market, we only reflected the construction costs going up …. whether [property prices will] go up would depend on the ability of developers to absorb some of the cost increase as well as the ability of the homebuying rakyat to absorb some of the price increase,” he said during an online media briefing of the Rehda Property Industry Survey 2H2021 and Market Outlook 2022 on March 15.

A total of 124 respondents comprising Rehda members in Peninsular Malaysia had taken part in the survey, which was conducted to assess the market performance in 2H2021, provide insights into the overall market dynamics in the housing industry, and seek developers’ views of the industry’s growth prospects and challenges, and the outlook and future market sentiment for 2022.

Tong noted that the cost of doing business has also been rising. “In 2021, developers reported that the cost of doing business had gone up by 18%, and one of the key components of this increase was construction costs.”

He added that the top three components affecting developers’ costs are material and labour; compliance; and financing and land.

In terms of building material prices, the survey revealed that the average percentage increase over two years was 55% for aluminium, 52% for timber, 38% for steel, 19% for cement, 18% for sand and 16% for concrete.

Rehda vice-president Datuk Ho Hon Sang said that with the increase in construction costs, gross development cost of products would inevitably go up. “Naturally, if the developer wants to maintain its profit margin, there would be an increase in the final selling price of the product. Based on the 19% increase in cost, easily there would be an 8% to 12% increase in selling price.”

Nonetheless, Ho warned that developers will need to be mindful of price increases lest the prices aren’t well supported by banks, which would make financing difficult. “So, even though there’s a price increase, take-up rates could suffer.”

To keep prices under control, Ho said developers will have to look at the design of the product, do a lot of design optimisation and value engineering. “It will be interesting to see how the market evolves moving forward in this new environment.”

Rehda vice-president Datuk Zaini Yusoff warned that construction costs may rise further in view of the inflationary environment globally. “We have to do a lot of value engineering to [control] property prices; if not, future designs could have smaller built-up areas in order to maintain the pricing. If we increase the prices, it might not go in tandem with getting the loans from banks.

“In fact, we have been lowering our profit margin for the past two years because in business, it’s about striking a balance. You don’t want to end up having cash tied up because you have already constructed the building. So, a lot of developers had reduced their profit margin to as low as breaking even to sell the units,” he added.

According to Zaini, the uncertain environment also has an impact on whether developers will launch new projects over the next 12 months. “We will launch projects that we are very certain we can sell, especially landed property. Whereas strata development is very high risk, so we really have to measure the risk factors before launching any projects.”

Tong concurs. “I mean, if they try to factor in all the inflation, developers may be at risk of pricing themselves out. But if they don’t price in enough inflation, they may be at risk of building at a loss. So it is quite a challenge.”

While the future appears to remain challenging, the survey did find that the impact on business operations had lessened somewhat in 2H2021 compared to 1H2021, Tong said. “I think this is also related to how everyone has been adapting to the challenges due to Covid-19. Some of the cost-cutting measures have included freezing new recruitment, less benefits/perks, salary reduction, KIV/rescheduling launches of planned projects, reducing the scale of launches and delaying projects.

“There’s inflation around the world, including Malaysia. Typically, we look to assets that can help protect us or at least mitigate some of the negative impacts of inflation, and one which sits very squarely in Malaysians’ mindset is property.

“So, potential interest rate hikes could signal two things. One, there is inflation that needs cooling off, and the other is that maybe there is some recovery in the economy, both of which I think will be positive for property. But again, it remains to be seen how things will continue to evolve because it is a very fluid situation,” he added.

More optimism for 2H2022

In terms of the business and economic outlook, sales performance and residential sector growth, the survey found that respondents were more optimistic about 2H2022 than the first six months of the year.

“In 1H2022, we’re still faced with a high number of daily infections, so people are looking forward to better times later in the year. I think everyone is hoping that the pandemic is going to be behind us by the second half of the year,” said Tong.

Of the 124 respondents surveyed, 51% said they plan to launch their projects within the first six months of 2022. Those not planning to launch projects cited the top reasons for not doing so as the unfavourable market conditions and the ongoing impact of the Covid-19 pandemic.

Meanwhile, 77% of the respondents with launches planned were anticipating their sales performance to be 50% or below in the first six months of their project launch.

Based on the survey, at least 17,969 units of strata properties, 5,997 landed properties and 591 commercial properties are expected to be launched in the first six months of the year.

In terms of pricing, the bulk of the launches in the first half of the year is expected to fall within the RM250,001 to RM500,000 bracket in most states, and the RM500,001 to RM700,000 bracket in the more urban areas such as Johor, Selangor and Penang. Tong noted that most launches in Kuala Lumpur in the first half of the year are expected to fall into the RM250,001 to RM500,000 price range, owing to a project in Setapak with more units in the lower price bracket.

In terms of measures to boost sales in 2022, the top three strategies stated by respondents were aggressive participation in networking/social media marketing/property portals; enhancing product innovation and creativity; and the use of virtual technology as a marketing tool. “I think this is a sign of the times. With the lockdowns that we’ve experienced over the last two years, developers have had to go virtual with a lot of their outreach,” said Tong.

Launched units decreased, sales performance increased in 2H2021

While the number of units launched in 2H2021 decreased by 8% to 10,665 units from the pro­jected 11,601 units in 1H2021, the sales performance increased by 11% during the same period, the survey revealed.

The majority, or 99.7%, of the launched properties were residential units, with 2- and 3-storey terraced houses dominating most of the launched and sold properties in the latter half of 2021. “By property type, it’s no surprise that terraced houses continue to be popular, followed by apartments/condominiums, and serviced apartments,” said Tong.

Commercial launches reduced significantly to 34 units in 2H2021 compared to 141 units in 1H2021.

Of the respondents surveyed, 32% launched projects in 2H2021. “There’s a slight decrease, based on previous surveys, and sales during the quarter was around 50%,” Tong noted.

The bulk of the residential properties launched fell into the price brackets of RM250,001 to RM500,000, and RM500,001 to RM700,000.

In terms of unsold units, 64% of respondents had residential units that were completed two years or more ago. “The reasons for the residential units remaining unsold were fairly consistent with previous surveys — the end-financing loan rejection issues whereby purchasers found it difficult to get financing from banks; the low demand/interest; and the unreleased bumiputera units as developers had to hold on to them,” Tong said.

“The best way to [ease the overhang] is either to lower the cost, and that’s not going to happen, or for wages to go up. That’s something I think the government has been working on to try and get us to become a high-income nation,” he added.

Tong said he hopes the federal and state governments can focus on providing affordable housing, so private developers can concentrate on delivering market-driven properties for the M40. “Without the cross subsidies, I think median house prices will come down and [the overhang situation would ease] when we are able to deliver houses at a more affordable rate.

“Another thing is that when there are cross subsidies, the government’s target [for affordable housing] is dependent on the [developers’ ability] to deliver. Better yet if the government drives and delivers homes for the B40 without waiting for the general market to determine the rate of production.”

After the briefing, Rehda past president Datuk Seri Fateh Iskandar Mohamed Mansor added that the uncertain economy calls for the reintroduction of the Home Ownership Campaign (HOC), which ended on Dec 31 last year.

“With the current situation that’s happening around the world, the conflicts we are facing, the uncertainty in terms of inflationary figures going up and the cost of doing business that have also gone up, I think it’s time for us to appeal to the government on behalf of the rakyat for the HOC to be reintroduced for us to [be able to] face the headwinds this year.

“So, I hope the government will listen to the voices, not only from us but also from the rakyat to assist in easing the burden of purchasing a home at least for the next 12 months. This is something that I think most developers and also potential purchasers are looking forward to,” he said.

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