The Covid-19 pandemic has brought nations and their economies to a standstill. Although some countries are looking to restart their economic engines, recovery will take time. How, then, can the local property sector survive this period and what can investors and property developers do until better days return? City & Country asks senior property developers and consultants who have been through financial crises to share their experience and views on how to manage in trying times.
Tan Sri Teo Chiang Kok
1 Utama and Bandar Utama City Centre director
The property industry was already facing headwinds in the past tw years, owing to the slowing economy, and the challenge added by the Covid-19 pandemic is devastating. The immediate and near future will be challenging, indeed, but with the understanding and proper assistance from the government, the industry will have to be most adaptive to meet the challenge and prevail.
Having been in the industry for the past 48 years, [I have observed that] it is a given that the economy goes in cycles, particularly the property development industry. In the past, there was never any instance in which there was a shutdown and the challenge of developers was to continue to finish projects that were under construction to ensure adequate cash flow from billings.
The previous crises were slower to precipitate, with a lot more warnings than the Covid-19 crisis, and developers had time to re-strategise, such as holding back launches. It is important to understand the warning signs and prepare for the impending inevitable slowdown. Negotiate earlier with the financiers for loan restructuring.
One very pertinent lesson I learnt from past crises is that local branches of foreign banks have less flexibility to accommodate restructuring, as they are dependent on the instructions from their headquarters, which are number crunchers without on-the-ground understanding. There were horror stories of foreign banks making a corporate decision to just immediately withdraw lending in a country they deemed at risk.
So, do your research well. Be prepared for the long haul because of the long-drawn-out approval process. Many a time, by the time the project is ready to get off the ground, the economic cycle has turned against you.
The inherent risk in property development is the long approval process. It is so important for our government to seriously look into expediting the approval process and also be open about the data of approved projects for the would-be developer to have better research findings before embarking on any new ventures.
For property investors, property is a long-term holding. Records show that properties will always gain in value over time, although there will be short-term falls in value in line with the economic cycles.
This Covid-19 crisis is unprecedented and the survival of many businesses is being deeply challenged. With the shutdown, there is no business income. Even after the Movement Control Order is lifted, we can foresee a long period of slow pickup, owing to a lack of confidence and lingering fear of a second wave.
With no business income, the avenue left is to reduce fixed overhead costs such as salaries and rentals. Fortunately, the government has been addressing these issues and continuously announcing assistance.
The government can first help reduce the cost of doing business by suspending all payments such as taxes, licensing fees, quit rent, assessment and supporting salary bills.
This is a critical time in which the government needs to dig into our nation’s reserves to save businesses -- in order to save employment and preserve the business eco-system for it to rehabilitate, rebuild and recover the economy.
Datuk Soam Heng Choon
Real Estate and Housing Developers’ Association Malaysia (Rehda) president
In the next six to nine months or a year, the property market will be slow. People will adopt a wait-and-see attitude to be sure of whether they have a job or reduction in their income before they make any decision. The next one year will be tough, but if the economy starts building up, then there could be pent-up demand, which is good. Developers have to go back to the drawing board and look at what people can afford for the short term.
During this short period of time, no more frills and fancy. Go back to the basics and look at the product that the people want.
It is important for developers to manage their cash flow and ensure their credit facilities are still available. Sacrifices such as pay cuts will have to be made so that fixed overheads and expenses will be reduced.
During the Asian financial crisis, many people withdrew their purchases and it was the most difficult time for a property developer.
For example, a pair of semi-detached houses was sold but, suddenly, one buyer dropped out. So, the developer had to stop construction of the semidees and persuade the other buyer to move to another unit. The same happened for terraced houses. For high-rises, it will be more difficult to do this. So, in this kind of situation, we need to find ways to encourage people to stay on with their purchase.
For investors, this is an opportunity. If they have the cash, they will be able to buy at the best price possible. If people want to sell properties in old areas such as Bangsar and Taman Tun Dr Ismail at below market value, it would be a good opportunity to pick them up.
Meanwhile, the government should not forget that corporations bigger than SMEs [small and medium enterprises] need help as well. Moratoriums that are extended to SMEs should be extended to the corporates and banks must not withdraw any facilities that were given.
The government should consider bringing back the Home Ownership Campaign, remove the real property gains tax for now, extend the loan tenure up to 40 years or up to age 70, with a special interest rate for properties below RM500,000, and reduce the third property loan-to-value cap, which is set at 70% right now.
Reduce or waive fees such as land premium, licences, and contribution and development charges for the next two years so that the cost of doing business for property developers can be reduced.
State governments should allow unsold bumiputera units to be released so that property developers can liquidate them and turn [the proceeds] into useful funds. The state governments will also earn from the revenue and can use it to help the targeted bumiputera groups.
Property developers should be allowed to terminate launched projects that have not achieved 50% sales and for which loan drawdown has not happened. This will prevent developers with poor cash flow from being unable to complete the projects. It is to prevent more serious implications in the future.
Datuk Seri Michael Yam
Impetus Alliance Advisors Sdn Bhd CEO and managing director
The general all-round consumer sentiment would be weak immediately after the Movement Control Order, assuming the MCO is gradually eased off, if not lifted, from May.
It depends on global trends and how the other countries, especially those that Malaysia trades with, deal with the pandemic. Their economic recovery may lag behind Malaysia’s gradual return to normalcy, hence dampening demand for our exports. Better clarity may be seen perhaps six months down the road, which would have the consequences of consumers’ delaying or deferring investment on big-ticket items such as property, cars or other heavy capital investment.
This six-month, slow sale period, combined with the soft market conditions prior to Covid-19, represents the dip in a typical property down cycle. But this is not to say that real estate is dead — just that the supply side would adjust itself and developers would wait until the cycle starts to pick up.
The Asian financial crisis is probably the most unforgettable one for me. I was helming Sunrise Bhd when the crisis hit and several strategies were introduced to keep the firm going, and they revolved around the letter “C”.
The first is cash flow. There were daily reports to monitor every sen coming in and going out. It was deep diving to see which asset could be sold even though it would be the worst time to sell land or property. Next is communication. Going to the staff and seeking their vote on whether the company should retrench at least 10% of the workforce or take a pay cut transformed them into stakeholders of the company. They picked pay reduction to keep everyone in employment.
We embarked on a corporate exercise subsequently. It was made possible, as Sunrise had a great reputation among its foreign partners. We structured private placement preference shares with yields to our UK-based partner and Irish contractors secured against unsold properties to get funding [for our projects] when no local banks were lending at all.
Cash flow or liquidity is paramount in real estate development. Do not embark on a project without doing a “stress” test. If you cannot cover the negative gap, either find joint-venture partners or talk to the bankers. After a recession, the market tends to re-bounce and its peak tends to be higher than the previous peaks.
Currently, the Malaysian property buyer is aged between 24 and 40, so developers should do property and in-depth research, carry out market studies and understand the trends and behaviour of the millennials. Find the right location and deliver a market-driven quality product at the right price point.
The government should introduce stimulus to sustain the property sector by reviewing stamp duty rates, real property gains tax, first-time homebuyer incentives and accommodative rates for owner-occupiers who wish to upgrade, as well as lowering the conversion premium, and contribution and compliance costs.
They should also allocate more development funding and provide more infrastructure to ensure that the capacity of the human and material resources of the construction industry remains robust and sustainable.
Tan Sri Eddy Chen
MKH Bhd group managing director
It is a foregone conclusion that the property market will be soft in the near term. This is especially so with a weak macroeconomy pre-Movement Control Order and a weaker one post-MCO. But I believe the market will be resilient and that it may slowly pick up by early next year and will see some decent activity by mid-2021.
As it is, property demand will not diminish, given that we have a youngish population driven by a house ownership culture. Affordability may be more challenging. It will take extra time for income and savings to build up before we can see a more robust and effective demand.
However, all this may still depend on how the Covid-19 pandemic plays out in the coming months or even years, if we are to believe some of the medical experts. [The pandemic, even after it is over] may change the way we go about our daily lives, the way we transact and how we travel; social distancing may be the norm for some time to come. Working from home, buying online and institutionalising other e-business platforms may have an impact on demand for offices or commercial investments.
I have been through three financial crises before this. The first one being in 1987, which was triggered by the Black Monday share market crash in the US, where the market lost 22% in a single day. This crisis lasted several years, but emerging from this was a booming property/housing market that lasted for a good half of the 1990s, before it crashed again under the weight of the 1997 Asian financial crisis. The housing market recovered from this through a series of strong measures by the government, not least the first Home Ownership Campaign of 1998 and 1999. Again, the property market recovered strongly through the early 2000s until it was crushed by the subprime crisis in the US and Europe starting in 2007 that led to a recession in the US in 2009. Then, the property market recovered from it swiftly. House prices began to spike from 2010 to 2015, averaging a high of 15% a year.
Through all the crises, the key to survival was to maintain a survival cash-flow position. I remember during the crisis in 1987, many of our suppliers, consultants, lawyers and other downliners were asked to take houses in lieu of cash payments. Sales were slow and there was not enough collection to pay everybody. This cooperation and understanding helped us all survive the crash.
Most developer colleagues of mine have survived the three crises, and I am sure we will do so again. Cash-flow management and preservation continue to be the key to survival. Different developer investors/owners will have varying degrees of ability to survive, but each must look into what is best suited to them in their own unique situations. Some may cut losses by letting go of some of their assets/properties in spite of the depressed prices. Some may take to cutting overheads, including staff costs and other operating expenditures. Many developers may choose to postpone their launches.
But, in all crises, there will be opportunities. There may be those who have done well over the last few years and have plenty of cash; it is time to accumulate cheap assets now. This applies to well-heeled developers, investors and so on to start looking at what the soft market has to offer. Keep in mind that property investment is a long-term play. My experience has been that the next high is going to be higher than all preceding highs.
There are many things the government can do to help prop up the macroeconomy. The government still has the capacity to raise money and do so relatively cheaply. Malaysian banks through the years of “cooling” measures are in a strong financial position to help. The government has the capacity to pump up the economy again, as we saw in the last few crises. All sectors will benefit from this action. The private sector looks to healthy government financial interventions, namely financial stimulus, to prosper — more so now, with the absence of a private sector catalyst.
Tan Sri Lim Hock San
LBS Bina Group Bhd group managing director
Demand for property is likely to weaken in the short term, as the Covid-19 pandemic and oil price slump will see consumers tightening their spending. Property developers will have to come up with the right strategies to address the significant changes in market conditions, and may hold back on new launches.
After the SARS outbreak in 2002/03, the property market in Malaysia saw a strong rebound in mid-2003 and towards early 2004. When the US subprime crisis ended in early 2009, the Malaysian property market bottomed out at the same time and that [was followed by] a multi-year bull run. I would expect that once the Covid-19 pandemic subsides, the property market will similarly recover in 2021.
As for financial crises, it reminded me of the time when LBS bought a piece of land in the 1990s to develop apartments, which were in high demand then. Prior to the 1997 financial crisis, [the segment targeted by developers] was the medium to high segment … We were faced with a lot of challenges such as an interest rate hike and poor market sentiment. We promptly changed our focus to the medium market segment, and the project was successfully sold out in a short period of time.
The lesson I have learnt from past crises is to turn crises into opportunities. It is to be well aware of the market trends so we can make the right adjustment, and promptly change focus to the right market segment.
Own-stay home buyers and long-term investors should take this opportunity to buy their choice of property when there are good bargains. Property is an important asset that will appreciate in value over time. Historically, buying property in times like this has proven to be a good investment decision.
The government should abolish many of the measures aimed at cooling down the hot property market at this time. It is now the complete reverse, and we need supporting measures rather than cooling measures to spur demand. For example, introducing incentives to encourage property developers to further tap digital platforms, such as virtual showrooms, online guided sales experience campaigns, enhancing digital engagement with customers, social media and mobile applications; reintroducing the Home Ownership Campaign on a bigger scale, as well as abolishing the real property gains tax. Property is an important sector and has big multiplier effects that contribute positively to our economy.
The government should also introduce a special, limited three-year, super-low interest rate housing loan, and to lower the price threshold for foreign buyers. It should also relax the lending criteria for end-financing and allow for a higher debt-service ratio.
VPC Alliance (KL) Sdn Bhd managing director
Last year’s Home Ownership Campaign (HOC) was a success and the property market has shown signs of recovering. However, the triple whammy of political uncertainties, oil price war and Covid-19 pandemic have reversed this trend. We are witnessing the coming of the worst property cycle as well as an unavoidable recession.
The Movement Control Order, with construction work stopped and market activities almost at a standstill, will have a negative impact on the property market. With the loss of consumer confidence, we expect buyers to adopt a wait-and-see attitude and property developers will recommence their property launches by the end of the year.
Oversupply and non-performing loans are expected to increase this year. It will be a buyers’ market and buyers with cash will be spoilt for choice. They can choose the property they want to buy at reduced prices. However, we do not foresee the property market crashing, unlike the Asian financial crisis of 1997, when the banking industry was caught unawares; banks nowadays are more prudent in their lending and, as such, we do not foresee many forced sales by the banks.
I have experienced the Asian financial crisis and the subprime mortgage crisis in 2007, whereby many professional firms had to retrench staff or resort to salary cuts, as banks had almost stopped lending and professional work dwindled. My firm was lucky in that we did not have to resort to such measures, but we did cut expenses and improve our productivity and marketing activities.
One of the lessons learnt is that professional firms should build up cash reserves to cover operating expenses during a new crisis. Employees are key assets and building a core group of employees to work as a team is one of the keys to the survival of the firm.
Unlike bigger developers that record high unbilled sales, smaller developers may have to further mark down their property prices to clear unsold property stock, have more online and virtual marketing activities, and review their loan facilities with their respective banks.
Over 66% of the overhang properties are in the condominium/apartment, serviced apartment and SoHo categories, the prices of which are expected to be further reduced this year. Thus, there will be opportunities for buyers to purchase these properties at reduced prices. They should focus on smaller units, preferably units priced below RM500,000, so they will be easier to sell or rent. We foresee more properties to be put up for auction this year; so, there will be opportunities to buy auctioned properties at bargain prices for resale later. Property investors should also examine their property portfolio and consult property consultants to strategise their property portfolio.
To revive the property market, I would recommend that the government reintroduce the HOC with similar incentives to reduce the overhang and further relax guidelines for foreigners to purchase all categories of properties, except industrial properties, where prior approval of the Ministry of International Trade and Industry is required. In addition, the real property gains tax after the fifth year of purchase should be withdrawn and a property fund should be set up to assist smaller developers to ease their cash flow so that they can revive their projects
Datuk Lee Tian Hock
Matrix Concepts Holdings Bhd founder and group executive deputy chairman
The next six months will be painful for our local property business, as I anticipate demand will drop 30%, if not more. It will take many economic parties and countries to come together to assist one another and not take advantage of the others’ weaknesses.
The economic and social issues may be depressing, but a ray of hope still prevails in Malaysia: the government is doing its best for the people.
I started working in 1983 to 1985, and that was during the economic recession. All of us who came out to work worked with the purpose of retaining our jobs; it was a hand-to mouth situation. There is a Malay saying: “Kais pagi, makan pagi; kais petang, makan petang.” We dared not spend any money then.
From 1997 to 1999, it was the Asian financial crisis and, at the time, I had just ventured into the property industry. Matrix Concepts was started in August 1997 and, a month before, the Thai baht collapsed.
But there is a Chinese saying: “Dangerous situations bring opportunities.” So, we decided to push a product that would appeal to the masses. Our single-storey terraced houses were sold from RM50,000 to RM53,000 and all were taken up. What we learnt was that there are still opportunities; you just need to find the demand and the right market.
Then came the crisis in 2007/08 in the US and EU. Even though the Malaysian financial sector was not affected, economically, owing to the sudden surge in oil prices at the time, we in the property and construction businesses were also affected. Steel prices went up by two to three times and we were caught off-guard.
Bandar Sri Sendayan township had just been launched and we were building our infrastructure. Our houses were sold at prices before the subprime collapse and we had to honour those prices. Construction was halfway done and we needed to continue. About 70% of our bottom line was wiped out. To overcome this, we pushed affordable products for the masses. This proved to be the right move and it tided us over during this extremely difficult period — again.
Now, in 2020, Covid-19 is global and it will be a very different ball game for everyone. There are no construction and sales activities until the Movement Control Order is lifted or until the government allows us to resume work. Cash flow is a concern. We have to practise prudence for the next six months.
From all the crises, only one thing really stands out, and that is the human spirit. We as human beings need each other to overcome problems and I believe no man is an island — being part of a team or even a support circle is vital for every one of us. Family is important and true friends are those who help you through bad times. We must believe that we can overcome problems, otherwise problems will overcome us.
I have learnt that in business or even in life, cash flow is the single most important concern; you need to manage your cash flow efficiently, with much efficacy.
For property investors and owners, there are always opportunities; you just need to find the best deal for yourself within your cash-flow capabilities. For smaller developers, those that have to launch new projects, take note that the buying power within the next six months or so will be reduced by up to 50%. So, relook at your products to make it even more attractive to your revised target buyers. The need for good cash flow supersedes any other concerns, as it is the lifeline of the company.
Banks and financial institutions should be encouraged to relax the lending requirements slightly and shorten the process and procedures for both bridging loans and end-financing. Also, the government should consider reducing the 3% bank guarantee to 2% on gross development cost and, for subsequent developments by the same developer, to just a token sum of RM100,000 per development. Moreover, waive stamp duties; extend the Home Ownership Campaign for another year at least; and reduce 5% over every year for the real property gains tax and zero rate it in the fifth year.
Finally, there needs to be proper legislation and a legislature body for foreign workers in construction to look into their welfare — from selection to health screenings to proper documentation and banking facilities to good accommodation and structured transportation and activities. These migrant workers are often overlooked and their plight needs to be addressed urgently to avoid social ills and safety concerns.
Datuk Jeffrey Ng
Sunway REIT Management Sdn Bhd CEO
Potential homebuyers’ strategy currently is to conserve their funds for a rainy day and, as such, big-ticket purchases are not on their minds during this stage of uncertainty and economic downturn. Unless the fears of unemployment and personal income shortfall subside, the property market’s outlook will remain subdued for some time in terms of transactions and prices.
As homeownership is among the government’s top agenda, especially for the B40 and M40 groups, property stimulus packages can be reintroduced when Covid-19 is contained. Consequently, we can expect pent-up demand for housing, as the younger age group will sustain the long-term annual demand for houses.
I have experienced the pan-electric crisis in 1987, Asian financial crisis in 1997 and global financial crisis in 2007/08. Each crisis saw combinations of soaring double-digit interest rates, lending curtailment or freeze on property transactions, a drastic drop in property values as well as tightened policies and guidelines, such as the property industry being classified as unproductive and restrictions on foreign ownership of properties.
Capital and operating losses were unavoidable, despite the untiring efforts made to consolidate costs and conserve cash flow. It was difficult to dispose of assets and the truth of asset divestment was that, during a crisis, only crown jewels were saleable at below market value. Under such circumstances, there was no choice but to bite the bullet on asset sales to allow the company to buy time and stay afloat until the property cycle recovered.
One of the lessons I learnt during the crises is that staying power is singularly the most important factor to overcome the cyclical nature of the property market.
The current pandemic and its effects on the economy are global — certainly not confined to only Malaysia. Usual business operations are in disarray, disrupted and disconnected.
Business cash flows and revenues were halted by the Movement Control Order, hurting the entire business ecosystem. It is about cash flow and balance sheet management to keep your head above water; and profitability is secondary, from a business survival viewpoint, if one needs to meet operational and financial commitments when they are due.
Over the past few decades, the government has been supportive of the property industry in recessionary times because of the generation of economic activities in the construction sector as well as the spillover effects on the manufacturing and services sectors.
In the current situation, new stimulus goodies should be “broad-based” to benefit a wider segment rather than specific segments. What we need is impactful economic results to achieve the “feel good” effects on the ground.
Certain stimulus proposals have worked well to boost the property market across the board — such as returning to zero real property gains tax after one has held the property for more than five years; stamp duty exemptions on sales and purchase agreements, memorandum of transfers and loans for all residential property transactions across all price ranges; easy access to house buyers’ financing at subsidised interest rates; and interest-only loan instalments over five years — and will prove to be fruitful measures.
The government should also consider a contribution by developers of, say, 2% of a project’s gross development value to the authorities, in lieu of providing an affordable housing quota, together with a residential real estate investment trust [to provide] for public rental housing. This will be a game-changer and have a big impact on the economy.
Datuk Khor Chap Jen
S P Setia bhd president and CEO
The coronavirus pandemic is unprecedented in many ways and cannot be compared with any previous crises that we have had to face. A contraction is expected in the short term. As it stands, the local market has been subdued over the past two to three years, thus the contraction would be buffered. The recovery will depend on how the outbreak will pan out.
The Movement Control Order had reinforced the importance of the home as a sanctuary and home office. Positive sentiment will return when the economy recovers.
My first experience of a downturn was the 1985/86 recession. Then, many were caught off-guard by the 1997 Asian financial crisis. Thanks to the swift intervention and comprehensive measures taken by the government, however, the economy stabilised. The Home Ownership Campaign (HOC) was introduced and became the lifeline of the industry. Liquidity was still very much present in the Malaysian market during the 2009 global financial crisis. Despite shaken confidence, the 5/95 Developer Bearing Interest Scheme helped rejuvenate interest in the property segment.
This Covid-19 crisis is entirely different in that it affects everyone in many countries and across all industries, and a vaccine has yet to be found. One must be prepared for the long haul and that means running a tight ship and maintaining cash flow.
The property market in Malaysia is unlikely to go off a cliff, as property is a relatively safe and sound investment in the medium to longer term. For those with the means, it is definitely a good time to pick up their dream property or add to their investment portfolio.
For most developers, as it had been for the last two years, the priority would be to maintain a healthy cash flow rather than profits. Unfortunately, some still think developers are raking in huge profits.
The property industry has been a big contributor of revenue to the government, especially the state government. I urge the government to step in and help the property market in the current situation.
Government intervention should include another HOC with additional incentives; reducing the real property gains tax to zero after four years; allowing foreigners to purchase all properties worth above RM500,000 to help clear unsold stock; releasing all unsold bumiputera units; and waiving the requirement of all quotas for one to two years.
In addition, defer or abolish the need to build subsidised low-cost units for one to two years; waive the requirement for all kind of deposits to local authorities; reduce and release the housing developers’ 3% deposit required for developer licence application, as it will greatly aid developers’ cash flow; and carry out a quicker release of monies in Housing Development Accounts to aid cash flow.
Tan Sri Leong Hoy Kum
Mah Sing Group Bhd founder and group managing director
The short-term outlook for the property market is challenging as the current situation has dampened consumer sentiment and market confidence. Among the government’s measures to counter these challenges are to lower the interest rate and reduce the statutory reserve requirement ratio for banks. The six-month moratorium for loan repayment is also timely and much needed.
The market’s medium to long-term outlook will remain resilient for property buyers who are buying to own or to invest as Malaysia has entered this unprecedented period from a position of strength, with a healthy financial system, strong domestic institutional investors, adequate buffers and robust policy frameworks in place. We also hope to see more property-friendly incentives to stimulate the property market and promote home ownership, especially for first-time homebuyers.
Among the crises that I have undergone over my 30-plus years of corporate experience are the Asian financial crisis in 1997, the Severe Acute Respiratory Syndrome (SARS) outbreak in 2003 and the global financial crisis in 2007/08. Each crisis is different and I have learnt to adapt and change to deal with them. In order to remain relevant, one must constantly be creative and innovative. As a consequence, a healthy balance sheet and sufficient cash flow are important to acquire good assets and sustain the business during a crisis.
The main objective is to make quick and proper decisions during a crisis and hence, it is crucial to conduct risk analysis and risk management to assess, engage and plan all courses of action.
In order for property investors/owners and smaller developers to counter the current uncertain situation, it is important to manage cash flow and assess carefully the product’s demand and supply, location, pricing and packaging. This will be a good time for homebuyers because of low interest rates. However, they need to be careful and always conduct proper due diligence on the developer’s track record to avoid future problems.
During this current challenging period, the government can help property developers, investors and owners by reintroducing the Developer Interest Bearing Scheme (DIBS) for first-time homebuyers, reinstating the maximum loan tenure to 45 years, reducing compliance costs including land premiums, development charges and capital outlay for public utilities, allowing a higher margin of financing for the purchase of the first property, and allowing buyers to apply for mortgage loans using gross income instead of net income.
Datuk Stewart LaBrooy
Alpha reit Managers Sdn Bhd chairman
The Movement Control Order and Covid-19 pandemic are dealing the property industry a cruel blow. Things were slow before the pandemic but, now, I see that transactions appear to have come to a standstill. Only developers that have strong balance sheets will be able to pull through. Once the pandemic subsides, investors and the public will be slow to return to the market. The subsectors that will succeed will be e-commerce, logistics, manufacturing, healthcare and data centres.
I have lived through three major financial crises in Malaysia — the 1985/86 financial crisis, the 1997/98 Asian financial crisis and the 2007/08 global financial crisis.
During the 1985/86 crisis, I was not in the property industry but running a manufacturing company that rode that disruption well. I joined the industrial/business parks property development sector only in 1995.
The Asian financial crisis started with the floating of the Thai baht in July 1997. At this time, I experienced what a sharp recession could do to a property-based business. Credit dried up. Projects were put on hold as banks stopped lending and cash flow vanished. I will never forget the day the bank called to inform us that our floating rate loan had gone from 6% a year to 22%, and many short-term credits were being cancelled and payment demanded. Cash-flow management was the order of the day. Also, the assets in our portfolio were well tenanted with multinational clients whose home countries were not affected by the crash and were able to pay their rent.
The global financial crisis, triggered by the bursting of the speculative bubble in the US housing market in 2008, percolated in the rest of the world through capital flows, trade flows and commodity prices. Share prices in Malaysia fell sharply, although the magnitude was far less than during the Asian financial crisis. At this time, I was running Axis-REIT and the period from 2005 to 2015 enabled us to buy assets for our portfolio with extremely attractive yields and valuations.
My advice for investors is, if you own a property that is leased out, ensure that you engage and retain your tenant by offering rebates and upgrades. If you are having a hard time finding a tenant, you need to be inventive in finding ways to attract businesses to your property. There are many new advertising platforms/property portals to market your property, for rent or sale. Also, invest in upskilling with the technology made available for property owners to find tenants or buyers. For smaller developers, revisit your design concepts and costing before embarking on a project.
I believe that, over the years, the cost of doing development has increased sharply, as projects are subject to a burdensome amount of fees and contributions to local authorities and statutory bodies, adding a lot to the price in any project.
Some ideas for the government to consider include scrapping stamp duty on land transactions for the next three years. Remove or reduce the real property gains tax to reduce the cost of business. Encourage companies with leasehold land to renew their leases to 99 years at a 50% discount, which will provide state governments with a cash injection to buffer the loss of revenue caused by lower development activity. No land premium for agricultural land when converting it to industrial to encourage the creation of more industrial parks for foreign investors. And back-end all fees and charges for developments — where they are to be paid upon completion of the project and not as an upfront charge. Alternatively, pass on the cost as part of the assessment calculation of the property upon completion.
Datuk Seri Robert Tan
IGB Bhd group CEO
The outbreak of Covid-19 has had a negative impact on almost all industries. During this tough time, those firms with high gearing, low cash reserves or unstable cash flows are particularly vulnerable.
Based on past experience, the market will bounce back. There will be a period of negative sentiment. However, the underlying fundamentals of the country should see the property market stabilising in 12 to 18 months.
Phase 1 of Mid Valley City was under construction during the Asian financial crisis (AFC). We got through this with regular communication of our business strategies with all stakeholders to assure them that we would be able to ride out that period together. We started Mid Valley Megamall just before the AFC in 1996 and opened at the end of 1999, probably the most difficult time in recent history. Our currency had halved against the US dollar, consumer sentiment was at an all-time low. We were ridiculed for trying to open a megamall at such a time, but over time, we have shown that our calculated risk, perseverance and planning have paid off.
The most important lessons we learnt were cash-flow management; the need to develop a strong trust with your financiers; and, most importantly, standing united with our staff, tenants and business partners.
This pandemic could mean opportunity for property investors and first-home buyers. Developers are coming up with better deals to clear their stock. It is now a very good buying opportunity. For smaller developers, managing cash flow is important to keep the business running. They should plan carefully and actively engage with their financing partner to ensure their available lines of credit remain available.
The construction sector is one of the biggest contributors to Malaysia’s GDP, accounting for RM146.4 billion in 2019. The private sector contributes a substantial percentage to this sector and, therefore, is one of the largest employers in the country. Steps must be made by the government to support private and public sector construction activities and businesses such as launching the Home Ownership Campaign 2020. As at November 2019, HOC 2019 had sold properties with a total value of RM23.2 billion, surpassing the initial target of RM17 billion. This shows that people are willing to purchase property that they can afford.
Easing of bank financing to help people keep their homes and to buy property would help curtail the falling demand for properties. A slowdown in the property sector does not bode well for the health of the economy.
Tan Sri Liew Kee Sin
Eco World Development Group Bhd executive chairman
Although things may look bleak now, there is actually room for optimism. This is the fourth major crisis I have experienced — the Asian financial crisis in 1997 was probably the worst. Thanks to good leadership and bold decisions, however, we not only recovered but thrived in the years that followed.
From that time, I learnt the truth of the saying, “Tough times don’t last but tough people do.” No crisis is ever easy when we are in the eye of the storm, but there are some certainties. It will eventually pass and as long as we stay calm, continue to make good decisions and work together, we will survive.
The good thing about Malaysia this time compared with 1997 and 2008 (the global financial crisis) is that our banks are strong. The major institutional funds are intact. The central bank is strong. That is why, until today, the good news is that the banks are still lending. Also, every part of the government is proactive in trying to solve the current situation.
I believe that the government’s decisive move to implement the Movement Control Order, Bank Negara Malaysia’s comprehensive measures to provide relief to borrowers, the huge Prihatin stimulus package of more than RM250 billion to undergird the economy, along with the remarkable work carried out by our frontliners, have collectively laid the groundwork for a strong post-Covid-19 recovery.
The recent decision by the Ministry of International Trade and Industry to allow more sectors, including construction, to recommence operations in phases, is very welcome. Moving forward, the government should think about how it can liberalise the property development industry. In the last few years, there has been a lot of regulations put on property developers. We are asking the government to relax the rules and assist the industry to grow.
Most necessary right now, everyone — including small and medium enterprises and retailers — must plan to survive for the next six months to one year. If we can survive this period, we won’t close shop.
My advice for property investors right now is that it is time to buy good properties that will appreciate over the long term.
For young developers, it is your gearing. Do you have enough to survive the next six months to a year? I think whichever crisis you face, the main thing I have learnt is to look at your cash flow. Cash flow is everything. From cash flow, you decide, how are you going to collect your money back? And will the banks support you? If these cash-flow issues are resolved, then you can survive.
The next thing to look at is, will the world change? Will customers come back or still buy from me? And how do we attract new customers? Then we need to ask whether our business model is sustainable? Must I change my business model or tweak it? The last part is processes. Are our processes efficient? This is a good time to review them.
That said, it has to be acknowledged that the road ahead will not be easy and developers will certainly have to work much harder to deliver and communicate our value proposition to buyers. We cannot operate as we did before and the need for social distancing will greatly change the way in which we interact and engage with our customers.
We Malaysians are pretty resourceful and resilient people, though. Covid-19 has forced many changes upon us, which will be difficult and uncomfortable at first but, as long as we adjust, adapt and reinvent the way we do things, we can come out of this better and stronger. We have done it in the past and, God willing, we can do it again.
Datuk Seri Fateh Iskandar Mohamed Mansor
Glomac Bhd group managing director and CEO
Moving forward, the local property market will be very challenging. This Covid-19 pandemic is unprecedented, and everyone is unprepared for it. Unlike the previous crises, Covid-19 is affecting every sector all over the world, with the exception of health equipment producers, which are doing well. Prior to Covid-19, our local property sector was not doing [exceptionally well] either. Ultimately, this is about balancing health issues and the economic damage.
In the past, there were bright spots despite the economic downturn or crisis, based on my experience during the Asian financial crisis, SARS pandemic and US and EU crises. During the 1997/98 Asian financial crisis, the rest of the world was still doing fairly okay. Malaysia struggled, but there were sectors such as manufacturing and exports that did well.
Prior to 1997, Glomac was selling commercial properties between RM20 million and RM30 million a month. When 1997 came and the government declared property as a “non-productive” sector, we had no sales whatsoever for nine to 10 months. But, in return, we had affiliates and partners that had been making profit from other sectors, and eventually looked into properties for investment and bargains. We also had to reposition ourselves and launch products that could be absorbed by the market.
During that time, our then prime minister Datuk Seri Dr Mahathir Mohamad proposed the first Home Ownership Campaign (HOC) in 1999; any property that was priced RM250,000 or lower was considered “productive”, which prompted the banks to provide loans for this segment. There was also another requirement by the authorities for developers at the time, that we needed to buy at least 1,000 acres of land to launch such projects. This HOC saved the industry.
There are two biggest lessons I’ve learnt during the previous crises. One is that it is best not to borrow too much. At Glomac, for example, we won’t go above 0.5% of our balance sheet. Our current gearing today is about 0.26%. The other lesson is not to be emotional over properties. If you get a good offer and price, sell it, take the cash and let it go.
It is time for us to adopt technology into property, as it will boost the market, inventories and project management. In the long run, we foresee a majority of transactions being done online, and communication will be done digitally. In this current uncertainty, it is imperative for us to look at this capacity and capability building, to start and to learn.
For the construction industry, the Industrialised Building System (IBS) will come into play. Today, developers and contractors would still most likely opt for the conventional way of building because the upfront cost is there; but if the tariffs and taxes are removed, then it would be more utilised in the long run.
The government can assist stakeholders by giving some form of goodies. For example, it can provide a tax-free period of five years. Another thing is pioneer status; for instance, developers and contractors must show that two-thirds of their projects are adopting IBS.
Perhaps it is also time for Malaysia to adopt a temporary Covid-19 bill, such as the one in Singapore. In property development, there are stages of building, especially when it comes to residential properties. In the Housing Development Act Malaysia, only the minister has the power to grant the developers a time extension. Thus, perhaps a specific bill could help speed up the process and alleviate issues such as time extension and construction halts.
We would also like to see the government extend the HOC. We would like to see the same benefits granted in the HOC last year. Developers experienced better sales because of the HOC. If the government is unable to extend this for the entire market, then perhaps it could apply it to the affordable segment below RM500,000, for a start.
It would be good to see the real property gains tax reintroduced at 0% if one disposes of property in its fifth year.
The end-financing criteria should also be more flexible to facilitate home acquisitions, with the removal of the loan-to-value ratio for housing loans for the third and subsequent properties. Property is a good debt that provides wealth creation, so priority should be given to serious buyers.
Lastly, perhaps the government should consider increasing the fund size of the MyHome scheme. The existing house price cap and household income limit, along with limited funds, have deterred many potential buyers from benefiting from this scheme. The incentive of up to RM30,000 (or 10% of the house price) is indeed helpful for first-time homebuyers.
Tan Sri Abdul Rahim Rahman
Rahim & Co International Sdn Bhd executive chairman
As the battle against Covid-19 is still ongoing with no clear end in sight, the local property market will most likely experience a drop in performance from last year’s numbers but, to what degree, it is still too early to say. With many affected financially, sales will take a hit. Adjustments need be made to adapt to the current market pace.
I went through three financial crises. Unlike the crisis we are now facing, however, they were purely financial, and experts could gauge how long they would last and take proper steps to solve the problems.
The 1985/86 financial crisis was my first. The KL stock exchange had to close for three days. At that time, we had 10 branches. From earning an average profit of RM200,000, we started to lose about RM200,000 a month. I was honest with the staff about the position we were in and their salaries were cut by 10% for the first month and 20% for the subsequent months until things improved. And they did improve after six months. All of the 200-plus staff stayed and we, as a firm, emerged stronger.
To survive a crisis, you need honest and strong leadership as well as a loyal workforce that trusts the leadership and is willing to work hard to overcome the crisis.
For property investors/owners and small developers, my advice would be to re-strategise your business model and make changes to ensure your survivability in the long run while minimising immediate damage.
For the government, some leeway and exemptions on certain taxes and compliance costs for a certain period of time would help property players to survive on top of funding that has already been allocated for small and medium enterprises (SMEs) to prevent retrenchment and massive losses.
Deferment of repayments of term loans and commitments allows better liquidity in the immediate term, but solutions for the medium and longer term must also be in place. SMEs, including professional firms, are part of the backbone of the economy, accounting for 98.5% of Malaysia’s business establishments.
Area Management Sdn Bhd senior adviser
We got hit with a double whammy — an economic slowdown since 2018 and now the Covid-19 pandemic — that has put a huge dent in market sentiment. We are forced to work from home and decisions are made online, resulting in the postponement of major decisions on expansion and acquisition. This may or may not be the new normal.
Malaysia has seen major recessions — in 1985/86, 1998 and 2008. Smaller property companies collapsed and some were acquired by larger non-construction companies. For example, Taiping Consolidated Bhd’s assets in Sentul Raya and Lot 10 were acquired by YTL Corp Bhd in 1999. Government-linked companies (GLCs) involved in property development, such as Sime Darby, set up new townships from government land alienated to them as agriculture land.
Non-bumiputera developers with profitable concessions, aside from YTL, built new suburbs outside major cities, which is a long climb up the profit ladder. Local council regulations became stringent and developers needed to walk the corridors of the local council to get the appropriate approvals.
The most important lesson I learnt during these crises was to follow the five-year rule linked to the national and local elections. After every election, friendly and supportive local councillors may suddenly become strangers as they go up the ladder. You will now have to gain the trust of the new guy handling your project, which will take time. So my rule is, get all approvals within that time period.
One piece of advice I would impart to developers is to finish a building under construction even if it means a loss in profit. A completed project has value and it will grow over time. An abandoned or half-completed building has no value.
The government will always help the GLCs. Property developers not linked to GLCs, in my experience, are on their own. They have to, as I did, walk the corridors looking for approvals after submission.