Will the Residential Real Estate Sector Move in Tandem with the Malaysian Economy? July 216
Chart 1: Performance of the Malaysian Currency 8 7 6 5 4 USD 9-Year Average at 3.374 3 2 26 27 27 28 28 29 29 21 21 211 211 212 212 213 213 214 214 215 215 USD GBP SGD USD 9-Year Average Source: BNM Statistics, JLL Malaysia Chart 2: Performance of the Malaysian KLCI KLCI 2 15 1 5 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 Source: Yahoo Finance, JLL Malaysia 2 JLL
Malaysia s economic resilience and currency both tested Last year, the Malaysian ringgit and the Malaysian Stock Market were among the worst performers in the region. While the agriculture, mining and government sectors were adversely affected by the falling oil and palm oil prices, the wealth effect on household consumption in particular took a toll because of the decline in stock market values. When the MYR fell to a 1998 low, there were concerns that Malaysia would face a crisis similar in proportion to that of the Asian Financial Crisis (AFC) of 1997/1998. However, we feel that concerns over the currency were over emphasised. While most Asian currencies depreciated against the US dollar as hot money took flight to seek refuge in the US currency in anticipation of higher interest rates, Malaysia s currency depreciation was one of the sharpest. This was made worse by the plummeting value of external revenues received from commodities together with the flight of hot money leaving the stock market. It must be borne in mind that Malaysia s financial standing today is no longer what it used to be during the AFC. For one thing, Malaysia s external reserves stood at USD 97.4 billion as at 15 June 216, a far cry from the USD 2.2 billion at end-august 1998 when Malaysia was unable to defend its currency. The day after the MYR fell to its weakest at 4.4725 to USD 1 on 29 September 215, the Malaysian international reserves stood at a strong USD 93.3 billion (having fallen by 12% since the beginning of 215). Malaysia also invests externally in mining, finance, real estate and other services in the ASEAN market, Australia, the US, the UK, and a host of other nations. Net direct investments abroad are substantial and to the tune of MYR 4-5 billion annually and those companies that are government-linked can be urged to repatriate their profits or exit their overseas investments in the event of any crisis, as was publicly stated in the last budget. The Malaysian state-owned fund, Employees Provident Fund (EPF), currently ranks as the world s 11th largest. Whether it was a call to bring back funds or a decision to exit profitably, last year Kumpulan Wang Persaraan sold One Sheldon Square in Paddington, co-owned with EPF, for GBP 21 million. It had bought this property for GBP 157 million in 211. Lembaga Tabung Haji, the government fund for Muslim pilgrims, exited profitably from its two-year investment in an office building at 151 Buckingham Palace Road for GBP 25 million. This had been bought for GBP 25 million in 213. Will the Residential Real Estate Sector Move in Tandem with the Malaysian Economy? 3
Commodity prices bottom This year, the flight to US dollar denominated assets has subsided. Moreover, commodity prices have bottomed and investors have chosen to return to Malaysia. After testing the resiliency of the Malaysian economy in 215, they have found that the fundamentals appear to be relatively sound. Oil prices have stabilised at levels above the 3-year average of USD 43/barrel while palm oil is above its 36-year average of USD 488.5/tonne. The current severe El Nino phenomenon is likely to have a positive impact on palm oil prices in the second half of the year. Chart 3: Oil prices stabilising 16 14 GC 28: HIGH USD 145.3/b1/b 12 1 8 6 1986: LOW USD 1.25/b AFC 1998: LOW 3-year average USD 43/b NOW USD 43/b 4 2 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 Source: Federal Reserve Bank of St Louis, Economic Research Chart 4: Palm oil prices picking up with the El Nino effect 1,4 1,2 1, 8 6 1986:LOW MYR 162.79/tonne AFC 1998: HIGH 36-year average USD 488.5/tonne GC 28: HIGH USD 1,446.86/tonne Now: USD 632.79/tonne 4 2 198 1981 1982 1983 1984 1985 1987 1988 1989 199 1991 1992 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 28 29 21 211 212 213 215 Source: Quandl 4 JLL
Foreign funds return Net foreign inflows amounting to MYR 5.6 billion for 1Q16 are a reversal of the outflows of portfolio investments that comprised mainly the movement of investments in bonds and equities across borders. This is a good indication that foreign funds are returning to these types of asset. In fact, foreign shareholdings accounted for 23% of Malaysia s market capitalisation of MYR 1.7 trillion as at end-march 216 compared with 22.3% in 215. Table 1: Reversal in outflow of net portfolio investments Inflows and outflows of net portfolio investments (MYR billion) 28-83.2 21 48.5 212 63.9 214-38.5 215-28.2 1Q16 5.6 Source: Bank Negara, Monthly Statistical Bulletin The MYR: from the worst performing currency to among the strongest The tide has reversed and the Malaysian ringgit has been one of the fastest to recover, strengthening by 5% since the beginning of 216. Fundamentally, Malaysia has proven to be resilient because it is well diversified with only a small share of its export revenue coming from commodities. In fact, 8.2% of its exports are now manufactures, while minerals contribute 1.6% and agriculture 8.6%. The dependence on oil has been reduced and, excluding LNG, Malaysia has been a net oil importer since 214. Because of its diversification, Malaysia should still grow at 4-4.5% this year, a commendable rate in the current global weakness. Growth should largely come from the service and manufacturing sectors. If the economy is not doing so badly, why is the property market languishing? Banks are becoming stricter on the approval of real estate loans Loans in the property sector both applied for and approved have declined. Banks are stricter in lending while credit is channelled into what this year may be considered more productive and lower risk sectors such as education (Chart 5). More stringent requirements Chart 5: Banking loans by sector (MYR million) 7, 6, 5, 4, 3, 2, 1, 26 27 28 29 21 211 212 213 214 215 216 Wholesale, hotels Real estate Education, health & others Source: Bank Negara, Monthly Statistical Bulletin
have been introduced for loan approvals in both the residential and non-residential sectors as bankers have become more cautious in lending. Since 212, Bank Negara has implemented a slew of guidelines for responsible financing that limit the tenure of personal finance to ten years and the tenure for the financing of residential and non-residential properties to 35 years. This is aimed at avoiding excessive household indebtedness and reinforcing responsible lending practices. Delinquencies remain low and they continue to trend down. Chart 6: Non-residential loans applied for and approved (MYR million) MYR million 4, Approval Rate 8% 3, 6% 2, 4% 1, 2% 26 27 28 29 21 211 212 213 214 215 216 Loan Applied ( Rm mil ) Approval Rate ( % ) % Source: Bank Negara, Monthly Statistical Bulletin, JLL Chart 7: Residential loans applied for and approved (MYR million) 8, 7, 6, 5, 4, 3, 2, 1, 8% 7% 6% 5% 4% 3% 2% 1% % 26 27 28 29 21 211 212 213 214 215 216 Loans Applied For (RM million) Loans Approved (%) Source: Bank Negara, Monthly Statistical Bulletin, JLL 6 JLL
Consumer worries over jobs Also, consumer sentiment has been affected by closures and layoffs. It was noticeable that while employment was hit quite badly during the global financial crisis in 4Q8, consumer sentiment bounced back after only two quarters. The economy also bounced back, humming at full throttle in 2Q9. This has not been the case in the past year, which has seen the employment index slide down slowly for five consecutive quarters and consumer sentiment falling to an all-time low (see Chart 8). How severe will the decline in property prices be? For the first time since the global financial crisis in 28, the average value of transactions for all sectors of Malaysian property, based on data from the National Property Information Centre (NAPIC), declined on an annual basis by 8% in 215. This fall matches the decline experienced during the global financial crisis when property prices fell 8.3% in 29. Chart 8: Consumer Sentiment Index CSI 14 12 1 8 6 4 2 Employment Index 14 12 1 8 6 4 2 28 29 21 211 212 213 214 215 216 Consumer Sentiment Index ( CSI ) Employment Index Source: Malaysian Institute of Economic Research
Chart 9: Volume and value changes in property transactions for all sectors Volume of Transaction (') 5 45 4 35 3 25 2 15 1 5 Change in Volume of transaction (%) y-o-y 5% 4% 3% 2% 1% % -1% -2% -3% -4% -5% 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215p -6% Volume of Transaction (') Change in Volume of transaction (%) y-o-y Source: National Property Information Centre As the economy is still growing at a rate of 4-4.5% and is likely to trend higher in 217, we do not think that the fall in prices will be as severe as that experienced during the Asian Financial Crisis (AFC) when values declined by 47.6% in 1998. Unlike the global financial crisis, however, the recovery will be slower this time.
Performance of residential properties in selected key states of Malaysia In 216, prices continued to fall, but the prime residential markets held up relatively well, declining by only 1.6% for those prime properties monitored by JLL in Greater Kuala Lumpur. However, we have heard of falls in the prices of distressed properties of as much as 2-25% for older, higher-end properties on the periphery of urban areas. At the state level, Penang, Johor, KL, and Selangor all showed declines in the average transacted values of residential property in 215. Transaction volumes of residential properties in KL and Selangor have been declining for the past three years and average transacted prices in these states monitored by NAPIC fell 6-8% in 216, but this was not as much as in Penang (-2%) and Johor (-34%). This could be due to the high level of stocks and a rise in overhang units while, on a national level and in other states such as KL and Selangor, the number of overhang units continued to decline. Chart 1: Volume and Value of Residential Property Transactions in Kuala Lumpur Volume 25, 2, 15, 1, 5, 7,539 7,767 16,686 18,314 1,731 2,756 9,533 13,532 Value (RM Million) 12, 1,177 9,35 1, 11,91-8% 1,521 21 211 212 213 214 215 Volume Value (RM million) 8, 6, 4, 2, Chart 11: Volume and Value of Residential Property Transactions in Selangor Volume Value (RM Million) 6, 22,28 22,676 23,54 21,697 25, 5, 2,55 16,53 4, -6% 2, 3, 15, 1, 2, 1, 51,624 21 211 212 213 214 215 Volume Value (RM million) 56,556 56,32 47,98 44,76 4,959 5, Chart 12: Volume and Value of Residential Property Transactions in Penang Chart 13: Volume and Value of Residential Property Transactions in Johor Volume 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, 3,976 1,671 Volume 6,686 18,15 6,189 6,2 6,49 13,141 11,311 Value (RM million) 12,299 Value (RM Million) 8, -2% 7, 5,189 6, 9,788 21 211 212 213 214 215 5, 4, 3, 2, 1, Volume 35, 3, 25, 2, 15, 1, 5, 12,237 7,975 4,852 3,671 4,161 19,84 2,877 27,194 31,969 32,1 23,59 21 211 212 213 214 215 Volume Value (RM million) Value (RM Million) 14, -34% 12, 8,99 1, 8, 6, 4, 2, Will the Residential Real Estate Sector Move in Tandem with the Malaysian Economy? 9
Chart 14: Residential Property: Overhang units in Malaysia 1, 9% 77.6% 76.34% 77.41% 79.96% 81.19% 9, 8% 8, 75.5% 75.86% 76.16% 7% 7, 6% 6, 6.76% 5% 5, 4% 4, 3, 3% 2, 2% 1, 1% % 21 211 212 213 214 215 1Q14 1Q15 1Q16 92,364 86,781 6,58 55,783 46,699 41,476 12,597 9,84 12,268 Chart 15: Residential Property: Overhang units in Kuala Lumpur 12, 83.51% 9.5% 1% 9.16% 9% 1, 79.55% 76.96% 89.77% 8% 77.78% 78.32% 8, 7% 71.1% 6% 6, 5% 4% 4, 3% 2, 2% 1% % 21 211 212 213 214 215 1Q141Q151Q16 8,22 11,93 9,415 7,986 4,77 3,334 1,917 1,283 622 Chart 16: Residential Property: Overhang units in Selangor Chart 17: Residential Property: Overhang units in Penang 16, 86.1% 14, 12, 1, 8, 6, 4, 2, 13,548 84.2% 11,27 84.25% 1,7 82.2% 82.33% 8,422 5,888 84.78% 85.83% 84.66% 4,155 1,324 979 79.94% 951 21 211 212 213 214 215 1Q14 1Q15 1Q16 87% 86% 85% 84% 83% 82% 81% 8% 79% 78% 77% 76% 3, 82.77% 84% 81.63% 82.9% 2,5 81.1% 82% 81.54% 78.46% 8% 2, 1,5 78.7% 78% 77.17% 76% 1, 74.65% 74% 5 72% 7% 21 211 212 213 214 215 1Q141Q151Q16 1,98 1,152 821 1,111 1,967 2,81 51 566 1,218 Chart 18: Residential Property: Overhang units in Johor 25, 74.35% 72.97% 73.28% 75.2% 76% 73.77% 74% 71.94% 2, 72% 72.6% 7% 15, 69.5% 68% 66% 1, 64% 63.55% 62% 5, 6% 58% 56% 21 211 212 213 214 215 1Q141Q151Q16 22,33 22,5 12,181 14,149 12,72 9,195 2,929 2,263 2,663 1 JLL
Conclusion The weakness in the residential market is likely to persist in the second half of the year, particularly in some states that have rising overhang numbers. We are more optimistic on an earlier recovery in KL and Selangor as the number of their overhang units continues to decline. Having learnt hard lessons from past recessions, developers have reduced their risk exposure by holding back launches during economic slowdowns, thereby reducing supply. About the author Veena Loh Associate Director Research & Consultancy +63 1327 4233 Veena.Loh@ap.jll.com The resilience seen in Greater KL is due to a demand underpinned by the youthful working population, rural-urban migration to the city and the higher per-capita income. Developers that have done well are those that have been innovative or launched well-planned townships at prices within the reach of the masses. Sunway launched a campaign that provided financing of up to 88% of the property price and also included deferred payment plans. With the provision of financing for buyers, Sunway s Mont Residences achieved an 8% sales rate within one week. Sime Darby s Elmina s first phase of 341 landed units, priced from RM6, upwards, was 95% sold in 24 hours when launched in February 216. Its second phase of 39 units, launched in April 216, was 94% sold in just four days.
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