Completed But Empty: Will Budget 2014 Help Fill Out Vacant Properties?

Hopefully the latest Budget 2014 measures will result in more realistic prices and houses functioning as homes again.

The recent budget dropped a double whammy for property buyers: An increase in real property gains tax (RPGT), ranging from 30% to 15% within five years, and the prohibition of Developer Interest Bearing Schemes (DIBS) where developers pay for interest on buyers’ loans during construction.

What will be the impact on the property market? According to property consultants CH Williams Talhar & Wong, an increase in RPGT would cause property transactions to drop, as they did this year when RPGT was increased in Budget 2013.

Selected launches have been very popular with property investors.

Indeed, outside of stampedes on projects like Sime Darby’s Bandar Bukit Raja, YTL Land’s Fennel, SP Setia’s Seri Mutiara apartments in Setia Alam and Setia Eco Hill in Semenyih as well as Eco World’s debut previews, the market of the last two years has cooled compared to the double-digit bull runs of 2010 and 2011.

While total property transactions dropped about 1% last year after having climbed more than 10% in 2010 and 2011, the number of home sales in the first half of this year dropped about 13% compared to the first half of last year.

This was from around 136,000 units to about 119,000 units, according to the Ministry of Finance’s National Property Information Centre (Napic). Number of home sales dropped by about 16% in Selangor, and by almost half in Kuala Lumpur!

“Since early 2012, when Bank Negara imposed the property responsible lending guidelines, we have seen the market slow down,” says MIEA president Siva Shanker. “Before that, it was a bit of a free-for-all. Anyone could get all sorts of loans, especially in the primary market.”

The recent launch at Setia Eco Hill saw all houses on offer booked out within a day.

Will prices drop?

In terms of value, however, the value of total home sales stayed pretty constant throughout Malaysia and Selangor in the first half of this year, compared to 1H2012, although they did drop about 26% in KL.

In terms of average home prices transacted, in fact, that still increased in this year’s first half by a national average of 16% compared to 1H2012, or 19% in Selangor and a whopping 41% in KL.

Indeed, according to Napic’s house price index, house prices increased every year since 1988. Outside of 1998 and 1999, in the wake of the Asian Financial Crisis, the index has increased even in years when the total values of property transactions dropped, such as 2001, 2005, albeit marginally.

Even for highly popular areas like Bangsar, there has to be a limit in property price increases, says real estate valuer Elvin Fernandez.

Some industry watchers also believe that there will be a surge in demand next year, before the goods and services tax (GST) is implemented in 2015.

“We do not think property prices will correct but rather stabilise allowing a greater pool of buyers to come on stream,” suggested Kenanga Research in its post-Budget analysis.

Nevertheless, property prices in some areas have increased to unsustainable levels, believes Khong & Jaafar managing director, Elvin Fernandez. “For selected hotspots in Kuala Lumpur, property prices are not four times the average household income but 15 times!

“Even for highly popular areas like Bangsar, there has to be a limit. If Bangsar is RM1.5mil, people want to live there, but are you saying that if the price is RM3mil or RM10mil, will people still want to live in Bangsar? At some point, it’s got to stop.”

Completed but empty

Even desirable neighbourhoods such as Mont’Kiara and Sri Hartamas have recently completed buildings which are only half occupied.

One property which has dropped its prices is that of a beautiful condo development located behind my own. It sits on a hilltop within a quiet and low-density part of Sri Hartamas, within striking distance of Bangsar, Damansara Heights and Mont’Kiara. For many, you can’t get a more desirable address than that.

The property itself is gorgeous with all mod-cons: exclusive lift lobbies where unique access cards open only to your apartment, video intercom, fibre optic backbone, etc. Even though the development was completed about three years ago, however, more than 60% of this tower is empty.

“This tower was originally bought en-bloc by a tycoon who intended to re-sell for profit but it has taken some time because they are all big units like over 2,000, 3,000 and 4,000 sq ft,” says a source close to the development. “Now the bank is also involved in the sale, and although the developer’s last price was over RM800 per sq ft, the price has recently been reduced to RM720 per sq ft.”

Another condominium in a central Damansara Heights spot has been quite empty since being handed over in 2011. 92 out of 318 units are occupied, which works out to under 30%, says a source close to the development. In fact, there are still developer units available for sale.

Siva: Owners of apartments would sometimes hang on to their investments, while waiting to get the right price, than look for tenants.

The majority of sub-sale owners here are foreigners, including investors, from Europe and Singapore, as well as block owners holding between 25 to 40 units, who engage agents to market their units.

Many times, owners of apartments such as these would rather hang on to their investments in the hope of selling for a profit, than look for tenants, reckons MIEA president Siva Shanker.

“We as estate agents often go to these owners and ask them, ‘Would you like to rent your unit?’ They say, ‘No, no, I want to sell!’ and we say, ‘But you’re getting nothing for it now, why don’t I bring you a tenant that will give you at least 6K?’. Maybe they don’t want to spend RM150K to renovate, put in kitchen cabinets, wardrobes and all that. They just leave it and don’t care.”

“It’s a distortion of the market,” admits a young developer. “Too much money speculating on property, while the main core of market cannot afford those prices.”

“The worst part about it is when absentee buyers don’t pay management or maintenance charges. Sometimes they say there’s no income from the unit so they don’t want to pay. The result is delapidated facilities and a security concern for those few units which are occupied.”

Even developers don’t like properties which stay empty after being handed over. “We don’t want it empty,” says one representative of a leading developer. “It doesn’t looks good.”

Too many luxury condos, not enough expats

Even if owners are willing to rent, the average occupancy rate for existing luxury condominium in KL has been on a downtrend since 2008 except for the Kenny Hills area, according to C.H. Williams Talhar & Wong’s Property Market Report 2012. “In the first half of 2012, the average occupancy rate further decreased by about 5% to 61.6%.

This is because new units were entering the rental market at a faster rate than the slower projected demand from working expatriate professionals entering Malaysia.

Furthermore, many more luxury condo units will be completed in the Klang Valley this year, says the report. “Approximately 6,113 units by 25 developments are expected to be completed by 2013, giving the total cumulative supply registering at 29,038 units by 2013.”

Empty offices

Officially, about 77% (24mil sq ft out of 104mil sq ft) of Malaysian office space is occupied, although anecdotally, experts profess to seeing several buildings “quite vacant with hardly any tenants”.

With its luxurious fully glazed and curved facade, this office building is a looker located just next to the SPRINT highway, opposite Tropicana City Mall. Yet, even though it was handed over to its strata title owners since early this year, it is still only about 10% to 20% occupied, says an estate agent who sells units there.

Signs recently came out for a furniture retailer to take up the ground and 1st floor, while one floor was sold to a Japanese company, she says. Nevertheless, the rest of the units remain empty.

Unsurprisingly, prices and rentals have dropped. Launched at about RM270 per sq ft, owners had originally listed the units for RM550 per sq ft, but some of them are now willing to go down to RM440 per sq ft, she adds. “Asking rental has also gone down, from originally RM4 per sq ft to RM2.50 or even RM2 per sq ft.”

These prices are just asking prices going down, however, says Siva Shanker. “Take condos around KLCC for example, people were asking for RM2,500 psf and then in 2008, 2009, people didn’t want to buy anything anymore, so prices dropped to RM1,700 or RM1,800 per sq ft. But these are mainly asking prices. In reality many of the good locations stayed flat in transacted price. People are still making money compared to the price they first paid.”

Hopefully, this would ultimately mean more realistic prices. Given the banning of DIBS and credit controls, credit may be less and less easy to come by, but prices may ideally approach fundamental values and keep the market moving.

The increase in real property gains tax will also make it more attractive to rent than flip. “Instead of trying to sell at a high price, rent it out for the next two to three years,” advises Siva. “Don’t leave it empty, waiting for it to turn. You don’t know how long it will take. Get a rental income.”

I hope this ultimately means all those properties we are told are so scarce and in-demand but end up empty would, rather than just being owned and held, actually be occupied and lived in. Just seems to make more sense, doesn’t it?

Is now the time to take advantage of an uncertain market? Check out all the latest real estate projects and discussions about the impact of Budget 2014 at Star Property Fair 2013, happening from Nov 8 to 10 at KLCC Convention Centre. More information from fair.starproperty.my.

Source: The Star

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