Navigating the challenges of property market

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By Joseph Wong 

Despite the property market experiencing multiple critical calamities over the past few years, from a slowdown to a global pandemic, many property developers have successfully weathered these storms. They are proactively taking steps to prepare for future challenges. With strategic measures in place, they are well-positioned to navigate even more challenging times ahead.

While Malaysia's real estate market is currently robust, having registered 104,297 transactions valued at RM56.53bil in the first quarter of 2024, this does not mean there are no potential storms around the corner, as evidenced by the sudden Covid-19 outbreak in 2020.

One of the key strategies employed by thriving developers is leveraging their substantial cash reserves. This financial cushion allows them to delay new launches, offering discounts and incentives to attract buyers. By carefully timing their projects, they can avoid oversaturating the market and maintain a steady stream of sales.

Furthermore, some developers are providing financing options to buyers like Sunway Property, making it easier for potential homeowners to secure properties despite tighter lending conditions. This not only helps sustain sales but also strengthens the relationship between developers and buyers, fostering long-term loyalty.

Venturing into different market segments

In response to changing market dynamics, many developers are venturing into the affordable housing sector as well as niche properties. Recognising the persistent demand for affordable homes, they have reconfigured their product offerings to meet this need. By focusing on affordability, they can attract a broader segment of the population, ensuring a steady flow of sales even in a challenging market.

Property investors point out that seasoned developers, having experienced multiple market cycles, are well-equipped to ride out the current slowdown. Their experience and strategic foresight enable them to adapt their offerings and maintain market relevance.

During periods of market downturn, developers like Mah Sing Group Bhd (Mah Sing) with strong financial muscles see opportunities for strategic land banking. With the property market in a buyer's phase, now is an opportune time for these developers to replenish their land banks at favourable prices. This positions them advantageously for future growth once the market recovers.

Furthermore, many developers are adopting rapid conversion strategies, swiftly constructing marketable properties immediately after land acquisition to minimise the duration their capital remains tied up.

Additionally, many prominent developers like SP Setia Bhd, OSK Property, Gamuda Land, IJM Land, UEM Sunrise Bhd and EcoWorld Development Group Bhd have ventured into overseas markets, particularly in regions like Australia and the UK. By diversifying their portfolios and entering international markets, they can mitigate risks associated with domestic market fluctuations and tap into new growth opportunities.

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Leveraging on existing developments

Developers are also focusing on maximising the potential of their existing developments. By capitalising on projects with ready infrastructure and amenities, they can ensure continued sales and revenue generation. This approach allows them to weather the market downturn while preparing for future projects.

Moreover, strategic partnerships with government bodies and other stakeholders enable developers to enhance the value of their developments. Collaborative efforts, particularly in affordable housing, ensure that their projects meet market expectations and fulfil public policy goals.

The property sector's influence on Bursa Malaysia is significant, with listed property companies making up a substantial portion of the market capitalisation. Despite the challenges, the top property players continue to contribute notably to the overall market value, reflecting their resilience and importance to the economy.

While the property market continues facing headwinds such as material cost increase, tight lending conditions and varying government policies, analysts maintain a cautious but hopeful outlook for 2024.

Strong cash reserves a critical asset

Since socio-economic conditions fluctuate, developers with deep financial resources are better positioned to navigate challenges and capitalise on opportunities. This financial fortitude is not merely a buffer but a strategic advantage, enabling firms to sustain operations, maintain investor confidence and pursue new ventures even in uncertain times.

Large developers like Sime Darby Property Bhd and IOI Properties Group Bhd with substantial cash reserves demonstrate resilience and stability. These reserves provide a cushion against market volatility and allow companies to continue funding their projects without relying solely on external financing. This independence is crucial when credit conditions tighten or when economic uncertainty leads to more stringent lending practices.

For instance, developers with robust cash positions are often viewed more favourably by banks and financial institutions. Their strong balance sheets mean they are perceived as lower risk, which can lead to better borrowing terms and greater access to credit. This financial strength enables them to weather downturns more effectively and continue their operations without significant disruptions.

Over the past few years, particularly during the pandemic period, the property market  saw declining property sales and narrowing profit margins due to aggressive marketing and promotional strategies which added expenses to the existing challenges. These strategies, while necessary to attract buyers, erode profit margins and strain resources.

Moreover, slower loan growth is anticipated, driven by stricter lending regulations and a cooling property market. Economists predict a modest loan growth rate, reflecting the cautious stance of financial institutions amidst continued economic uncertainties. This cautious lending environment underscores the importance of internal financial strength for developers, as access to external funds may become more constrained.

The economic landscape, characterised by moderate inflation and currency volatility, further complicates the scenario. With the central bank likely to maintain the overnight policy rate to manage inflation and stabilise the currency, developers must be prepared to operate within these constraints. This stability in interest rates, while beneficial for planning, also means that companies cannot rely on rate cuts to spur borrowing and spending.

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Attracting foreign investment

Interestingly, the weakened exchange rates present an opportunity to attract foreign investors, particularly from cash-rich countries. Locations with high appeal, such as areas near major urban centres or infrastructure projects, are likely to draw interest from international buyers. These buyers, often looking to preserve wealth rather than maximise returns, view property investment as a stable and secure option.

However, there are concerns about the long-term implications of such investments. The practice of en bloc sales, where entire blocks are sold to a single investor who then sells individual units, can lead to high vacancy rates post-completion. This scenario poses a risk to market stability and underscores the importance of strategic planning and market analysis.

Smaller developers more at risk

While large, listed developers have the advantage of accessing additional funds through rights issues, smaller, unlisted developers face greater risks. These companies may struggle to secure financing and could be tempted to cut corners on quality or, in the worst-case scenario, abandon projects altogether. This potential for increased defaults and lower-quality developments highlights the critical need for sound financial management across the industry.

Strong cash reserves are a vital asset for property developers, providing stability and flexibility in a complex market environment. As the industry continues to face challenges from economic fluctuations, lending constraints and evolving buyer preferences, the importance of financial resilience cannot be overstated. 

Developers like SkyWorld Development Bhd (SkyWorld) with robust financial foundations will not only survive but thrive, leveraging their strength to seize opportunities and drive growth in the property market. Established in 2006, SkyWorld has grown into a prominent listed company with a robust financial foundation. 

Collaborations and partnerships

Collaboration is another vital aspect of landbank expansion. By forming strategic partnerships with other developers, government bodies and financial institutions, developers can pool resources and expertise to undertake larger and more complex projects. Joint ventures can also facilitate the sharing of risks and rewards, making it easier to tackle ambitious developments.

For example, Mah Sing recently launched the Mah Sing DC Hub@Southville City, its maiden data centre development with partner Bridge Data Centres (BDC), owned primarily by Bain Capital while UEM Sunrise signed a Memorandum of Understanding with LOGOS Infrastructure (LOGOS) to exclusively explore the opportunity to develop a data centre campus in Iskandar Puteri, Johor. 

Similarly, Sime Darby Property and LOGOS SE Asia Pte Ltd joint venture (SDPLOG) teamed up for an Industrial Development Fund valued at RM1bil, with five other limited partners, Permodalan Nasional Bhd via unit trust funds under its management (PNB), Kumpulan Wang Persaraan (Diperbadankan) (KWAP), Great Eastern Life Assurance (Malaysia) Bhd and investors through TA Islamic Private Investment Fund. The capital is expected to go towards large-scale industrial and logistics real estate with certified green building standards, focusing on key logistics, e-commerce and cold-chain sectors.

By continuously monitoring market trends and maintaining strong relationships with stakeholders, developers can identify opportunities and mitigate potential obstacles. This proactive approach ensures that they can continue to grow their land banks and deliver projects that meet market demands.  As the market continues to evolve, those who prioritise a pro-active approach to be well-equipped to lead the industry and deliver exceptional value to their stakeholders will continue to thrive.


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