Variables keeping the property market on its toes
Contributed by Datuk Paul Khong
2022 came in as a recovery year when the Covid-19 pandemic was recategorised into an endemic. Unfortunately, the Ukraine War, which started on Feb 24, has taken a toll on all international markets. This war is expected to continue more into the cold winter months and demand for oil and gas (O&G) will continue to peak resulting in higher fuel prices. This has also resulted in escalations in raw materials, construction costs and consumer goods prices. The disruptions in supply chains in the international markets are causing prolonged chaos and delays impacting many related markets.
Moving to the Malaysian shores, we note the following:
- With the Housing Ownership Campaign (HOC) and Loan Moratorium ending in Jan 2022, the property market had to work through the year on its own merits. It was a difficult start for the first half of 2022 as many buyers had already picked up their units earlier during the HOC 2021, coupled with the low lending rates offered.
- Local construction costs have also continued to soar into 2022. According to the Department of Statistics Malaysia (DOSM), the building materials cost index (BCI) for all building categories in Peninsular Malaysia, Sabah and Sarawak increased to 22% in August 2022 as compared to a year ago.
- As of November 2022, the overnight policy rate (OPR) sits at 2.75% after four revisions of 25 bps each since May 2022. This consistent increase in OPR has caused many borrowers to struggle financially and economists expect Bank Negara Malaysia to further increase OPR in the coming months.
- Developers are not spared from the ongoing cost escalations but are pushing hard to achieve high sales targets despite compromising profit margins. Many are re-introducing innovative financing packages in the residential market. They are targeting landed developments at attractive prices in their newer townships. Besides, the typical bread-and-butter medium and affordable range, high-rise strata condominiums are the key focus of the developers to fulfil the local housing needs.
- Malaysia is truly and naturally lucky in 2022 as West Texas Intermediate (WTI) crude oil price hit its peak in June 2022 at US$124 per barrel and is now trading well at US$93 per barrel in November. The lowest level in the last three years was at US$11.26 per barrel in April 2020. The Government Fuel Subsidy Bill is expected to reach RM28bil for the year. To date, our petrol prices at the pumps are still at a record low rate of RM2.05 per litre for Ron 95. For comparison purposes, in Singapore across the causeway, Ron95 now costs about RM9.50 per litre (SGD2.85 per litre).
Overall, a general wait-and-see attitude is expected to be present for the rest of 2022. As a result, the recovery of the property sector is still bumpy into 2023, led by cyclical risks of rising borrowing costs and inflationary pressures. However, some improvements are in the works for the respective residential, office, retail and industrial sectors.
According to the National Property Information Centre (Napic), the value per transaction for Malaysian residential products saw a year-on-year (y-o-y) increase of circa 4.7% to RM392,682 per transaction in 1H 2022 from RM375,036 per transaction in 1H 2021.
The volume of residential property transactions has markedly improved by 26% y-o-y, from 92,015 units in 1H 2021 to 116,178 units in 1H 2022. The value of transactions also improved by 32% y-o-y, from RM34.5bil in 1H 2021 to RM45.6bil in 1H 2022.
A positive start for 2023 is underway should this recovery momentum carries through. We foresee property prices will continue to move northwards slowly (although still with strong resistance due to uncertain market conditions worldwide plus high inflationary pressures and dwindling local demand) with the current high-cost push elements in construction and the continuous petrol price subsidies.
The primary residential affordable segment will stay strong whilst landed products will do well but buyers should expect to pay more for new offerings in 2023.
The office market is on a clear recovery trajectory with positive improvements in net absorption on the back of a reactivated leasing market as businesses resumed normalcy. However, landlords will still face challenges in maintaining competitive rental rates amidst rising vacancy rates and costs of doing business, even as supply growth in newer and better-quality office buildings has moderated in the recent past.
The flight-to-quality phenomenon to newer offices at competitive rental bodes well with evidence of asset repurposing and rejuvenation works on older offices, for example, Wisma KFC along Jalan Sultan Ismail into a 430-room Hyatt Centric hotel, Menara Zurich along Jalan Dewan Bahasa into a columbarium and Bangunan KWSP along Jalan Raja Laut.
The retail sector (especially the food and beverage section) has shown vast improvements in 2022 as footfalls to the malls improved and many businesses are thriving again. We see gross turnover rent (GTO) figures increase to a tune of 80% to 100% y-o-y against 2021.
We observed a healthy return of visitor footfalls to the city and suburban malls. Some good ones have achieved close to 100% or better than pre-covid numbers. As of 1H 2022, tourist arrivals recorded 2.13 million persons with tourist expenditures of RM6.21bil, a stark improvement from the previous year. In this regard, we look forward to a sustainable tourism recovery into 2023 with the hope of achieving pre-Covid arrivals.
As we move into the final quarter of 2022 and with the festive seasons of Christmas 2022 and Chinese New Year and Hari Raya 2023, we expect to see a bumper year for many retailers and operators moving ahead.
The outlook for the industrial sector remains promising with stable growth in the e-commerce and manufacturing sectors. The demand for high-specification warehouses/facilities remains high, underpinned by the growth in manufacturing, logistics, data centres as well as the pharmaceutical and electrical and electronics (E&E) sectors.
The industrial property sector is expected to remain stable despite market uncertainties and issues like labour shortage, unstable macroeconomic conditions and geopolitical tensions. The industrial sector will still lead the market in 2023 as it is one of the essential economic pillars to attract foreign direct investment (FDI).
The recent changes in the lineup of the Unity Government will now re-enhance investors’ confidence in its new leadership and this will stabilise local politics. Currently, the market anxiously awaits the new directions of the country’s economic and fiscal policies. Budget 2023 is still outstanding to date and an urgent rewrite is much needed before year-end.
We hope the new upcoming Budget will help in rejuvenating the Malaysian economy and boost the entire property sector which has been lagging for some years. In this context, we look forward to the following measures:
- The HOC will make a return and some government fiscal measures like Real Property Gains Tax (RPGT) and Stamp Duty exemptions will be allowed to re-boost the marketplace.
- Relaxation of foreign property ownership in the mid and high-end residential sectors.
- The upcoming budget 2023 should address the entire property sector (not just the B40) with the main objective to get the property market up and going again.