Property Market Outlook 2010

2009 General Economy Review

The Malaysian economy contracted in 2009, with growth in real domestic product (GDP) recorded -3 % mainly due to weak external demand following the economic crisis, leading to lower private investment activities in the country. Fiscal interventions earlier in the year by the government has boosted public spending and helped counteract the impact of the externally induced slowdown on the domestic economy by the later part of the year. Measures taken to stabilise the economy has also improved consumer and business confidence in the second quarter. Contraction in all the key sectors has also moderated in the second quarter 2009.

The following table shows the economic fundamentals of the Malaysian economy for the past 5 years (2003-2009)

  2005 2006 2007 2008 2009
GDP (% growth) 5.0 5.9 6.0 4.6 -3
Economic Activity:
Agriculture
Mining
Construction
Manufacturing
Services

2.6
-1.3
-1.8
5.3
6.7

5.2
-0.4
-0.5
7.1
7.2

3.1
3.3
5.2
3.1
9.0

4.0
-0.8
2.1
1.3
7.2

-2.3
-2.9
3.5
-12.1
2.1
Employment and Labour:
Labour force (‘000)
(% growth)
Unemployment rate (%)

11,291
4.1
3.5

11,545
2.2
3.3

11,775
2.0
3.2

11,968
1.6
3.3

12,061
0.8
3.9
Consumer Price Index 3.0 3.6 2.0 5.4 0.5

 

Economic Outlook For 2010

The outlook for 2010’s general economy is promising based on the overall optimistic sentiments and forecast from many quarters and various positive measures earlier promised by the government. The international reserves of Bank Negara amounted to RM331.3 billion as at 31 December 2009, which is sufficient to finance 9.8 months of retained imports and is 4.1 times the short term external debts.

As projected by Bank Negara, Malaysia’s economy is expected to expand by 4.5% to 5.5%, as growth picks up momentum after the positive growth of 4.5% in 4Q2009, underpinned by the strengthening domestic demand and improving external environment. Growth is also expected to be increasingly driven by private sector activity, and private consumption would benefit from further improvements in the labour market, rising disposable income and improved consumer confidence.

The central bank expects the manufacturing and mining sectors to record positive growth in 2010 as external demand for major products such as electronics, crude oil and natural gas recover. The services sector remains the key contributor to overall GDP growth, with growth expected to be broad-based.  Inflation is expected to rise with the recovery in global economic activity, the upward trend in global commodity prices, and some revisions in administered prices by the government. However, it is expected to remain at modest levels during the year, up from 0.6% last year and increase to between 2 % and 2.5%.

Apart from the above projection by the central bank, the optimistic outlook on the economy is also echoed by other quarters. Some economists have observed that so far this year, domestic economy continues to show signs of strong recovery. CIMB Economics Research meanwhile has forecasted 1Q growth of a strong 6.8%, based on early indications of a strong rebound in exports and consumer spending. More good news is the fact that foreign investors are beginning to show more interest in Malaysia, as they look for higher yields and anticipate more major announcements on economic reforms in the months ahead. This is proven when some 61% of the net supply of MGS (Malaysian Government Securities) have been snapped up by offshore investors. This has helped drive the strength of the ringgit higher and make it one of the best performing currencies in the region. The ringgit has previously closed at RM3.307 against the USD and Barclays Capital believes that the ringgit could strengthen to RM3.20 against the greenback by 4Q of 2010.

Another factor to consider is the expectation of further interest rate increase. The governor of Bank Negara has been talking about the need to normalise interest rates for some time now in the wake of improving economic data. On March 4, the central bank has raised the overnight policy rate by 25bps to 2.25% and market observers are generally of the view that another rate hike of a similar quantum could come later this year. This is based on the current scenario whereby consumption has returned to pre-crisis level and rising consumer prices.

Apart from the above, the wellbeing of the economy will also largely rely on the government efforts to reduce its budget deficit, especially from investors’ point of view. The government has so far announced measures such as cutting subsidies and disposing of government assets which have yet to be implemented. At the same time, the government has also announced more spending plans – a monthly allowance of RM200 for 33,000 police officers, and also promotions for government dentists, doctor and pharmacists that could cost it another RM200 million. This measure, whilst increasing the spending power of some public servants could also mean a further strain on the budget deficit. On a cautionary note, while the domestic economy is showing signs of recovery and growth, there is still concern that economic reforms for sustainable long term growth are not moving fast enough to keep pace with global developments in the wake of the recession.

As such, the actual undertaking and proper implementation of the recently unveiled New Economic Model (NEM) to replace the old NEP and 10th Malaysia Plan which will be announced on June 10 this year, will play an important role in turning the positive sentiments on the economy into a reality. The gist of the NEM is to turn Malaysia from a country acknowledged as being trapped in the middle income syndrome into a high income nation guided by three principles – high income (targeted at USD15,000 to USD20,000 per capita by 2020), sustainability and inclusiveness to be driven by eight strategic reform initiatives:-

  • Re-energising the private sector to lead growth
  • Developing a quality workforce and reducing dependency on foreign labour
  • Creating a competitive domestic economy
  • Strengthening the public sector
  • Putting in place transparent and market friendly affirmative action
  • Building knowledge based infrastructure
  • Enhancing the sources of growth and
  • Ensuring sustainability of growth

2009 Property Market Review

Residential property continued to dominate the overall property market, capturing 62.5% of the total volume and 52.3% of the value of transactions. Nationwide the first half of 2009 recorded 96,896 residential property transactions worth RM17.81 billion. Residential sub-sector was lethargic as seen in the contraction of all activity indicators but otherwise can be generally regarded as stable. Higher take-off of projects related to the stimulus packages in the second quarter contributed to the sector’s improved performance. Residential and non-residential sectors continued to support the construction industry. Sales performance of newly launched housing units at 32.6% improved over H2 2008 (27.6%) supported by accessibility to ample financing and lower cost of borrowing. There was falling numbers and value in residential overhang, due in part to the lower numbers of new units launched. In terms of capital values, prices of landed residential properties were generally mixed although sought after locations remained sturdy

In the industrial sub-sector, overhang declined and the unsold under construction and not constructed units increased showing a mixed performance. The purpose-built office sub-sector saw lacklustre performance whilst the construction activity in office sub-sector moderated. Likewise, the performance in the shopping complex sub-sector was not encouraging.

On the whole, prices of all property types remained stable with isolated movements noted in selected locations. Generally, prices of landed residential property held firm at last year’s prices, even in the face of the country’s current economic downturn. On the other hand, stratified residential properties saw some declines even in good locations. Notwithstanding this, the on-going promotion of properties on the international platform has brought forth positive results. The announcement of substantial liberalisation in the service sector last April and the lifting of the 30.0% Bumiputra equity requirement for newly listed companies in June should make Malaysia more attractive to foreign investors; therefore FDI is expected to increase.

Property Market Outlook For 2010

The Malaysian property market recorded a modest performance in the first half of 2009, in line with the weaker economic growth of the country but improved in the second half of the year.

In spite of the moderate overall market performance, response to new launches in the residential primary market improved. A total of 16,069 units were offered for sale nationwide, of which 5,239 units were sold. Sales performance was 32.6%, improving from 27.6% in H2 2008 (12,797 units launched).

The outlook for 2010’s property market is promising with mixed sentiments and forecast from various quarters. The various measures promised by the government as earlier mentioned coupled with the government economic stimulus package of RM67.0 billion which started rolling last year which would continue until the end of 2010 would help sustain the market activity. Malaysia property market is expected to recover in 2010 based on the residential property sales which have started to pick up in the second half of 2009

Housing developers in particular are generally upbeat and optimistic (with some smaller developers still remaining cautious) on the future property market condition underscored by the expected rise in disposable income and improved consumer confidence. This would be aided by the banking sector which is expected to remain accommodative towards the property industry with attractive financing schemes and relatively low interest rates.

In the primary housing market, the absorption of the unsold housing units since Q1 2007 has been encouraging. Construction activity would remain moderate as some developers will continue to be cautious but some initiatives in the housing sector under the coming 10th Malaysia plan would be one of the drivers for the housing construction sector. As for the secondary market, continued movements are expected despite the 5 % RPGT for sales within 5 years of purchase which has been effective since January 2010. In terms of capital value, generally house prices would sustain but some increases are expected for houses in sought-after locations depending on the housing types.

On the demand side, landed properties are expected to continue to perform better than stratified properties, with high end and luxury condominium taking the brunt due to heavy reliance on expatriates who left the country during the crisis and are yet to return in droves. On a positive note, liberalisation of FIC guidelines would increase the competitiveness of Malaysia as a preferred investment destination. Acquiring properties in Malaysia would also be more attractive as the approval is no longer required from FIC and this hopefully would help alleviate the oversupply and high number of vacant units of this type of residential property in the long run.

In the office property market, the general sentiment is that it will be tough for the next 2 to 3 years. Vacant office premises are expected to increase in the next two years with better located buildings with good features faring better. Rental rate is expected to decrease further to as low as 15% from 2009 level whilst capital values which have seen a marked decrease in the past few years are expected to generally stabilise. As such yields are expected to slowly rise in the future which in turn, will improve investment demand. The office market relies much on the service sector which in turn is affected by foreign direct investments which hopefully will improve with the current liberalisation of the sector. The service sector growth is projected at 3.6% for year 2010, compared to 2.1 % in year 2009.

In the retail market, the performance in the future will rely much on the increase in urban population, the increase in consumer spending power and household income, and the increase in tourist arrival which is expected to reach 24.6 million in 2010. The relatively young population of the urban areas will support sales in the retail market which in turn will favourably affect the retail property market especially rental rates. Retail market activity in terms of transaction and rental will continue supported by the continued supply of retail spaces with the launching and proposals of new shopping/commercial centres such as the Platinum Park (near KLCC), Keramat City Centre and Setia Eco Commercial Centre (near MidValley), and the refurbishment of dated centres such as KL Plaza, Summit USJ and UE3.

In the industrial segment, the performance of the property market heavily relies on the manufacturing sector which commands the second largest contributor to the GDP after the service sector. The outlook for this property sector remains unfavourable in the near future compared to other property types due to the sharp decline in the industrial production in year 2009. However, the manufacturing sector being Malaysia’s traditionally strong key sector, is expected to play an important role in achieving the NEM’s target and will thus receive special focus by the government. This hopefully will positively affect the market activity of industrial properties in the longer term. Going forward, the 2010 outlook for industrial property market, particularly in the Klang Valley is expected to ride on the promising outlook of the general economy and overall property market, albeit at a lesser rate if compared to residential property market. The positive factor that can contribute to the performance of industrial property market are emerging trends in industrial property developments such as the growing interest and focus on the development of halal parks/hubs, “Super link” terrace factories and more emphasis on semi detached factories to cater for the medium-sized industrial activities which forms the bigger share of the market portion.

Source: The Property Market Report, The Edge and NHC Research