Property gets a beating, and operating expenditure is under-budgeted

Fellow blogger TongkooiOng of www.tongkooiong.com blogs about the recent Budget effect on the property market.

FRIDAY, 25 OCTOBER 2013

As I mentioned in last week’s article, I expected the property sector to be hammered. Complaints of rising prices and affordability triggered by more foreign buying and the need to address social inclusion has resulted in very severe measures just announced in the budget.

The removal of DIBS (interest paid by the developer during the construction phrase) has removed a major “warrant” price for new launches. By just paying a small deposit, say 10%, buyers were free from any subsequent payments until completion, some 2 to 4 years away.

While raising the RPGT for everyone has the effect of reducing speculation, the perpetual and higher RPGT on foreign buyers will take a heavy toll on demand too. This is especially so when it is also combined with raising the minimum price for foreign buyers to RM1 million from RM500,000 previously.

There are many properties priced to sell at just above the RM500,000 threshold. These are small units, like the SOHO and small apartments, ranging in size of between 500 and 1,000 sf and priced at around RM700 to RM1,000 psf. This was the fast moving market segment.

We know the prices of new launches are at about a 10% to 20% premium to a comparable property in the secondary market. And new launches sell quickly in comparison too.

The new measures will change the game. The “warrant” premium is substantially gone. As such, we expect in the short-term, transaction volume will fall substantially. Prices will fall too, perhaps by as much as 10% to 20%.

On the overall budget, the Government is expecting its deficit to fall to 3.5% of GDP. I believe the operating expenditure is under-budgeted. Emoluments are expected to rise by just over 3%. We have not seen such a small increment in recent years. Also, subsidies are forecasted to fall by some 20% or over RM7 billion. What subsidies will be cut, besides sugar?

It is most likely that we will see supplementary budgets in the months ahead.

The budget is contractionary overall. This is positive for the long-term. The announced 6% GST from 2015 is also in the right direction, especially since it is accompanied by reduction in personal and corporate tax rates.

The splattering of small handouts, I suppose, is populist to gain the support of the poorer communities and a way to offset rising cost of living.

I expect the stockmarket to be adversely affected but the Ringgit will take the news positively… with some skepticism.

Budget 2014

There is some focus on cooling property prices in Malaysia in this new Budget announced today. If anyone who has bought properties and are looking at flipping upon completion (as many do...) - they're fucked!  

The new tax scheme is now a whopping 30% if sold within the 1st 3 years:

1st to 3rd year : 30%
4th year : 20%
5th year : 15%
Beyond 5th year : no tax

Those above are for Malaysians only. Non-citizens pay 30% for selling their properties within the 1st 5 years and 5% beyond that. Expect the higher end properties to suffer in sales because of this as foreigners start to find other markets more attractive to invest in - for example Thailand where there is no RPGT. Also, the minimum price that can be purchased by foreigners now is RM1million (up from RM500k). Those studio units, SOHO, SOFO, SOVO usually priced between RM600k to RM1million are expected to suffer. Developers should build less of these in the 1st place as they are not sustainable although they are popular due to the pricing.

Perhaps what will hit developers most is the abolishment of DIBS (Developer Interests Bearing Scheme). While the original intention of DIBS is to promote home ownership by making homes easier to own, the reality is, DIBS has become a haven for speculators to the extent every developer and his dog has been offering DIBS.

But it will be interesting to see how this will really affect property prices as all previous efforts such as reintroduction of RPGT and the 70% capping on 3rd property loan seems to be not as effective. Instead, I think the property prices are already cooling anyway due to over-building especially those priced over RM500k. We rarely or never see any HOMES in decent locations that are priced below the affordable threshold of RM350k for most wage earning Malaysians these days.

Mayland Launches the Dorsett Residences

Following their rival Low Yat's launch of the Tribeca last year, Mayland is going head on with their Dorsett Residences, built right beside their flagship Dorsett Regency hotel and opposite the Tribeca.

 

With prices at the Tribeca hitting a dizzying RM2,000psf, Mayland wants to follow on these footsteps... So, over RM1.2million for a 650sf studio apartment. It will be a 30 storey building with 250 units of apartments as compared with Tribeca's 300+. Judging from the plot of land they have (red box), which is extremely tiny... it looks like the Tribeca (blue box) pale in comparison of density. Certainly it will be challenging to build any car parks up such a tight space, so Mayland has proposed a valet service with a Korean-style car park lift similar to the yet unbuilt Vida Soho in Bukit Ceylon.

As I blogged earlier, there really isn't much difference in unit layout in all Mayland's projects. Like many developers in Malaysia, they tend to recycle every useless architecture drawings they already have. But Mayland need to change their interior designer more than anything else... During my visit to their showroom, the interior design almost made me faint.

While I was looking at the chandelier (above) in horror, the salesman informed me that it is included in the package, I immediately went "NOOOOOOOOOOOOO!!!"

I felt like I was in a very luxurious massage parlour in mainland China. The glass bathroom walls however is a good idea to help deliver sunlight to the windowless lounge and kitchen/dining area as well as deliver a stunning view to whoever is watching the bathroom

While Tribeca is trendy, Dorsett is "luxurious". If grandpa and grandson are ever going property hunting together, be sure the old man will choose Dorsett while the young lad go for Tribeca. Imagine he brings his girlfriend home... she will think he is still living with mum!

Location wise, Dorsett is slightly better than Tribeca being at the back of the Starhill mall and will just be a small hop from the upcoming MRT station - important for the older man as he can't walk that much. Also, the Dorsett price tag while it rivals Tribeca, comes with an un-assigned car park which the latter does not provide. Dorsett also comes fully furnished, although you might rather they don't furnish it at all!

BTW, has anyone got their booking downpayment back from their Dorsett Place Waterfront project yet?

The Fennel at Sentul

Quite timely after my rant about the lack of architectural value in Bukit Ceylon, we now wander off to Sentul where a lot of exciting and artistic stuffs are happening. Quite literally...

Sentul used to be a rough area. Back as far as 2000, developer YTL came in and promised to reinvent the place into Sentul West and Sentul East, beginning with the launch of The Maple and Tamarind. I remember I went for the launch of the Tamarind when I could get a 3-bedroom unit for a cool RM200k... but I did not. Today this has appreciated 3 times over to RM600k....

picture above: The Tamarind (courtesy of ytlcommunity.com)

Then YTL gated the park which was once Malayan Railway land and invited KLPAC (the KL Performance Arts Center) to set up shop, the whole place suddenly has life and meaning. Sentul is slowly transforming, although very slowly... it is very exciting to see what it is turning out to be. There are now new commercial buildings coming up which truly does not identify with the typical Malaysian landscape but it's truly refreshing...

pictures above: D7 (courtesy of skyscrapercity.com)

My next foray into Sentul was an attempt to purchase an apartment at Mutiara Sentul, a couple of years back which ended up in disaster. But I still think Sentul is quite a promising area. Connectivity wise, it's  in the middle between the KL city center and the northern and eastern parts of the city with expressways into PJ and Mont Kiara. We also have the existing LRT stations, monorail and also the KTM Komuter right in the heart of Sentul. The only problem is, the place is still considered rough, especially at night when it gets relatively quiet unlike vibrant Bangsar and Bukit Bintang and this needs to change for Sentul to be successful. 

Recently we see a few bill boards advertising YTL's latest project, The Fennel which is really, a twin of the Capers. They are now currently rising in construction in the KL skyline looking like some alien robots just landed.

picture above courtesy of 37 Exposures @ forum.lowyat.net

So that brought me to their showroom which unfortunately turned out to be disappointing. Not only because the 1st 2 of 4 blocks launched were fully sold out within 2 days of their launch back in August, the sales girl in attendance was totally unhelpful. Every question I asked her she told me to refer to their website which made me wonder what is the expensive show room and her employment for. YTL should just advertise their website and forget about having a showroom at all. Finally, after hearing me grunt a lot, she decided to answer my questions which I just found out cannot be obtained from even their website...

This is not only a freehold property, it is also a residential title which is so rare these days. The price was about RM600psf and there was only a 3-4% hike between the 1st and 2nd launch. That means, the price range was somewhere between RM700k and RM900k which is rather interesting considering they are relatively large and nicely laid out 2 to 3 bedroom units from 1100sf to 1500sf. 

There are typically 3 types of layout - Type A1 and B1 are 3 bedroom units. Type C4 is a spacious 2-bedroom unit.

The type A1 below has the smallest size starting from 1186sf.

Type B1 below is the largest at 1554sf. However, for a 3-bedroom unit, I find the A1 much better although the B1 has an additional maid room. All 3 bedrooms in the A1 are en-suite. 

The sole 2-bedroom unit is pretty spacious at 1,200sf. But the 2nd bedroom is not en-suite as well.

So, that leaves the A1 as the best choice unless you are thinking of having a maid.

The best thing I like about the units are they are designed with "Asian-style" kitchen which allows for proper cooking unlike those open style kitchen some developers are so fond of these days. All in, the freehold title, the residential title, the friendly living layout, connectivity of public transportation and proximity to KL and PJ city centers make this The Fennel a good grab for our collection in my opinion... Not forgetting that with this entry price, owners can also afford to let out very competitively from RM3,500 onwards for a decent 6% yield. For 3-bedroom units of this status, that will be very attractive to tenants.

Bukit Ceylon Today

In 2008, this blog started off with Bukit Ceylon, then we ventured everywhere including Australia, Thailand, the Klang Valley, Penang and today, we are back again in Bukit Ceylon. Let's take a look at how some of the "Mega Projects" here have turned out.

Unfortunately, compared with the KLCC area, Bukit Ceylon is lacking any iconic architecture with the likes of the Troika. In fact... it is rather dismal. The largest project to date here at Bukit Ceylon is Verticas Residensi below...

One can be forgiven to mistake the Verticas for an office complex. For a supposedly grand 5-star condominium, one of the blocks occupied by serviced apartment operator, Lanson Place, it is shocking that they passed off this hole in the wall (picture below) as their grand entrance.

Perhaps it is not as shocking as UMland's use of this cheap corrugated zinc roof over their front porch (picture below) for their flagship Suasana Ceylon just opposite the Verticas. UMland is embroiled in a tussle over common areas at their earlier project at Seri Bukit Ceylon perhaps says it all about their style...

Suasana Ceylon (above), which is built off the edge of a hill does not boast of any amazing design... rather plain and lame to say but nothing prepared us for this grey box with windows called SixCeylon (below).

By marketing and form, Bolton's SixCeylon promised an elegant and trendy design. The end result is looking to be a complete disaster. Perhaps the architect died and they cremated him with all his drawings before realizing they've forgotten to make copies...

The best design award, rather unexpectedly...goes to relatively unknown Laman Ceylon.

And it is the most unfortunate thing for SixCeylon to be sited right beside Laman Ceylon....

Before we forget, UOA has also made their claim in Bukit Ceylon. However, they cannot decide if they were building car parks or apartments...

Yet another housing affordability article, this time by Malaysiakini...

Reaffirming my views that there is over speculation of the property market, developers should now look at providing homes for the masses with a view for longer term appreciation instead of for short term flipping. This involves:

1. Doing away with DIBS - basically this just adds into the costs of the property rather than make them easy to own

2. Provide basic homes - no furnishing package, no fancy kitchen etc

3. Focus on family layout instead of SOHO, SOFO, SOVO, SOwhatever marketing ploys

The Widening Housing Affordability Gap

by Khairie Hisyam

A hot button topic in the Malaysian property circle at the moment, housing affordability is a sore point for many Malaysians who can only dream of owning a house to call home.

Amid talk of surging house prices being unsustainable and pointing towards a property bubble in the residential property sector, the fact is that the man on the street has little care for such market concerns —he just wants a roof over his family’s head.

With that in mind, the prevalent feeling these days is that houses are increasingly becoming too expensive for many Malaysians in the middle-income segment, who can only look on as prices surge faster than their income levels can keep up with.

That’s how it feels for Anne, 27, who recently welcomed her first child. Together with her husband, her household earns between RM3,000 to RM5,000 a month but finds that prices for houses that suit their needs are too high.

“The right ones are too expensive, while the ones we can afford are not suitable,” said Anne to KiniBiz. “Often the affordable ones are too small and in poor locations.”

Farlina, 26, concurs, saying that she and her husband just want a safe house in a location that fits nicely between their respective places of work.  “Prices are unbelievable. Some intermediate houses are up to RM450,000 where we’re looking.”

The side effect of curbing household debt

In a previous series by KiniBiz on the property industry, there is much discussion highlighting excessive market speculation as the reason for skyrocketing house prices in recent years.  While some action has been taken in effort to curb the speculative elements, how much impact they have in helping genuine homebuyers remains to be seen.

For one, the real property gains tax (RPGT) was re-introduced in 2010 after a temporary exemption between April 1, 2007 and Dec 31, 2009, although with lower rates which has prompted some quarters to call for higher rates and tougher implementation.

There has even been the argument that further raising RPGT rates would accelerate the increase of house prices.

Additionally, concerns surrounding rising household debt levels have indirectly affected genuine housebuyers.  As part of a wider effort to curb the rising indebtedness of Malaysian households, Bank Negara recently capped capped mortgage tenures to 35 years, which also follows the issuance of its responsible lending guidelines to banks last year.

The indirect impact is that as banks tighten their lending criteria in response to Bank Negara, genuine housebuyers in the middle-income bracket find it harder to qualify. While Farlina and her husband collectively earn about RM8,000 per month, they can only apply for mortgages using her income.

“We did have problems with mortgage applications especially since my husband is self-employed,” said Farlina to KiniBiz. “And we can’t find a house using only my loan [capacity].”

Choong, 28, and her husband also faced problems with mortgage applications, especially when asking prices for sub-sale houses did not match the lower valuation given by banks. The dilemma then is whether to take less favourable terms or find a way to foot a huge down payment sum.

While Choong has since found a house her family can afford, she remembers very well the pressure to find the right house. “Before we got our home, we kept worrying that our household income may not be enough to buy a house because prices keep increasing day by day.”

The growing price-income mismatch

Choong’s concern is not just sentiment — house prices have indeed risen faster than income levels.

According to the 2012 Household Income Survey by the Department of Statistics, the national average monthly income of the Malaysian household is RM5,000, with an average annual growth rate of 7.2% between 2009 and 2012. The national median monthly household income stood at RM3,626 while the average annual growth rate between 2009 and 2012 is 8.1%.

KiniBiz via simple calculations found that earning RM3,626, a borrower with a 35-year tenure and interest rate of BLR -2.2% can expect to get  a maximum of RM239,156 in mortgage amount, but this figure precludes any debt obligations on the borrower’s part such as student loans, car loans and personal loans.

Given that cars and student loans are nearly a given for many Malaysians, the actual amount they qualify for is presumably much lower. For example, adding a monthly car repayment obligation of RM500 a month reduces the amount to RM203,476.

In comparison, the Malaysian all house price index rose by 9.9% and 11.8% in 2010–2011 and 2011–2012. Based on the Property Market Report 2012 published by the National Property Information Centre (Napic), Ministry of Finance, the national average transacted residential property price for 2012 is at RM248,515.

As income levels grow at a more stately pace, the inevitable implication is that house prices spiralling beyond what most of the middle-income group can afford to pay — and as they struggle to boost their income, prices are rising even faster than they can keep up with.

In addition, rural–urban migration is set to accelerate as Malaysia pursues its objective of becoming a developed and high-income nation. With certain areas being the focus of the population movement, the national average house price does not tell the whole picture.

Zooming in on certain ‘hot’ states, the average is higher — Kuala Lumpur for example sees an average house price of RM489,052 while Selangor’s average is RM338,508. The average house price in Penang is RM304,858. The distinction of highest average residential property price goes to Putrajaya with RM603,413 per unit.

The minister of urban wellbeing, housing and local government Abdul Rahman Dahlan has recently acknowledged affordability concerns, quoting the Department of Statistics in saying that 80% of Malaysians earn below the RM6,954 mark and they can only earn RM300,000 in mortgages.

Comparing the figure with Napic’s finding in its 2012 report that only 31.7% of new housing units were priced below RM250,000, Abdul Rahman said there is a “serious gap of about 40%” between supply of affordable housing and demand.

“Of concern is the fact that income growth has not been keeping in tandem with (rising house prices),” said Abdul Rahman in his keynote address at the 16th National Housing and Property Summit 2013.

Abdul Rahman also noted that rural–urban migration has led to high demand for housing in urban areas, leading to sharp price increases that often follow when demand outstrips supply.

“The free market has gradually skewed towards higher-priced properties whereas most of the existing public housing initiatives only cater for the low income group, and even these are insufficient to meet the demand.”

The middle-income dilemma

The result of the current housing scenario is that many Malaysians, who are already priced out of suitable houses in the first place, will gradually fall further behind as house prices continue to rise faster than their income levels can.

Then the question is: what can be done about the affordability dilemma plaguing those who — like Anne and Farlina— need housing?

“I hope house prices can be more affordable for those just beginning to work or start families,” said Anne. “Because these are the people who need houses but mostly cannot afford to buy one.”

Some point to the government, calling for action to put into place measures to counteract what is happening and arguing that public housing has always been the government’s responsibility everywhere in the world.

And the government has responded. In 2011, prime minister Najib Abdul Razak unveiled the 1Malaysia People’s Housing Programme (PR1MA), which will specifically cater to the middle-income group earning within a specified income bracket.

At the moment, PR1MA defines middle-income as earning between RM2,500 and RM7,500.

“The implementation of PR1MA will be of help towards achieving the National Housing Policy’s objective to provide sufficient, comfortable, quality and affordable housing,” said Najib in 2011.

While some has lauded PR1MA, others question its implementation, raising various issues concerning the programme.

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