Property – a hedge against inflation

In Petaling Jaya and Kelana Jaya, prices are going between RM400 and RM450 psf, and have the further benefit of infrastructure capital.

WHEN it rains, it pours. Inflation jitters, global credit tightening, stubborn high oil prices (and rising) and a looming food crisis have been major beefs weighing down global economies over many months.

As a direct consequence of battered consumer and business sentiments, companies have been snipping away at their sales forecasts, causing jitters in equity markets across the board. Such sentiments have led to a volatile and fluid environment; market pundits have not been spared from the wild swings as they vacillate between the “worst is over” and “there's still bad news in store.”

This week, for example, key figures in US offered directly contrasting opinions on their take on the market direction. US Treasury Secretary Henry Paulson and Citigroup Inc CEO Vikram Pandit commented that the worst of the credit crisis is over. However, Federal Reserve chief Ben Bernanke’s comments were laced with reservation. He said that while markets have improved, they remain far from normal. The markets continue to reflect such uncertainty.

However, undeniably, the mood has been somewhat buoyant since April, as retail and ISM figures paint a more optimistic US outlook.

According to Standard & Poor’s monthly global stock market review, developed markets posted a 5.15% gain in April after losing 8.95% in March. Likewise, emerging markets climbed 7.49% in April after falling 5.11% the month before.

Now that we're full fledged into May, record oil futures of US$124 are back to sting the market.

With few other fuel alternatives in production, it is still carved in stone that oil is the main source of energy. Some oil experts have said that further dollar weakness can possibly send oil prices to US$150 a barrel in coming years.

Time to buy property?

Hence we have a general undertone that is still one of restrain and uncertainty. The lowered wealth effect from equity markets heightens the defensive nature of investors.

This has obviously put a damper on Malaysia's property market, taking some shine away from its robustness last year, not least because of the slew of attractive measures to boost the sector.

The fluid political landscape in Malaysia does little to lift the cloud for investors, most of whom are evidently adopting a wait and see approach.

But interestingly, economists say that during times of inflationary pressures, real estate in fact offers a good hedge against inflation. (Inflation hedging is when the real return of an asset is independent of the rate of inflation. Generally, an asset is a complete hedge against inflation when its nominal return changes in a one-to-one relationship with inflation).

Citi Research expects, that over the long run, property rents and asset values to rise in line with inflation, but more likely with nominal gross domestic product.

Will prices slide?

“There is no way property prices are going down. Construction and labour cost is going up. Land cost is also fixed. If you have money, you have to invest, because you won't get them any cheaper,” says Hall Chadwick Asia Sdn Bhd chairman, Kumar Tharmalingam.

Kumar: The subprime in the US is not really affecting us.

“For example, if you bought a home 18 months ago or if you buy that very same house today, it is likely to be more expensive now than it was 18 months ago,” says Kumar.

Real Estate and Housing Developers' Association (Rehda) president Ng Seing Liong adds: “If I were a buyer, I would buy today, because raw material prices are going up. This is the time to buy,”

Ng: I would buy today because raw material prices are going up.

“Demand on property still depends on location. On the whole, the results of the recent general election did cause some instability and led to a wait-and-see attitude among house buyers. But the undercurrent is still fairly stable,” he says.

Getting the act together

While global financial markets will continue its roller coaster ride, most property experts opine that Malaysia is fairly well insulated, Although macroeconomic fundamentals are sound, asset prices have been temporarily dampened as investors price in discounts to factor in a possible slowdown in the future.

“The subprime in the US is not really affecting us. But because of uncertainties in equity markets, this is creating a temporary gap of expectation. People are anxious that their incomes may be eroded by rising commodity prices. Banks have also started to aggressively advertise again. But house buyers are holding back until the market clears,” says Kumar.

“We have been so used to being mollycoddled over the last 30 years. So the present situation confuses people especially the lower rungs of homebuyers. Among the developers, yes, there is a slowdown in the bread and butter homes, but it's marginal. There is perhaps a 10% drop across the board on the bread and butter homes of less than RM400,000,” says Kumar.

Rehda’s Ng says that the state and federal government should take more proactive measures in their approach to work together.

“Everyday we are hearing criticism from the various political parties which isn't constructive. We need to hear more positive statements,” he says.

Slower implementation

Ng admits that developers are delaying launches of new developments. He attributes this partly to building plans that are slower in getting approved, adding that some local authorities have yet to have their new councillors.

Areca Capital Sdn Bhd chief executive officer Danny Wong says that demand in the residential urban segment for medium and high end homes is still encouraging.

Wong: The demand for properties depends on perception.

“Nonetheless, we are in a period of rising inflation, so caution dominates. The demand for properties depends on perception. If the location is unique, people will still buy as there is ample liquidity...” he says.

Given the present scenario, Wong says there are a few factors that developers can consider when launching a new development, such as rising cost of material and labour, uncertainty on demand and the rising cost of funds of a development.

A property analyst from Hwang-DBS Vickers Research says that people are adopting the wait-and-see attitude.

“Nonetheless good developers, such as Sunrise Bhd for instance, are not really affected by this period of uncertainty. Malaysia has a young population with an economy that is still growing. On that note, the property market will continue to perform decently,” he says.'

For Ng, location is everything in picking the right property.

He says Mont Kiara, Damansara and Petaling Jaya are prime property areas. Overhang issues exist mostly in the outskirt areas, where the population is sparse.

Generally, successful developers are those that have land in prime areas. While Ng says there is some truth in attention being given to far-out locations due to its unique design, that novelty will eventually die off and people will start to neglect those areas.

“Good locations must have close proximity to schools, hospitals and other such amenities.

“Shah Alam is one good example. While the initial launches in these areas have done well, it remains to be seen whether there is the population to support later launches. So far, the launches that have been made are over 3 to 4 years. The next 6 to 7 years remain to be seen,” he says.

Kumar and Ng are strong advocates of buying now, as they don't see prices coming down. Generally too, house prices appreciate by 4% to 6% per annum based on the inflation rate.

“If you want long-term capital appreciation, you buy landed property. If you want rental yields, you buy condos. Property development in Malaysia has always been robust and an important engine of growth other than plantation and oil,” says Kumar.

Limited downside

Noteworthy is that Malaysia's property market has yet to strongly take off unlike Singapore and Hong Kong. In prime areas, where rental yields of 8% to 10% are easily achieved, the property's price downside risk is further protected.

Malaysia's property market is buffered as it isn't financed by international bankers, nor is it affected by foreign debt.

“Malaysian banks are in healthy financial positions. We are able to take loans up to 80%. Even the EPF helps to pay the downpayment for property purchases,” says Kumar.

Kumar says certain developers have been very innovative. Through unique landscaping and creative gardening, they are able to fetch a premium price tag although their developments are located out of the city.

“The development in Ara Damansara for instance is very clever, as it has divided its development into small plots, each with its own identity. Instead of saying they live in Subang Jaya or Section 19, PJ, they say The High, or The Swing,”

“These niche developments have a name of their own, and is a one-upmanship by the developer. This enables the developers to tweak the prices as they offer a sort of avant-garde kind of living,”

Kumar says there are new groups of homebuyers, the younger generation, who do not mind paying more for quality design.

In the condo sector, he sees pockets of excellence in Mont Kiara, KLCC, Ara Damansara, Petaling Jaya Section 16 and the Kelana Jaya area. Notable developers include Sime Darby, SP Setia, Gamuda and E&O.

“Mont Kiara is a good example of how other developers have tapped into pioneer developer Sunrise Bhd's blueprint and benefited from it. All the developers there are doing well because Sunrise has set the standard and quality. They match its quality, if not make it better. So although the place is so crowded, it has not lost its attraction,” says Kumar.

He adds that the slowdown in Malaysia's property sales has not been significant, somewhere around 10%.

“Developers have no choice but to keep the momentum going as most of them are public listed companies with earnings to deliver. If they can't sell at a previous high price, they will reduce its size or increase its value added proposition,” he says.

Wong is of the view that if a buyer has the intention to reside in a property, then the present time is the time to buy, as vacant land is scarcer especially in the prime areas.

“However, if you are buying to invest, perhaps pause for awhile, as the global situation is still uncertain. The Malaysian economy could be slightly affected by slowing exports, as the exports are currently supported by strong commodity prices. While the impact is not severe, it may slow down the economy,” he says.

Talking hi-end

One segment of the market that has certainly not been affected by inflation or credit worries is definitely the luxury and upper end property market. Because of healthy liquidity and wealth amassed, this segment continues to transact record prices.

Kumar says luxury homebuyers are typically high net worth individuals with deep pockets.

“Record prices in KL will continue to be transacted in the secondary market. One KL (a development by Datuk Chua Ma Yu) for instance, which started off at RM1,200 per sq ft (psf), recently had two transactions at RM2,000 psf. We have yet to see what kind of prices will be transacted when The Four Seasons is launched,” he says.

The Binjai and the Millenium Residence are other branded residences that may be tested with new benchmark pricing.

Currently, the average develper's selling prices of residential properties in Kuala Lumpur and its fringes range between RM1,300 and RM2,000 psf, while those in the suburbs are between RM700 and RM1,000 psf.

In the last few years, these apartments, which were sold for between RM500 and RM700 psf, have recorded price appreciation of between 70% and 120%.

“For suburbs such as Mont' Kiara and Sri Hartamas, prices start from RM650 psf and goes beyond RM1,000 psf. In Petaling Jaya and Kelana Jaya, prices are going between RM400 and RM450 psf, and have the further benefit of infrastructure capital.

“The KL City area is an AAA location. Prices will vary, but as long as we have tourism income contributing RM15bil-RM17bil a year, I don't see the property market being affected,” says Kumar.

On record prices, Ng says this is dependent on the yield that the particular property is generating. If the property is unable to command the said yield, property prices will eventually go down.

“Even if the area is a AAA location, but if it cannot get the yield required, the price will fall. The rule of thumb is that yields must be at least 5% of the property cost. Lets say you buy a property for RM1mil, therefore you should get rental of at least RM50,000 per annum. Otherwise the law of equilibrium steps in to bring the price down.”

Another area that Kumar foresees to be one of the hottest spots is the Bandar Utama, Mutiara Damansara and Damansara Perdana area. Known as the “golden mine”, the only missing ingredient is a link connecting all three townships.

“This has got to do with the stubborn old school mentality of the three developers. The linkages between Bandar Utama and Mutiara Damansara will benefit both the commercial centres of 1Utama and the Curve/Ikea/Cineplex area and Damansara Perdana.

Each has its own loyal purchasers but cross selling and ease of connections can only help both developers and Damansara Perdana in values and trade,” says Kumar.

He sees another future hot spot nearer the Shah Alam area, as many of the developers there are owners of huge tracts of landbank.

Among the developers in Shah Alam are SP Setia Bhd, Sime Darby Bhd, Island & Peninsular Bhd and IOI Corp Bhd.

Foreign Direct Investments

Kumar admits that foreign direct investments (FDI) into Malaysian properties could be a lot better. To the high-end segment, FDI is contributing about 15%, while to the overall property market, it is contributing 5%.

“There is a perception in Malaysia that still needs to be overcome. There are still issues on FIC for non-residential. Not every non-residential wants to buy residential property. They also want to buy investment and commercial properties,” he says.

In Thailand and Vietnam for instance, foreigners can choose any partner when buying such properties, but in Malaysia, they cannot.

“Our regulations are quite dated. There aren't many incentives for real estate, only restrictions. But I think our government realises now, as they have seen how Vietnam has benefited enormously from wooing real estate investments.”

By The Star (by Tee Lin Say)