Rising construction costs may dampen industry growth

RISING costs of construction may dampen the growth of the Malaysian real estate industry next year as property developers postpone or curtail some of their launches.

There have been growing complaints from industry players, particularly contractors and developers, that higher construction costs, intense competition and - to some extent - the recent shift in political landscape following the general election, will further erode profit margins and cause a “wait-and-see” attitude among investors and house buyers.

In fact it has been reported that many contractors are going bust because of rising building costs. Many of them are pleading with the developers to review their contracts. The developers in turn are faced with reduced margins.

Although the spate of new launches, especially in the Klang Valley, seems to be still going strong with many new players jumping onto the band wagon, there is a general sense of caution, even among the more established players, that things will start to worsen if crude oil prices do not come down soon.

“I think the property market is slowing down. We are monitoring the situation very closely,” said the chief operating officer of a property development company.

However, house buyers are caught in a dilemma of whether to put off their purchase to play safe in case the economy sours or buy now as property prices are unlikely to come down. The second choice seems to be more popular judging from the generally good demand for newly launched properties although they now take longer to sell.

Recently, the Real Estate and Housing Developers’ Association of Malaysia (Rehda) held a dialogue session with 35 analysts and fund managers to discuss issues like political changes, rising consumer prices and building material costs as well as bumiputra quotas and discounts.

Aseambankers analyst Ong Chee Ting said the dialogue “echoed our view that the property development sector outlook remains uncertain in the immediate term, with rising inflation affecting consumer sentiment and affordability.”

“Rising construction costs are also affecting developers’ margins and delaying new launches. Compounded with domestic political and external economic uncertainties, developers and house buyers are generally adopting a wait-and-see strategy,” he said adding that developers were relying on strong locked-in sales over the past two years to deliver earnings growth.

“On a positive note, developers are experiencing general improvements in public delivery, with increased efficiency and reduced bureaucracy post-election,” he added.

Ong said the mass market segment remained price sensitive, which limited developers’ pricing power while high-rise developers were generally at greater risk of margin erosion as they faced higher land cost.

Meanwhile, Rehda in its Budget 2009 wish list, has urged the Government for a total tax exemption for dividend income from real estate investment trust companies; higher minimum selling prices for low-cost houses, at RM60,000 per unit; lower stamp duties across the board, by half; and standardising bumiputra housing policies at the national level in terms of discounts (e.g. Johor’s 15%, Malacca’s 10% and Selangor’s 7% currently) and policies relating to the release of bumiputra quota.

By The Star (by S.C.Cheah)