How resilient is Malaysia’s property sector?

In recent weeks, a series of telling full-page advertisements have appeared in the local papers on the sale of luxurious condominiums. The location: Mont’ Kiara and KLCC. Is somebody unloading?

The question begging to be asked is this: How resilient is Malaysia’s property sector in the current financial meltdown?

There seems to be two broad versions right now. The first is that the current crisis will not affect the property sector as much as it did in the 1997/98 financial crisis.

The rationale given by property consultants is that in the late 1990s crisis, interest rates went up from less than 10% to 15%. Now interest rates are around 7% and getting lower for residential properties.

The second rationale is that banks were withholding credit in the late 1990s. The third rationale is that property buffs (which include buyers, sellers and observers) have learned from that crisis and are not so highly leveraged.

We shall call this first group the “bulls”, following the stock market jargon for investors who have dared to invest and who saw the silver lining behind a dark cloud.

Then there are the “bears” with a more cautious stand. Their rationale: The world is going through what could be the worst financial crisis since WWII and there is no such thing as decoupling from the US market because every country is affected. The question is to what degree will we be affected, and how developers and property buffs will weather the crisis.

As Glomac Bhd group managing director F.D. Iskandar Mohamed Mansor puts it: “To those who say Malaysia will be insulated, let me say that when our trading partners – the US, Europe, Japan, India and China – are affected, we will be affected. We have to face that,” he says.

Iskandar is also Real Estate and Housing Developers’ Association Selangor branch chairman.

But there are those who are positive. According to a report by research house ECM Libra, which recently hosted a property talk for about 100 fund managers, the current property downcycle will not be as bad as the 1997/98 Asian financial crisis.

“The indications are that the market is fairly resilient. With the exception of luxury condominiums, correction of capital values and rental of properties should be moderate,” the report says.

Rehda president Datuk Ng Seing Liong is positive. “We know there is a slowdown, not a crash. On average, it will only be a 5% drop in property prices, maybe in some locations and segments, 10%. We are well insulated and there is nothing to fear. We will not be like Singapore, where there will definitely be a crash.

“Of course, there will be a slowdown as buyers take a wait-and-see attitude. But everything is under control and we have asked for a 50-basis-point reduction in interest rates. We have a 25 basis points cut, so in the next few months, we hope there will be another,” says Ng.

Some property consultants and a valuer say they are not seeing any fire-sale and that their customers are still holding on to their prices from six months ago.

PA International Property Consultants (KL) Sdn Bhd managing director I (agency and corporate services) Jerome Hong says: “I don’t think it will be as bad as before but we will only know by the first half of next year.”

Hong says his concerns are with high-rise condominiums the prices of which have come down by about 10%.

“We have multiple-unit buyers who are now letting go. But those in good locations and with good views may be fine. We will see more in January and February next year,” he says.

And now, views from the “bears”: Savills Rahim & Co managing drector Robert Ang says the property sector is not as resilient as many would like to think.

“Six months ago, I told a group it will weaken, that our cycle is almost coming to an end, that it will taper off by 2009 or early 2010. It came earlier as a result of what is happening in the outside world.”

Ang says the last few months have attracted a lot of foreign interest and many of these foreigners, together with Malaysians, have been affected.

Ang, who at one time was an all-out promoter of the KLCC area, believes that KLCC is over-built and that the other troubled area is Mont’ Kiara.

“The condo market has been weak for the last couple of years. The office market will have a lot of supply. The landed houses will be much more resilient,” he says.

Another property consultant, who declined to be named, says he sees two troubled spots – the KLCC and Mont’ Kiara.

“KLCC is in a better position than Mont’ Kiara. Depending on the project, its developer and the view from the top, prices may drop 15% to 20% next year. In Mont’ Kiara, it may be 20% to 25%.

“At the same time, there are units going for RM2,500 per sq ft or more. The winners will be those who bought into that area at RM500 to RM600 per sq ft. For example, Dua in Jalan Tun Razak.

“Dua went up to about RM1,000 per sq ft, so with a 20% drop, even at RM700 per sq ft, these buyers are still okay. It is those who went into that area at RM900 or RM1,000 who will face difficulty,” he says.

Says a source from a foreign bank, who monitors the property scene: “I would hold cash. Realistically, Malaysia has not yet felt the whole effect of the global meltdown. The next six months will provide more clarity.”

By The Star (by Thean Lee Cheng)