Glut dampens market value and rental of condos

Since the high-end condominium market took a beating following the global financial crisis in 2008, their values have been left pretty much battered even today. Investors who got into the market around the peak must still be quite disheartened by the market's lethargy.

The big supply coming onstream has also been a dampener on property values and the rental market of these residences.

There are now many condominiums in need of tenants and the net rental yields are in the range of 3% to 5%, depending on the location.

But despite this, the speculative fervour in the upper-medium to high-end landed residential sector has not abated. There are signs that it is spilling onto the latest craze small sized, and more affordable, commercial cum residential accommodation known as SoHo's, and service apartments.

It is time to exercise caution on property matters to ensure the market's sustainability and avoid unnecessary losses.

The fact that even analysts are concerned and have downgraded the property sector pretty much indicates the party is coming to an end and it is time to be cautious.

UOB Kay Hian Research has downgraded its grading for the property sector to “market weight” from “overweight” citing that the property valuation cycle has peaked.

A global double-dip recession, coupled with the European debt problems, would certainly have spillover effects on the domestic economy, including the property sector. If the world economy is hit by a recession, the property market will not be spared either.

The recent market volatility and sell-off has affected investor confidence and the market is taking a breather now.

Although the market seems to be holding out quite well for now, there is no telling how it will react if sentiment is badly eroded by the gloomy external outlook.

As such, developers should also be cautious and build more affordable property units priced below RM350,000 that still has strong demand.

As shown by the havoc caused by the oversized property bubble and sub-prime loan crisis in the United States which literally brought down the world economy to its knees, we have witnessed how significant a role property has on the health of the economy and financial system of countries. The world would have been spared the agony of the global financial crisis and the continuing state of volatility and uncertainty had the United States been vigilant on its crumbling market fundamentals that inflicted such gargantuan damages felt till this day.

For the sake of a sustainable property market in the long term, it is important to have policy measures that will ensure the market is closely tied to market fundamentals, and to curb any artificial inflation in property value.

The more that is known of the fundamentals, the better and this calls for greater transparency.

To ensure financial and social stability, it pays for the Government, through its policy measures, to keep the property market closely tied to fundamentals.

The hot property market and sharp rise in property prices in residential markets in the Klang Valley and Penang continue to be of concern among property buyers and the authorities.

Bank Negara is said to be considering further tightening measures to cool the market and rein in speculative buying and further price hikes.

Some of the possible measures that are at the disposal to tighten the market include hikes in bank interest rates to fight inflation, and the further tweaking of the loan to value ratio (LVR) to dampen the excessive property demand.

The central bank is also said to be keeping a close watch on the mortgage loan market to see whether a capping of the LVR (at 70% of the property price) on second mortgages is necessary.

The critical sectors are the upper medium to high-end landed residential sector and non-owner occupied houses. Purchasers who have multiple properties and who already have a mortgage loan will be subject to the new loan limit if it is implemented.

To address speculative activity in the property market, there is also a likelihood that the Government may reinstate the real property gains tax (RPGT) to a higher quantum from the current 5% for all property sold within the first five years of purchase.

The Government has tweaked the RPGT on various occasions depending on market conditions.

From April 2007 until it was reintroduced in January last year, all gains from property transactions have been exempted from the tax.

Under Budget 2010, the RPGT was brought back in January, albeit at 5% for all property sold within the first five years of purchase.

If the Government decides to reintroduce the RPGT in its entirety, property speculators will get the brunt of the “axe” as gains from property sales within the first five years of purchase will be subjected to a tax of 5% to 30%.

The maximum 30% is for disposal within the first two years; 20% within the third year; 15% within the fourth year and 5% within the fifth year. Profits earned from disposal in the sixth year and beyond will not be taxed.

As for bank borrowings, directives may also be given to banks to lend based on net income and not on gross income as the practice now.

With the world's antenna tuned in to unfolding news on the US and eurozone's debt crises, such prudent measures will help to ensure the market's sustainability.

Deputy news editor Angie Ng believes going back to basic fundamentals and prudence is the way to go in times like this.

By The Star (by Angie Ng)