Signs of distress in the market

HOW can you tell when the property market is softening?

There are several telltale signs like developers taking a longer time to sell their properties, delaying new launches and giving away more freebies and incentives. A weakening market will also see a decrease in rental and capital values.

There are also more subtle signs like the developer keeping a low profile, the project slowing down, the development changing hands or the developer maintaining the original selling price but reducing the built-up area.

There are also instances where the developer continues to build the houses despite very slow sales but this situation is masked as “build then sell”. Some developers might earlier claim they have sold most of their units but later said they have taken back the units and selling en bloc as prices have escalated.

These ominous “signs” have mostly surfaced.

Of late the property development industry is feeling the jitters as crude oil prices continue to soar. The industry is grappling with increased cost of doing business, rising price of building materials, inflationary trends in cost of living, global economic uncertainties, rigid policies for developers and a softening market.

Property developers are also faced with eroded profit margins, higher construction costs, intense competition, and fear that rising inflation was affecting buyers' sentiment and affordability.

To make things worse, they are burdened with onerous contributions and social obligations. Developers having to provide all sorts of amenities from building police stations, community halls to flyovers.

Many developers have argued that even in the best of times, these “social obligations” were “eating” into their profits, what more in the current tough market condition.

If the inflationary pressures continue, another recession is very near!

The Government has proposed various measures in the 2008 Budget to sustain economic growth and provide such incentives as 50% waiver of stamp duty for purchase of one house costing not more than RM250,000 from Sept 8, 2007 until Dec 31, 2010; exemption of real property gains tax; allowing monthly withdrawal of EPF contributions for housing purposes and a RM50mil fund to guarantee housing loans for buyers who do not have fixed income.

However, Rehda feels this is not enough and wants policy changes.

A “thorn” in their flesh is the bumiputra quota in which Rehda wants the release procedures to be standardised to reflect a more transparent and structured release mechanism.

Bumiputra quota should not exceed 30%, based on sales regardless of the units being sold to bumiputras were the identified lots or not. Bumiputra discount should be capped at 5% and only applicable for houses priced at RM250,000 and below, excluding low-cost and low-medium cost houses.

It was unfair for someone who could afford a multi-million ringgit property to enjoy a bumiputra discount that differed from state to state (7% discount for Selangor, 15% for Johor and 10% for other states).

Rehda also wanted the Government to take over the provision of low-cost public housing, thus freeing the private sector developers to focus more on market driven products.

The Government should also review the price of low-cost housing from the current RM42,000 to RM60,000 to mitigate increased costs.

Rehda hopes the Government would abolish its decision to charge 10% import duty on cement importers immediately. Instead we hope the Government will impose 10% to 20% export duty on all cement and steel materials to ensure adequate supply.

Rehda vice-president Datuk FD Iskandar said it was inevitable that house prices would go up soon as construction costs had shot up by 30%.

“Prices of raw materials from steel to cement have all gone up. It will be very challenging for the property development industry. Contractors are crying out for a revision of their contract prices and they will walk off if their demands are not met. Projects will stall,” he said, adding there was also a shortage of steel and cement whose prices have risen to RM4,000 per ton and RM18 per bag respectively.

Iskandar who is also the Rehda Selangor chairman said there were construction firms who would be too glad to get out of a contract now that prices of everything had soared. They would stand to lose, as there was no price fluctuation clause to allow for an upward revision of prices. “Some of them prefer to wait until prices have stabilised,” he said.

Unless oil prices drop drastically (which many industry players do not see it likely to happen) and the inflationary trend is checked, the economy in particular the housing and construction industry will be heading for a downturn.

Happy 51st National Day

Selamat Hari Merdeka, and have a good weekend. For our muslim readers, selamat berpuasa too.

New office buildings unlikely on Penang island due to glut

THERE is unlikely to be new purpose-built office building projects on the island in the near future in view of the glut of office space and high construction cost.

On the island, there is an overhang of 2.8 million sq ft of office space with occupancy rate of 74%, compared with about 72% in 2005.

The total available purpose-built office space in George Town as at end last year was about 11 million sq ft, a large portion of which is in purpose-built office buildings developed 10 to 15 years ago.

These properties are not in demand because they lack information technology (IT) infrastructure and facilities and are not well maintained.

Developers were also unwilling to launch more of such buildings due to the high construction cost.

The construction cost and land value for per square foot of commercial space is about RM210, while the selling price per sq ft of the commercial space is RM250 to RM300, which is less than the 30% profit margins generally looked for by developer.

Current rentals of conventional purpose-built office space on the island ranged between RM1.50 and RM2.50 per sq ft while the modern purpose-built office buildings with IT features command a rental of above RM3 per sq ft.

The modern purpose-built office building projects being developed on the island were now in Bayan Baru. They include the recently completed SunTech and the IJM headquarters in Metro-East.

The 23-storey RM100mil SunTech by Emerald Capital Group is almost 100% sold. “The building has the latest IT-MSC infrastructure and facilities. The rental is RM2.60 to RM4.20 per sq ft,” he said.

Demand for pre-war properties was slightly stronger as there was limited supply of such properties for commercial use.

Many of these houses are also highly sought after because they are strategically located on main roads.

The present value of a pre-war property in George Town is around RM600 per sq ft. A 3,200 sq ft pre-war property on Campbell Street was recently sold for about RM2mil.

On the retail sector that also faces a glut (occupancy rate is 70% compared with 72% in 2005), there was 13.9 million sq ft of retail space, of which 70% was occupied while new supply stood at 1.2 million sq ft.

The new retail space include such projects as Jusco in Bandar Perda, Penang Times Square, D'Piazza, Wikiworld, Mutiara Parade, Farlim Megamall, Gurney Plaza Phase 2, and Gurney Paragon.

The oversupply situation has not improved since 2005 as the market is still tough.

The rising cost of living and declining purchasing power have worsened the situation. Many Penangites will visit shopping centres during weekends, but their expenditures are expected to drop in the next few months.

Ground floor rentals ranged between RM9.50 per sq ft and RM30 per sq ft for malls in prime locations such as the Queensbay Mall and Gurney Plaza. Meanwhile, those in the heart of George Town ranged between RM4 per sq ft and RM28 per sq ft.

The average rental rate has remained more or less the same over the last few years.

The state government should work with the private sector to revive George Town by having new business themes for different precincts in the inner city.

The state government could offer incentives for businesses like traditional medicine, souvenir or local produce and designating certain streets in George Town for them.

This type of planning would help absorb the existing commercial properties in the inner city and enhance George Town’s appeal as a tourist hub.

Sustainable development, in the form of environmentally friendly policies, is key towards unlocking the value of commercial properties in George Town.

There was also a need for more parking facilities, improved drainage system to overcome flash flood, and quality public transport.