Demystifying the property market overhang

AN account­ant, who is tasked with pre­par­ing the books of a cor­por­ate, will always be guided by account­ing prin­ciples when it comes to how the fin­an­cial state­ments of the com­pany are presen­ted on an annual basis to ensure they are accur­ate and reflect­ive of the com­pany’s busi­ness affairs.

An aud­itor, look­ing at the same pre­pared accounts, will run through the num­bers and audit the key mater­ial items to ensure they are reas­on­able, reflect­ive of the com­pany’s fin­ances, and free from mater­ial mis­state­ments, includ­ing due to fraud or error, or applic­a­tion of wrong account­ing treat­ment.

In fin­an­cial state­ments, two of the most crit­ical items are receiv­ables and invent­or­ies.

In order to have proper account­ing treat­ment, account­ants and aud­it­ors used account­ing the­or­ies to describe what is deemed to be cur­rent, and those that have a longer-dated age­ing pro­file are either impaired or writ­ten off.

The reason for this is to ensure that the fin­an­cial state­ments reflect the status of a cor­por­a­tion’s cur­rent assets and are in no way doubt­ful.

There is also an applic­a­tion of gen­eral pro­vi­sion or spe­cific pro­vi­sion when it comes to how these bal­ances ought to be treated in the fin­an­cial state­ments.

Often, we see cases of over-inflated bal­ances and when it came to the crunch of the mat­ter, the man­age­ment would have no choice but to write them off.

The ‘real’ over­hang

At the recently con­cluded 15th Malay­sian Prop­erty Sum­mit 2023, the Dir­ector of the National Prop­erty Inform­a­tion Centre (Napic) presen­ted a paper on the status of the Malay­sian prop­erty mar­ket up to the third quarter of last year (3Q22), with some data points related to the per­form­ance of the mar­ket up to Novem­ber 2022.

The full mar­ket report is only expec­ted to be released in the middle of next month, where Napic will not only provide the usual annual update of the mar­ket’s per­form­ance but also provide more insight into some of the key data points that have been much dis­cussed among all stake­hold­ers, of which, one of them is the status of over­hang in the mar­ket.

As we are aware, the res­id­en­tial over­hang at the end of 3Q22 stood at 29,535 units worth some Rm19.95bil.

Napic’s web­site also provided the details of where these over­hang prop­er­ties are loc­ated and the three key states – Johor, Selangor, and Pen­ang – are the main hot­spots, account­ing for some 14,956 units or just over half of the coun­try’s total over­hang.

In terms of the type of prop­er­ties, the 3Q22 data showed that high-rises com­prise 18,962 units or 64.2% of the total over­hang.

In terms of price points, 23.8% of the total over­hang was priced at RM300,000 and below, 29.5% was priced between RM300,001 and RM500,000, 31.6% was priced between RM500,001 and Rm1mil and the bal­ance was priced above Rm1mil.

In terms of the total value, the res­id­en­tial over­hang is skewed towards the high-end seg­ment with prop­er­ties worth more than Rm1mil account­ing for 43.4% of the total over­hang value, while those priced between RM500,001 and Rm1mil accoun­ted for 31.9% of the total over­hang.

Prop­er­ties priced between RM301,000 and RM500,000 have a total over­hang value of just Rm3.5bil, while prop­er­ties priced below RM300,000 are worth some Rm1.39bil. These two rep­res­ent some 24.8% of the total over­hang value.

For the ser­vice apart­ments, the total over­hang in units stood at 23,688 worth some Rm20.21bil as at end of 3Q22, with Johor alone account­ing for 62.4% of the total.

Most of these over­hangs in the seg­ment are prop­er­ties priced between RM500,001 and Rm1mil, which accoun­ted for two-thirds of the total unit num­bers and 58.9% in value of the total over­hang.

For the longest time, Napic had not shared with the stake­hold­ers the key under­ly­ing age­ing pro­file of this over­hang, and that has led to a mis­lead­ing status of the mar­ket’s over­hang status. It was indeed an eye-opener to see what the real over­hang has been.

For example, as seen in Table 1, the key over­hang is prop­er­ties (both res­id­en­tial and ser­vice apart­ments across the four key states) that have been part of the stat­ist­ics for the last five years and they account for between 51% and 93% of the total over­hang units.

For example, as seen in Table 1, the key over­hang is prop­er­ties (both res­id­en­tial and ser­vice apart­ments across the four key states) that have been part of the stat­ist­ics for the last five years and they account for between 51% and 93% of the total over­hang units.

In total, these prop­er­ties accoun­ted for a whop­ping 75.7% of the mar­ket’s over­hang status while prop­er­ties that have been in the mar­ket for the last three years are just over 5% from the key states.

Spe­cific men­tion must also be made on ser­vice apart­ments loc­ated in Johor, and those that are in the five to 10 years bucket, as they account for 26% of the total mar­ket over­hang.

In terms of prices, most of the over­hang is seen in the same five to 10 years bucket across the board and they alone account for 71% of the total over­hang prop­er­ties in the mar­ket.

As seen in Table 2, prop­er­ties below three years account for less than 5% of the total mar­ket over­hang. Spe­cific men­tion must also be made on ser­vice apart­ments that are in the RM500,001 to Rm1mil bracket and are in the five to 10 years bucket as they account for 25% of the total mar­ket over­hang.

In the cor­por­ate world, when one is up against data that is dis­tort­ing the real pic­ture, the proper thing to do is to see whether the data is still rel­ev­ant or oth­er­wise.

Clearly, look­ing at the age­ing pro­file of the prop­erty over­hang, those above five years will likely remain unsold for a fore­see­able future, mainly due to either being wrongly loc­ated and without the proper or good infra­struc­ture to sup­port com­munity liv­ing, or untouched by prop­erty buy­ers for simply being too expens­ive, espe­cially those bey­ond the RM500,000 price threshold.

Clearly, look­ing at the age­ing pro­file of the prop­erty over­hang, those above five years will likely remain unsold for a fore­see­able future, mainly due to either being wrongly loc­ated and without the proper or good infra­struc­ture to sup­port com­munity liv­ing, or untouched by prop­erty buy­ers for simply being too expens­ive, espe­cially those bey­ond the RM500,000 price threshold.

Hav­ing iden­ti­fied the issues, reg­u­lat­ors and prop­erty developers would need to come out with strategies to address them and to attract buy­ers to these prop­er­ties via a rehab­il­it­a­tion exer­cise and with a sig­ni­fic­ant price reduc­tion.

The bot­tom line is to remove them from the over­hang data.

Let’s call a spade a spade

So what is Malay­sia’s real over­hang? Based on the data presen­ted by Napic, one can take com­fort that over­hang is not as ser­i­ous as it is made out to be mainly due to a lack of data and proper ana­lysis in terms of what is real over­hang pre­vi­ously.

While those more than three years but less than five years are part of stat­ist­ics, we should redefine them as core over­hang while those bey­ond five years can be redefined as hard­core over­hang.

As we have been able to slice and dice these num­bers, the real over­hang is only per­haps less than 5% of the mar­ket in terms of the num­ber of units and value.

Napic could also help stake­hold­ers to under­stand bet­ter the prop­erty mar­ket data bet­ter by break­ing down the data points as an over­hang that is mainly due to gov­ern­ment hous­ing schemes and those that are privately built.

In this way, we could also see whether the gov­ern­ment’s inter­ven­tion is needed to boost demand for these obscurely loc­ated prop­er­ties.

For the private developers, most of these invent­or­ies would have been impaired as the like­li­hood of the assets being real­ised in full value or even at 50% to 60% of the mar­ket value is seen as low.

Private developers too ought to think out­side of the box on how to over­come the prop­erty invent­or­ies sit­ting in their books as being part of the stat­ist­ics only res­ults in paint­ing the wrong pic­ture for the prop­erty mar­ket as a whole.

By Pankaj C. kumar is a long-time invest­ment ana­lyst. the views expressed here are the writer’s own. 

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Resilient values: Geh believes that both landed and high-rise units in prime locations will hold their values.

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THE Penang property market is expected to remain flat yet resilient this year and could bottom out within the next two years.

CBRE|WTW Research in its Real Estate Market Outlook 2019 says it will be a buyers’ market over the short term, particularly for residential properties.

“Under the prevailing subdued market, launches of smaller, single phase developments would reduce in the short-term but larger integrated mixed developments or townships would carry on.

“The property market is anticipated to remain generally soft and flat in 2019. This is in consideration of the challenging global and domestic economy, rising cost of living, as well as supply-demand imbalances, particularly in the high-rise residential sector.”

The property consultancy however adds that Penang’s property market still demonstrates resilience, aided further by recovery in the economy.

“Meanwhile, the current excess in supply will effectively be absorbed by the market. Benefits of reforms undertaken by the new government could also trickle down to the local property market.”

Raine & Horne Malaysia senior partner and FIABCI Malaysian chapter president Michael Geh says transactions and values will most likely remain flat, at best.

“As residential market activity, in terms of transacted units, has been falling over the last few consecutive quarters, at best the year-on-year levels will hold. In light of the overall soft market, property values are not expected to rise in 2019,” he tells StarBizweek.

Malaysian Institute of Estate Agents Penang chairman Mark Saw says the Penang residential market will see “some correction” this year.

“However, long-term planning on infrastructure improvements will go some way towards ensuring those locations currently only accessible by cars are better served with public transport.

“For those who have been holding back their launches the past few years, there may be a need to start selling, especially if land were bought on loans.”

He adds that measures taken by the state government will help to spur the Penang property market.

“With the waiver of the 3% approval fee for foreign purchasers starting from Feb 1, Penang must be seen to be investor friendly and foreign buyers should be encouraged to come.”

Meanwhile, Knight Frank Malaysia in its latest research report Real Estate Highlights for the Second Half of 2018 says the general outlook for the Penang property market “remains mixed without a dominant overall trend”.

“However, resulting from the interplay of supply and demand as well as the general economy, different sectors are performing differently. The residential sector, which is the leading sector in terms of total volume and value of transactions, has shown some improvement during the first half of 2018. “It registered a 5.4% increase in the volume of transactions year–on-year. This trend is expected to continue.”

Saw says prices of landed property in Penang are unlikely to drop.

“However, the high-rise market will remain challenging and developers will need to continue to offer incentives as well as alternate options of home ownership.

“Developers with deeper pockets or less loans may look into rent-to-buy schemes in tandem with the recently-announced National Home Ownership Campaign by the government.”

Geh believes that both landed and high-rise units in prime locations will hold their values, while speculatively-purchased condominiums will be affected.

“Government announcements on transportation plans, infrastructure and stimulus plans are among actions that can help stimulate the Penang property market tremendously,” he says.

Easing overhang

CBRE|WTW Research says the overhang within the Penang residential property market is likely to ease over the next two to three years, with developers offering special packages and postponing launches, all of which would allow demand to catch up with supply.

“The medium to long-term outlook remains positive given that various policies and efforts are being undertaken by the government,” it says.

Citing data by the National Property Information Centre, CBRE|WTW Research says there are over 2,200 high-rise overhang units worth nearly RM1.6bil as at the second quarter of 2018. “This is due to the abundant apartment and condominium units launched, constructed and completed within the past three-to-five years, coupled with the high rejection rate of end financing, unreleased bumiputra units and low demand for units in secondary locations.”

In terms of unsold residential units, CBRE|WTW Research says around 34% or 1,300 of the overhang units are in the RM500,001 to RM1mil per unit price range.

“On the other hand, units priced at RM1mil and above form the bulk (58%) of the total overhang valued at approximately RM1.75bil.

” The property consultancy adds that high-rise projects, particularly, are experiencing increased sales pressure amidst an oversupply situation.

“Under the challenging market, developers have resorted to offering incentives such as rebates on selling prices, zero or low downpayment, easy instalment payment of up to 24 months, deferred payment of (say) 30% of the selling price over five years at 0% interest, free legal fees and one year’s maintenance fee.

“Complimentary packages include interior design package, kitchen and electrical appliance vouchers as well as referral and reward schemes.”

Office and retail markets

Knight Frank Malaysia says the office sector is still enjoying stable rents and high occupancies, pointing out however that the overall occupancy rates in some buildings have dropped marginally.

“This favourable state of affairs is expected to continue for the next few quarters as new supply is only expected to come on-stream beyond 2020.”

CBRE|WTW Research says pent-up demand for newer and prime offices persists in Penang.

“New supply of offices in Penang in the past ten years was limited. New prime purpose-built office buildings completed within the past three years such as HunzaTower and Straits Quay Commercial Suites are enjoying commendable occupancy rates, although charging new benchmark rentals.

“Newly set-up offices, as well as offices relocated from older office buildings, comprise the tenants in these new buildings. Office occupiers are seeking newer office buildings that serve their contemporary needs and enhance their corporate image.”

It adds that pent-up demand for newer and prime offices would continue in the short-term, as most of the upcoming purpose-built office buildings are scheduled for completion in year 2020 and beyond.

“Older buildings are likely to experience a slide in demand thus lower rentals and capital prices.”

CBRE|WTW Research says stable occupancy rates can be anticipated, adding that rentals will increase.

“As at mid-2018, the overall occupancy rate of purpose-built office buildings in Penang declined slightly to 77% from 82% year-on-year. Occupancy rates are anticipated to generally remain in the region of 80% in near future.

“Rentals of prime office space in Georgetown were between RM2.50 and RM3.50 per sq ft. Prime offices outside George Town, particularly newer buildings in Bayan Lepas/Bayan Baru and Tanjung Pinang (Tanjung Tokong), registered higher rentals of RM3.30 to RM4.50 per sq ft.”

Due to increasing maintenance cost, CBRE|WTW Research says rentals of office space in most buildings are expected to increase in the short term.

“The overall average rental of prime offices would also increase, pulled-up by new entrants with higher asking rentals.”

As for the retail sub-sector in Penang, Knight Frank Malaysia says the current supply remains unchanged, adding that a more challenging scenario is anticipated for this sector with new supply to come on-stream with the expected opening of IKEA in Batu Kawan in the current quarter and the extension of Penang Times Square.

“Other retail centres/expansion of retail centres will be adding on the supply in 2020 and 2022.”

CBRE|WTW Research says the retail sector in Penang is likely to be flat, buffered by cautious optimism.

“Mixed performances will be more evident between the better and under-performing retail complexes, of which the latter is likely to drag down the overall occupancy and average rental rates.

“With abundant supply in the pipeline, shoppers can look forward to exciting shopping experiences.”

It says the overall occupancy rate stood at 72% as at mid-2018, with 79% for Penang island and 63% for Seberang Prai.

“Retail lots on the ground floor of selected prime retail complexes on the island commanded higher gross rental rates of up to RM45 per sq ft.”

Meanwhile, Geh says better-managed malls in prime locations are sustainable.

“These malls have sustained rental rates but vacancy factors have certainly increased by 5% to 10%.

“There is no oversupply but a rise in vacancy factors. Going forward, the general population’s purchasing trend remains cautious and wary of big-ticket items.”

Saw is less optimistic about the Penang retail sector, saying “this sector has been saturated for a few years and there is no end in sight”.

By Wugene Mahalingam, The Star

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MANY international experts and organisations have expressed concern about the global economic outlook this year.

Tighter monetary policy, weaker earnings growth and political challenges are confronting major economies.

The long-running US-China trade war and uncertainty around the UK’s exit from the European Union have soured business and consumer sentiment in recent months. However, the risk of a recession remains small, say economists.

Flat property market seen for Penang

Resilient values: Geh believes that both landed and high-rise units in prime locations will hold their values.

Research house says it will be buyers’ market over the short term

THE Penang property market is expected to remain flat yet resilient this year and could bottom out within the next two years.

CBRE|WTW Research in its Real Estate Market Outlook 2019 says it will be a buyers’ market over the short term, particularly for residential properties.

“Under the prevailing subdued market, launches of smaller, single phase developments would reduce in the short-term but larger integrated mixed developments or townships would carry on.

“The property market is anticipated to remain generally soft and flat in 2019. This is in consideration of the challenging global and domestic economy, rising cost of living, as well as supply-demand imbalances, particularly in the high-rise residential sector.”

The property consultancy however adds that Penang’s property market still demonstrates resilience, aided further by recovery in the economy.

“Meanwhile, the current excess in supply will effectively be absorbed by the market. Benefits of reforms undertaken by the new government could also trickle down to the local property market.”

Raine & Horne Malaysia senior partner and FIABCI Malaysian chapter president Michael Geh says transactions and values will most likely remain flat, at best.

“As residential market activity, in terms of transacted units, has been falling over the last few consecutive quarters, at best the year-on-year levels will hold. In light of the overall soft market, property values are not expected to rise in 2019,” he tells StarBizweek.

Malaysian Institute of Estate Agents Penang chairman Mark Saw says the Penang residential market will see “some correction” this year.

“However, long-term planning on infrastructure improvements will go some way towards ensuring those locations currently only accessible by cars are better served with public transport.

“For those who have been holding back their launches the past few years, there may be a need to start selling, especially if land were bought on loans.”

He adds that measures taken by the state government will help to spur the Penang property market.

“With the waiver of the 3% approval fee for foreign purchasers starting from Feb 1, Penang must be seen to be investor friendly and foreign buyers should be encouraged to come.”

Meanwhile, Knight Frank Malaysia in its latest research report Real Estate Highlights for the Second Half of 2018 says the general outlook for the Penang property market “remains mixed without a dominant overall trend”.

“However, resulting from the interplay of supply and demand as well as the general economy, different sectors are performing differently. The residential sector, which is the leading sector in terms of total volume and value of transactions, has shown some improvement during the first half of 2018. “It registered a 5.4% increase in the volume of transactions year–on-year. This trend is expected to continue.”

Saw says prices of landed property in Penang are unlikely to drop.

“However, the high-rise market will remain challenging and developers will need to continue to offer incentives as well as alternate options of home ownership.

“Developers with deeper pockets or less loans may look into rent-to-buy schemes in tandem with the recently-announced National Home Ownership Campaign by the government.”

Geh believes that both landed and high-rise units in prime locations will hold their values, while speculatively-purchased condominiums will be affected.

“Government announcements on transportation plans, infrastructure and stimulus plans are among actions that can help stimulate the Penang property market tremendously,” he says.

Easing overhang

CBRE|WTW Research says the overhang within the Penang residential property market is likely to ease over the next two to three years, with developers offering special packages and postponing launches, all of which would allow demand to catch up with supply.

“The medium to long-term outlook remains positive given that various policies and efforts are being undertaken by the government,” it says.

Citing data by the National Property Information Centre, CBRE|WTW Research says there are over 2,200 high-rise overhang units worth nearly RM1.6bil as at the second quarter of 2018. “This is due to the abundant apartment and condominium units launched, constructed and completed within the past three-to-five years, coupled with the high rejection rate of end financing, unreleased bumiputra units and low demand for units in secondary locations.”

In terms of unsold residential units, CBRE|WTW Research says around 34% or 1,300 of the overhang units are in the RM500,001 to RM1mil per unit price range.

“On the other hand, units priced at RM1mil and above form the bulk (58%) of the total overhang valued at approximately RM1.75bil.

” The property consultancy adds that high-rise projects, particularly, are experiencing increased sales pressure amidst an oversupply situation.

“Under the challenging market, developers have resorted to offering incentives such as rebates on selling prices, zero or low downpayment, easy instalment payment of up to 24 months, deferred payment of (say) 30% of the selling price over five years at 0% interest, free legal fees and one year’s maintenance fee.

“Complimentary packages include interior design package, kitchen and electrical appliance vouchers as well as referral and reward schemes.”

Office and retail markets

Knight Frank Malaysia says the office sector is still enjoying stable rents and high occupancies, pointing out however that the overall occupancy rates in some buildings have dropped marginally.

“This favourable state of affairs is expected to continue for the next few quarters as new supply is only expected to come on-stream beyond 2020.”

CBRE|WTW Research says pent-up demand for newer and prime offices persists in Penang.

“New supply of offices in Penang in the past ten years was limited. New prime purpose-built office buildings completed within the past three years such as HunzaTower and Straits Quay Commercial Suites are enjoying commendable occupancy rates, although charging new benchmark rentals.

“Newly set-up offices, as well as offices relocated from older office buildings, comprise the tenants in these new buildings. Office occupiers are seeking newer office buildings that serve their contemporary needs and enhance their corporate image.”

It adds that pent-up demand for newer and prime offices would continue in the short-term, as most of the upcoming purpose-built office buildings are scheduled for completion in year 2020 and beyond.

“Older buildings are likely to experience a slide in demand thus lower rentals and capital prices.”

CBRE|WTW Research says stable occupancy rates can be anticipated, adding that rentals will increase.

“As at mid-2018, the overall occupancy rate of purpose-built office buildings in Penang declined slightly to 77% from 82% year-on-year. Occupancy rates are anticipated to generally remain in the region of 80% in near future.

“Rentals of prime office space in Georgetown were between RM2.50 and RM3.50 per sq ft. Prime offices outside George Town, particularly newer buildings in Bayan Lepas/Bayan Baru and Tanjung Pinang (Tanjung Tokong), registered higher rentals of RM3.30 to RM4.50 per sq ft.”

Due to increasing maintenance cost, CBRE|WTW Research says rentals of office space in most buildings are expected to increase in the short term.

“The overall average rental of prime offices would also increase, pulled-up by new entrants with higher asking rentals.”

As for the retail sub-sector in Penang, Knight Frank Malaysia says the current supply remains unchanged, adding that a more challenging scenario is anticipated for this sector with new supply to come on-stream with the expected opening of IKEA in Batu Kawan in the current quarter and the extension of Penang Times Square.

“Other retail centres/expansion of retail centres will be adding on the supply in 2020 and 2022.”

CBRE|WTW Research says the retail sector in Penang is likely to be flat, buffered by cautious optimism.

“Mixed performances will be more evident between the better and under-performing retail complexes, of which the latter is likely to drag down the overall occupancy and average rental rates.

“With abundant supply in the pipeline, shoppers can look forward to exciting shopping experiences.”

It says the overall occupancy rate stood at 72% as at mid-2018, with 79% for Penang island and 63% for Seberang Prai.

“Retail lots on the ground floor of selected prime retail complexes on the island commanded higher gross rental rates of up to RM45 per sq ft.”

Meanwhile, Geh says better-managed malls in prime locations are sustainable.

“These malls have sustained rental rates but vacancy factors have certainly increased by 5% to 10%.

“There is no oversupply but a rise in vacancy factors. Going forward, the general population’s purchasing trend remains cautious and wary of big-ticket items.”

Saw is less optimistic about the Penang retail sector, saying “this sector has been saturated for a few years and there is no end in sight”.

By Wugene Mahalingam, The Star

Related:

Real Estate Market Outlook 2019 - CBRE | WTW - C H Williams Talhar ...

Property sector expected to recover in first half

 

 

 

 

 

 

Property sector may take up to two years to recover

Hunza and IJM Land go ahead with mega projects

 

Malaysian REITs: Key financials based on various segments

 

Scepticism over housing policy

Property goodies with Govt and developers offering various incentives

Tackling housing, overhang problems

Solving the housing problems

Malaysian building material firms,contractors to gain from ECRL revival

 

A new challenge for the EPF

• 
  

  
  

  
  

  
  

  Pressure on asset managers - Business News

 

Malaysia hits deflation for first time since 2009
global crisis

 

Deflation hits Malaysia for the first time since 2009

 
MANY international experts and organisations have expressed concern about the global economic outlook this year.

Tighter monetary policy, weaker earnings growth and political challenges are confronting major economies.

The long-running US-China trade war and uncertainty around the UK’s exit from the European Union have soured business and consumer sentiment in recent months. However, the risk of a recession remains small, say economists.