Right time to buy real estate?

KUALA LUMPUR: Further signs of a recovery in the Malaysian real estate market are being seen as the country’s economic recovery takes shape and the stock market soared to fresh highs against the backdrop of a stronger ringgit.

Based on the historical strong correlation between property sales and gross domestic product (GDP) growth, and the fact that real estate sales lag GDP growth by about three months, property sales, according to market estimates, could have bottomed, at the earliest, in the first quarter of 2010.

This is based on the fact that the country had registered economic growth in the fourth quarter of last year following three consecutive quarters of contraction.

Amid the economic recovery, one may ask a pertinent question — is it the right time to buy real estate in view of the anticipation of even higher interest rates which translate into costlier financing, against the landscape of rising property prices going forward?

Association of Valuers & Property Consultants in Private Practice Malaysia president James Wong Kwong Onn thinks so. He said this was the time for potential buyers to take advantage of existing property launches before interest rates went up further.

“The (recent) slight increase in interest rates has got a minimal impact,” Wong told The Edge Financial Daily in a telephone interview last Friday. “But interest rates will go up further,” he added.

Property prices to increase at an annual pace of 10%

According to Wong, whose association represents some 300 members, real estate prices in the country were expected to increase by some 10% this year from a year earlier across the board as the economic environment improves further.

“Development land prices will also go up,” Wong said, as the economic recovery prompted developers to replenish their land bank.

The economy rebounded from a recession, expanding at an annual rate of 4.5% in the fourth quarter of 2009. The fourth-quarter numbers translate into a full-year GDP contraction of 1.7% in 2009. In quarterly terms, GDP expanded 2.2% from the third quarter.

GDP contracted at a smaller annual pace of 1.2% in the third quarter of 2009 although the economy grew 5.7% in quarterly terms.

The central bank recently raised the overnight policy rate (OPR) by 25 basis points (bp) to 2.25% after keeping the benchmark interest rate at 2% at seven consecutive monetary policy committee (MPC) meetings. One bp is one hundredth of a percentage point, or 0.01%.

Investors usually park their money in countries with higher interest rates to generate better returns from their funds. They pick a country deemed to have positive long-term fundamentals, but foreign funds could also come in due to the potential for quick gains which denote speculative elements in the local market.

Anticipation that the ringgit will strengthen will spur overseas investors to acquire local assets such as stocks and real estate, hence, the appreciation of the ringgit due to demand.

This translates into double gain for foreign investors when they sell their assets as they will be able to reap both the currency exchange gains, and capital appreciation of their assets. This scenario could be reflected in the recent rally in the equity market.

Demand-supply forces for residential properties almost at equilibrium

Meanwhile, HwangDBS Vickers Research analyst Yee Mei Hui said demand-supply forces for residential properties in the country were almost at equilibrium, but long-term demand would be supported by the nation’s young population, urbanisation and shrinking household size, besides ample liquidity.

“Demand for niche lifestyle products, especially in the Klang Valley and Penang, are expected to remain strong with rising affluence.

“Demand for high-end condominiums/serviced apartments may remain weak given large incoming supply, especially around KLCC (Kuala Lumpur City Centre) and Mont’Kiara,” Yee wrote in a note to clients.

According to the analyst, buyer enquiries had picked up recently, but prices and rentals were still 10% to 20% below peak rates.

Nevertheless, developers which exhibit strong branding and track records such as Eastern & Oriental Bhd, DNP Holdings Bhd, and Sunrise Bhd should continue to see strong take-up rates.

According to Yee, fresh supply of office space entering the market in the next two years should be absorbed as half of the amount had been pre-let.

“Thereafter, new supply, especially mega projects with unsubstantiated demand, might create an overhang,” Yee said.

In the retail property sector, sentiment is expected to pick up as the economy regains momentum and occupancy of retail space is anticipated to remain stable at 92% with minimal new supply.

HwangDBS Vickers foresees an upward revision in rentals for prime retail space this year, possibly between 10% and 20% for places like Suria KLCC, The Gardens, Pavilion, and Sunway Pyramid.

“Rentals should be driven by rising inflation and tourist numbers,” the research house said.

Companies to watch in this category included KLCC Property Holdings Bhd, IGB Corp Bhd, and Sunway City Bhd, it added.

This article appeared in The Edge Financial Daily, March 15, 2010.