House prices still surging in Malaysia

 

House prices in Malaysia continue to surge, despite anti-speculation measures. 

In Q3 2013, Malaysia´s national house price index rose by 10.1% (7.8% in real terms) year-on-year. This year´s price rise, nationally, was only slightly lower than last year´s, which was 11.9% (10.4% in real terms).

Kuala Lumpur’s house price index rose especially dramatically, with nominal prices up by 14.4% (11.9% in real terms). Kuala Lumpur has the most expensive houses in the country, with an average house price of MYR 620,758 (US$ 189,342). It is followed by Sabah and by Selangor, with average prices of MYR 413,187 (US$ 126,030) and MYR 405,826 (US$ 123,784), according to theValuation and Property Services Department (JPPH).

House prices also surged in Johor (20.4%), Pulau Pinang (14.3%), and Negeri Sembilan (6.3%). Selangor and Perak had the lowest annual price growth at 4.3% and 3.7%, respectively.

Recent anti-speculation measures are expected to lessen transactions volumes.  But property prices in upcoming areas/hotspots are expected to continue rising, according to Knight Frank.  Partly because the market overhang has diminished - the number of housing units launched in Q3 2013 fell to 3,736 units, 74.5% lower than the 14,662 units launched during the same period last year.  The number of houses sold, relative to stock, was 18.7% in Q3 2013, up from 15.3% in Q2 2013, and 12.5% from the previous year.

House prices still below Asian crisis levels

Amazingly, house prices in Malaysia are still below pre-Asian Crisis 1997 levels. They rose rapidly in the early 1990s in two particularly dramatic surges – in 1991 house prices rose 25.5% (20.3% in real terms), and in 1995 they rose 18.4% (14.4% in real terms).

After the Asian Crisis, prices of luxury detached Kuala Lumpur houses then slumped 39% between 1997 and 1999.  However, Kuala Lumpur´s house prices since then have significantly outperformed the rest of the country, especially after the economic downturn of 2008-2009, when the property market was revitalized with the help of the Greater Kuala Lumpur Plan, targeting developing key locations, including the latest “The MRT Project”.

The 2013 prices rises, with Kuala Lumpur´s house price index rising by 14.4% (nominal), shows that Kuala Lumpur retains its status as a market leader.  Kuala Lumpur´s housing market is now red-hot, with strong price rises.

In 2012 Kuala Lumpur house prices rose 11.1% (9.3% in real terms)

2011: up 12.2% (8.7% in real terms)
2010: up 12.2% (10.3% in real terms)
2009: up 2.5% (-3.1% in real terms)
2008: up 4.5% (-0.7% in real terms)
2007: up 7.9% (5.8% in real terms)
2006: up 5.3% (1.6% in real terms)
2005: up 6.5% (3.4% in real terms)

In contrast national price rises have been more muted.   Before this year´s 10.7% national price rise (7.78% nominal) the following price rises were seen:

In 2012 the national Malaysian house price index rose 11.8% (9.9% in real terms).

2011: up 9.9% (6.5% in real terms)
2010: up 6.7% (4.9% in real terms)
2009: up 1.5% (0.9% in real terms)
2008: up 4.7% (a fall of 0.7% in real terms)
2007: up 5.3% (3.2% in real terms)
2006: up 1.9% (a fall of 1.7% in real terms)
2005: up 2.4% (a fall of 0.6% in real terms).

By property type, nationally, during the year to Q3 2013:

• The average price of terraced houses rose by 7.8% y-o-y to MYR 238,337 (US$ 72,697).
• The average price of detached houses increased 15.1% y-o-y to MYR 458,858 (US$ 139,960).
• The average price of semi-detached houses rose by 14.7% to MYR 421,622 (US$ 128,602).
• The high-rise price index soared 13.7%, to an average price of MYR 248,567 (US$75,817).

Low interest rates are encouraging mortgage borrowing

The average lending rate fell to 4.56% in December 2013, significantly below historic rates.  The Overnight Policy Rate (OPR) is at 3%.  This is despite the base lending rate (BLR) being raised in December 2011 to 6.53%, where it remains.

These low interest rates explain why, despite many curbs, mortgage lending is still surging in Malaysia.  In July 2013, Bank Negara Malaysia (BNM) introduced new policies to reinforce responsible lending practices.

• The new maximum home loan period was reduced to 35 years, from the previous period of 45 years.
• The maximum personal loan period was shortened to 10 years from 35 years.
• Pre-approved financing products are no longer possible.

Aside from these three new policies, the BNM introduced stricter lending guidelines on January 1, 2012, requiring mortgage eligibility assessments to be based on net income, considering:

• Statutory deductions for tax;
• Employees Provident Fund (EPF) contributions, and;
• All other debt obligations.

Yet despite all this, outstanding housing loans in Malaysia increased by 10.7% in 2013 to MYR 271.2 billion (US$ 82.7 billion), about 27.3% of GDP.

To make home-buying possible for people on low and medium incomes and young people, in July 2011 the Malaysia People’s Housing (PR1MA) Bill 2011 was launched. Developers are as a result switching from high-end developments to mid-range ones to lure first time buyers with easier financing and reduced stamp duty for houses below MYR 400,000. Borrowers with monthly income up to MYR 7,000 per month qualify for the scheme.

Tighter anti-speculation measures

Some other anti-speculation measures introduced by the government:

Fly-by-night developers targeted. Housing license project deposits of 3% of total estimated project cost were recently introduced.  A MYR 500,000 fine, plus maximum of three-year jail term for developers who abandon projects, have been proposed by the Housing and Local Government Ministry.

Capital gains tax rises.  On January 1, 2014, the Real Property Gains Tax (RPGT) rose from 15% to 30% on properties sold within three years from purchase.

Taxes on gains on properties sold after four to five years rose to 20% and 15%, respectively. No RPGT will be imposed on citizens for properties sold after six or more years, while companies will be taxed at 5%.

For non-citizens, RPGT on properties sold within a holding period of up to five years is 30%, while RPGT on properties sold within six years or more from purchase is 5%.

The end of the Developer’s Interest Bearing Scheme (DIBS).  The government has forbidden banks from offering financing via the DIBS, introduced in 2009 to boost condominium sales, where the developer paid the interest on buyers’ loans during construction of a project.   DIBS-financed projects have tended to be significantly more expensive than others, as their prices include financing costs and reflect future property values.  According to some, the schemes distorted the market, and in any case, they certainly added to buyers´ liquidity.

Bulk sales. The Malaysian government will soon require property developers to obtain permission before making bulk sales of more than four units. The move is aimed at curbing rising property speculation, and to give ordinary individuals an equal opportunity to buy houses.

The introduction of the new cooling measures is expected to tone down transactions in the property market. This also extends to the leasing market, especially in the prime locations, which, according to Knight Frank, “is also expected to continue facing challenges as an estimated 6,277 units are scheduled for completion by end-2014”.

Tougher restrictions on foreign buyers

The Malaysian government has partly retreated from its December 2006 liberalization of foreign property purchases. In January 2010, the price floor below which foreign buyers cannot buy was hiked to MYR 500,000, twice the previous level.  From January 2014 it was hiked again to MYR 1 million (US$ 302,892).  Foreign purchases above the threshold are placed under the “purview of the State Authorities” under the regulations, with approval expected to take one to two months.

According to Knight Frank Malaysia, the increase in floor price is not likely to slow the increasing demand for Malaysian property.

Aside from this pricing threshold, there are no other restrictions that hinder non-resident foreign buyers in Malaysia. Malaysia along with Hong Kong and Singapore is one of the Asia-Pacific countries that imposes minimal restrictions on foreign property buyers (see Knight Frank´s July 2013 Asia-Pacific Residential Review).

There has been an upward trend in “Malaysia My Second Home” (MM2H) applications in recent years. The number of application approvals increased to 3,227 in 2012, from 2,387 in 2011, 1,499 in 2010.   From 2002 to 2012, the “Malaysia My Second Home” (MM2H) programme attracted 19,488 foreign buyers.

As of November 2013, around 22,320 foreigners were given long-stay approvals under the MM2H program. Most foreign buyers (out of the 122 countries) came from China (4,187 participants), Japan (2,880), Bangladesh (2,603), United Kingdom (2,016) and Iran (1,266).

Housing over-supply?

Although there is a high demand for high-end condominiums, it is also clear that supply continues to increase.   It is not really clear if there is oversupply, and the lag in the release of statistics doesn´t make things more transparent.

By end-2012, around 63,008 properties were unsold, a 15.5% rise from the previous year. However, this was still way below the peak of 83,811 unsold units recorded in 2004 - a year which was not followed by house price falls.  In 2012 the condominium market saw a large number of construction starts, especially in Ipoh, Johor Bahru, Kota Bharu, Kota Kinabalu, Kuala Terengganu, Melaka, Penang, and Seberang Perai, according to C.H. Williams Talhar & Wong.  Overall housing approvals in 2012 rose by 47.4% to 235,249 units. The value of residential construction work rose 24.9% on the year in Q4 2012, to RM5.76 billion (US$1.9 billion).

In Q3 2013 the pressure seemed to be easing, and the number of launches drastically dropped by 74.5% to 3,736 new housing units, from 14,662 units in Q3 2012.  As of Q3 2013, housing approvals declined by 22.5% y-o-y to 140,891 units, according to the Ministry of Housing and Local Government.

Moderate yields, small rental market

Kuala Lumpur’s rental yields are moderate. Condominiums enjoy higher gross rental yields, ranging from 4.67% for 300 sq. m. condominiums to around 5.44% for 65 sq. m. condominiums. Bungalows have lower yields as compared to condominiums, ranging from 3.78% to 5.04%, according to the Global Property Guide research in December 2012.

During the second half of 2013, rents of existing high-end condominiums in Kuala Lumpur City have remained stable, ranging from MYR 3.00 (US$ 0.92) to MYR 5.50 (US$ 1.68) per square foot (psf) per month, according to Knight Frank’slatest report.

Next to KL City, Bangsar’s high-end condominiums have rents ranging from MYR 2.50 (US$ 0.76) to MYR 4.50 (US$ 1.37), followed by Damansara Heights with rents between MYR 2.50 (US$ 0.76) and MYR 4.00 (US$ 1.22).

The government’s Economic Transformation Programme (ETP) has helped to increase the demand for luxury condominiums in Klang Valley, which caters mainly to foreigners, according to C.H. Williams Talhar & Wong.

Malaysia has a small rental market. Only 6% of the housing stock is in the private rental sector. About 85% of total stock is owner-occupied, while government-provided housing accounts for 7% of the stock.

Better economic outlook in 2014

The Malaysian economy slowed in 2013, expanding by 4.7%, after experiencing a 5.6% growth in 2012. according to the Department of Statistics Malaysia.

From 2002 to 2008, the economy enjoyed growth rates averaging 5.7%, but growth fell sharply to 1.5% in 2009, during the global financial crisis. In 2010, GDP growth bounced back, surging by 7.4%, and was followed by 5.1% growth in 2011.

The IMF’s forecast of 4.9% GDP growth in 2014, but the Malaysian Institute of Economic Research (MIER) predicts growth of 5.5%, while Bank Negara Malaysia(BNM) expects 5.1% GDP growth.

In recent months, inflation has been rising. From 1.34% in January 2013, inflation rose to 3.4% in January 2014. The recent price hikes were partly due to the fuel subsidy cuts implemented by the government in 2013, which raised prices of some petroleum products and eventually lead to an increase in consumer goods.  BNM expects higher inflation in 2014, possibly exceeding the 3.2% long-term average.

The Overnight Policy Rate (OPR) has remained at 3% throughout 2013. However, it is likely to increase to 3.25% in Q4 2014, according to Edward Lee, Standard Chartered Bank Southeast Asia’s regional head of research.

Source: http://www.globalpropertyguide.com

There’s A Business Behind Every Stock

If I were to ask you to bet your money on the future success of your investment in a property company, whom would you choose to become the CEO of your company, Dato’ Liew Kee Sin of Eco World Development Berhad or your good friend Datuk Bill Ch'ng Chong Poh of Malaysia Pacific Corporation?

If I can trust your IQ, betting on the most capable person would make greater sense for you than betting on your good friend.

The same philosophy holds true while investing in stocks. You must not put your money on a stock whose name you like the most or whose chairman is your good friend. Instead, you must invest in the stock of a business you believe has the maximum potential.

But this is one reality that most investors forget – that…

“… a stock is not just a piece of paper that has a name, but a share of a business that has real assets and profits.”

While buying a stock, you should take the same approach as you would if you were buying an entire business. The only difference is that instead of buying the whole of the business, or a partnership in the business, you are only buying a tiny share.

“Investing is most intelligent when it is most businesslike,” Ben Graham.

The idea of buying a stock without understanding the company’s operating functions – its products and services, management quality, employee relations, raw material sources and expenses, plant and equipment, capital reinvestment requirements, and needs for working capital – is unacceptable.

This mentality reflects the attitude of a business owner as opposed to a stock owner, and is the only mentality an investor should have. Owners of stocks who perceive that they merely own a piece of paper are far removed from the company’s financial statements.

They behave as if the stock market’s ever-changing price is a more accurate reflection of their stock’s value than the business’s balance sheet, income statement, and cash flows.

For Buffett and all other successful investors , the activities of a stock owner and a business owner are closely connected. Both should look at ownership of a business in the same way.

 “I am a better investor because I am a businessman and a better businessman because I am an investor.” Warren Buffett

As explained in ‘The Warren Buffett Way’ by Robert Hagstrom, these are some of the key questions that you must answer to understand the business of a company.

Questions you must answer to understand a company’s business

Let’s discuss them in some detail here.

Questions on the core business

1. Is the business simple and understandable?

Never invest in a business you do not understand, for you can’t see the future opportunities and challenges before they arise. For example avoid special-purpose acquisition company (SPAC) if you don’t know how shell or blank-check companies that have no operations but just with a famous person can beat all other smart investors and established companies in the world to acquire great businesses and make big fortune for you.

“Acknowledging what you don't know is the dawning of wisdom.” Charlie Munger

2. Does the business have a consistent operating history?
Past performance is no guarantee for future success, but it shows if a business can operate under varying business conditions. Very often, that is the only thing we can rely on. Often naïve investors try invest beaten down stocks of companies with poor and untrustworthy management with the hope of turnaround of the business and hence its share price. Alas with the same management which has shown poor operating and management record, the turnover never does. As Buffet says:

“In the business world, the rear-view mirror is always clearer than the windshield.”

3. Does the business have favourable long term prospects?

‘Sustainable business’ is the key word here. Look for business that would most likely to last for many years to come. Stay away from companies that operate on trends and fads that can go out-dated in the future.  Yes, like APACs.

Questions on management quality

4. Is management rational?

Now this is a very important part of an investor’s business analysis. The rationality of the management and its ability to deploy cash in a profitable manner is what separates a good business from a bad one.

• Stay away from companies with ambition of empire building rather than focus on the efficiency of the core business.
• Do not invest in companies which the CEOs know only how to talk c*** but care nothing about the running of the business.
• Avoid with all cost companies with CEOs who are very good in speculating in shares.

5. Is management candid (frank) with its shareholders?

You don’t want to get into a future Enron, right? Look for managers that admit mistakes and take complete responsibility of their actions, rather than blaming everybody, and macroeconomic and political events and everything else.

6. Does management resist the institutional imperative?

Institutional imperative is the need for managers to act like their peers, no matter how irrational their actions may seem. Avoid managers who have the tendency to give in to peer pressure and do dumb things.

Questions on financial performance

7. What is the return on equity?

As we will understand later, return on equity is one of the most important metric for evaluating the profitability of companies. Earnings can be manipulated, but return on equity will show how worthy a business is.

Intuitively, if you put in RM100,000 capital into a business, are you looking at what earning the business makes, what are the margins, or are you more concern about the return of your capital?

Long term, return on equity will have a more profound effect on the company’s fortune than earnings.

My personal preference is Return of Invested Capitals though, but the principle is the same.

8. What are the profit margins?

A company that can convert its sales into profits is a successful business. The key is to keep costs at the minimum, and go for higher profits instead of higher market share. Avoid companies with low margins relative to its industry.

Finally, remember what Buffett said:

“If a business does well, the stock eventually follows.”

And don’t forget what Peter Lynch said too.

“ Wonderful companies become risky when people overpay for them.”

Hence you must have a good feel of the value of a company in order to avoid overpaying for a business.

By,

K C Chong (15 May 2014)