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Archive for December 27th, 2008

M’sian property market can weather slump

Posted by luxuryasiahome on December 27, 2008

Analysts expect a slowdown but no major correction as there is still room to grow

THE Malaysian property market, which is expected to enter the down cycle next year, will still be resilient enough to survive the onslaught of a softening global economy.

The government’s RM7 billion (S$2.9 billion) stimulus package, including the reduction of Employees’ Provident Fund contributions from 11 per cent to 8 per cent coupled with lower interest rate and inflation, would provide the bright spark to the market.

The market still has ample liquidity as banks continue to give out financing despite worries about an increasing credit crunch in the US.

Association of Valuers and Property Consultants in Private Practice Malaysia (PEPS) president, James Wong Kwong Onn, said that although the property market was expected to see a slowdown in the take-up rate, there would not be a major correction as there was still room to grow.

He said that Malaysia was in a better position compared to Singapore, Hong Kong and Thailand which were more exposed to the US sub-prime crisis. ‘Prices in these three countries have shot up tremendously by 50-100 per cent but in Malaysia, the increase was gradual,’ he said.

Mr Wong, however, said that the association did not expect the market to burst as there would be a moderate reduction in property prices. He added that the property market, especially for residential and commercial, has been ‘red hot’ for three years up to the third quarter of this year but the softening economy has put a pressure on it.

According to Real Estate and Housing Developers’ Association president, Ng Seing Liong, the property market would see a slowdown of between 5 and 15 per cent in 2009. He attributed the economic slowdown as a dampener to the enthusiasm of buyers.

Mr Ng said that sales generally would be ongoing but in small volumes as most purchasers adopted a wait-and-see attitude while most developers downsized their new property launches for next year. ‘Prices are likely to moderate by 5-10 per cent from the first quarter 2009,’ he said.

An analyst from Aseambankers Malaysia Bhd said that buyers were holding back their investments until the economic environment was stable. He, however, anticipated home buyers to return to the market in the second half of 2009.

‘The ‘hot’ property items, especially luxury condominiums in the prime locations, such as in the Kuala Lumpur city centre and Mont Kiara, would continue to be a focus as demand remains positive. Iskandar Malaysia is in the limelight. The most prominent developments are in Nusajaya and Danga Bay, which have attracted buyers from all over the world,’ he said.

An analyst from OSK Research, who also shared his view, said that given a huge supply expected to hit the market, especially in the high-end condominiums segment commencing late this year, 2009 would prove to be a year of reckoning for the Klang Valley’s luxury condos.

‘As the market having to digest the massive supply of high-end condos that will flood the market to at least 2010, this supports the belief that the next property boom cycle will potentially be led by high-end landed properties,’ he said. He added that the next phase of the property upcycle could only commence in early 2010 or 2011.

Source : Business Times – 27 Dec 2008

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Don’t be in a hurry to reinstate DPS

Posted by luxuryasiahome on December 27, 2008

Uncertainty in the market being caused now by the scheme should not be treated lightly. By Kalpana Rashiwala

THE deferred payment scheme (DPS) was scrapped over a year ago but it has left a lingering uncertainty in the market that may not clear for some time yet – a fact that should not be taken lightly in examining the merits of reviving the scheme, as some developers are urging the authorities to.

Developers say bringing back DPS will stimulate property demand and point out the scheme did help genuine home buyers tide over temporary cashflow issues.

However, DPS has also been blamed for creating excesses during the recent property bull run. It fuelled speculative buying, since buyers needed to pay only 10-20 per cent of a property’s purchase price to the developer, with the rest only upon the project’s completion.

Amidst the current property slump, DPS has also created a ‘time bomb’ that is ticking away as projects sold on the scheme near completion, which is when buyers have to pay the chunk of their purchase price to the developer. Buyers who have not secured a housing loan yet may find it difficult to get one, with the current tight lending regime being practised by financial institutions.

Without a housing loan, these buyers may not be able to meet their payment to the developer to complete their purchase. This will have consequences.

The government recently revealed that 10,450 private homes sold in uncompleted projects were under DPS as at Nov 30, 2008 and has even given a breakdown of this figure by location and expected year of completion. Of course, not all DPS buyers are speculators. Nevertheless, the debate continues to rage on how big an impact there will be on Singapore’s property market from buyers failing to complete their purchase when projects receive Temporary Occupation Permit (TOP).

Predicting the size of the blast from the DPS ‘time bomb’ is tricky.

For one thing, no one knows how many of these buyers who purchased on DPS have already secured a housing loan. For those who have, paying that big instalment to the developer at TOP may not be an issue. Those without a loan may start to panic.

Other factors affecting the magnitude of the problem created by DPS include: how buyers are affected by the ongoing recession, prospects for their jobs or businesses, the economic and property market outlook at the time, and whether banks relent on their current tight lending policy.

So the impact of DPS is unclear. And the fate of buyers and developers remains uncertain.

Much has been said about DPS buyers defaulting on their purchases by walking away and returning units to developers. The reality is not so simple. The right to repudiate the sale-and-purchase agreement lies with the developer, not the buyer. Even so, some foreign buyers may get away with absconding from the deal and limiting their damage to the 10 or 20 per cent deposit paid.

However, local buyers who fail to complete their purchase risk being sued by developers to either complete the transaction or to compensate the developer for the shortfall between the original contracted purchase price and what the developer manages to sell the unit for later.

On the other hand, if buyers try to offload their units in a weak market, this may accelerate the tailspin in property prices. Another point to note is that those who sell their units at a loss in the subsale or secondary market will still have to cough up the difference and pay the developer.

For instance, if a buyer had picked up a $1 million property on DPS, has paid the developer a 20 per cent or $200,000 deposit and manages to sell his property to another buyer for say, $700,000 in the downmarket, the first buyer has to pay the developer the $100,000 shortfall before it agrees to transfer the title to the second buyer.

Developers too will have to count the cost of this whole episode, including the damage to their image if they drag financially strapped buyers to court.

The global financial crash has already dealt a big blow to sentiment in the Singapore property market. This is being exacerbated by the uncertainty over the likely fallout from DPS.

Defusing the time bomb

What can be done to defuse this time bomb? If buyers say they can’t secure housing loans or sufficient loan quantums from banks to complete their purchase of properties bought on DPS, some of the stronger developers may be game to provide second mortgages for buyers – if the authorities allow that.

Alternatively, developers could record the outstanding payments from problem DPS buyers as debt owed to them. So these buyers become debtors to the developers, who may charge them interest on the unpaid amount until the sum is settled by buyers, as allowed under the sale-and-purchase agreement. Developers may, however, be deluged with buyers taking refuge in such arrangements. And these arrangements can only be made with the support of the developers’ banks. Already, many mid-sized and smaller developers are highly geared.

Whichever way you look at it, somebody will have to pay the price for the problems created by DPS – be it buyers having to sell their units at a loss or being sued by the developer, or developers ending up financing buyers to help them complete their purchase.

Sentiment is so weak now that reviving DPS alone probably won’t do the trick in jumpstarting private home sales.

Banks are tight-fisted now, but it is a matter of time before they have to relax on home mortgages. The business of financing will then be best left to them. In the months gone by, some banks had even devised novel schemes like zero instalment and interest absorption that mimicked DPS – and served the needs of genuine home buyers with temporary cashflow problems, just as well as DPS did.

The good thing about this approach is that banks will have to do checks on borrowers to ensure they are credit worthy – to minimise the risk of non-performing loans manifesting later from giving loans to poor-quality borrowers dabbling in properties beyond their means.

Developers, on the other hand, are not in the business of assessing the creditworthiness of potential buyers. Their business is to sell homes – to as many people as possible and at as high a price as possible. If developers are again allowed to offer DPS in its old form to home buyers, it may once more draw speculators with weak credit standing and create another round of excesses.

Some have suggested ways to temper DPS. For example, buyers could be required to pay an additional 10 per cent – say 18 months after they have paid the initial 20 per cent to the developer. The idea is that buyers would need to apply for and draw down a housing loan, bringing banks into the picture earlier. That may help to sift out financially weaker speculators.

DPS helps HDB upgraders to buy private property, as they don’t have to sell their existing HDB flats immediately to make progress payments on their new home. But the problems being caused by DPS should not be treated lightly amidst calls to reinstate the scheme.

The Singapore property market will eventually recover after the dust from the global financial crash settles and the Remaking Singapore Story takes centre stage once again. In future, high-net worth individuals from overseas and other investors looking for places to park their monies may develop a distate for places brimming with excesses. After all, buying a property is a long-term commitment, best made within one’s means.

Source : Business Times – 27 Dec 2008

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The story of three slumps

Posted by luxuryasiahome on December 27, 2008

The current downturn bears little resemblance to those of 1998 and 2001

HOW does the current property market slump compare with the earlier ones in 1998 and 2001?

Sitting here at my desk, looking out over the huge Marina Bay building site that will grow into Singapore’s first integrated resort, it doesn’t look much like a market in a downturn. But, we are currently experiencing some very special market conditions that started 18 months ago with the sub-prime issue in the US. It has had a knock-on effect across the global economy that few at the time anticipated.

To make some sense of it all, I find myself thinking about how very different from 1998 and 2001 this current situation is. In 1998, the turmoil came from some parts of Asia, as a result of weak fundamentals such as inadequate regulatory oversight, and overexposure to foreign exchange risks. There were also two further events – the dotcom failure in 2000 and Sars in 2003 – that derailed the recovery and shut down tourism, dampening consumers’ confidence in Asia until 2005. As a consequence of this sequence of events that started in 1997, a number of the Asian markets underwent a substantial structural revamp, harried on and supported by the developed economies.

Today, thanks to these economic storms, the Asian economy is in much better shape than in 1998.

However, the current downturn is more serious than we’ve seen before. Credit – a key tool in the business world – is at the centre of the crisis. As the credit markets froze earlier this year, consumption in the developed markets shifted to low gear and this is affecting the global economy. With debt availability low, businesses find it difficult to continue functioning as before. Even a growing company is stymied without investment.

So, coming back to Singapore, it showed itself to be strong in 1998 and has continued to use the experiences of the last 10 years to advance its economic and financial structure even further. It is now better positioned to manage this global slowdown. And, more importantly, to come out of it faster and stronger.

For example, Singapore has been very successful in attracting foreign direct investment (FDI), with an estimated $348 billion in 2007, compared to $165 billion in 1998 in (estimated real value terms). This is a direct endorsement of the business-friendly measures that Singapore has put in place. These have ranged from the removal of capital gains tax through to the signing of tax treaties with 50 countries that allow companies based here to reduce taxes in dividends, interest and royalties.

The property market here benefited from this investment influx. The value of property investment in Singapore has increased from $15 billion in 1997 to $43 billion by 2007 (estimated real value terms) – almost a 290 per cent increase.

Part of this property investment has come from Reits. The Monetary Authority of Singapore’s issuance of the guidelines for property trusts in 1999 opened the door for Singapore to become the Asian Reit hub it is today. There are now 20 Reits listed on the Singapore Exchange built from a variety of properties across Asia.

The formation of the Reit market has made this chunky and illiquid investment class accessible to a larger pool of retail investors and improved the transparency of this market – a key determinant in attracting foreign investments that has provided more liquidity.

One of the most striking changes from 1998 is that, despite its size, Singapore has increased its resident population from 3.6 million in 2005 to 4.6 million today.

With the enlarged population, the proportion of non-Singaporeans has also increased by 5 percentage points to 25 per cent. It is with no surprise that the volume and demand for new residential launches has similarly jumped.

In 2007, there were over 13,000 units launched and sold – 25 per cent more than the 10,000 units launched in the 1996 peak. Demand, spurred by a relaxation in government policy on foreign ownership of residential properties in Singapore, increased some 64 per cent over the same period.

There is much talk about the health of the property market in Singapore at the moment, but looking at the figures, our market today is in a more robust state than in 1998. Vacancy rates are much lower, with grade A office vacancy at 1.8 per cent today, against 14.4 per cent 10 years ago. This indicates a very tight market.

In the residential sector, we see the same strong story, with capital values in the prime market still 57 per cent higher than in 1998 and affordability improving. So those who see themselves in Singapore for the long term and missed the last market rise, now have an opportunity to enter the market.

As the global economy continues to struggle, Singapore is still likely to feel the pinch. However, the pro-business mindset and innovative attitude of its government are two crucial ingredients that will support the economy – and the property market – through the downswing.

We all know that there will be a turning point in the current cycle. Perhaps when buyers and sellers of physical assets finally agree on price expectations, or liquidity returns to the market as credit conditions revert to normal. Or perhaps a change in people’s sentiment could cause the turnaround. Whichever it is, Singapore has worked hard on managing its economic fundamentals and infrastructure, to be ready to capitalise swiftly on any positive economic moves. Certainly, the Marina Bay Sands coming to life outside my window will be ready to take advantage of the upswing.

Chris Fossick
Managing Director, Head of SE Asia
Jones Lang LaSalle

Source : Business Times – 27 Dec 2008

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Retail rents expected to fall in 2009

Posted by luxuryasiahome on December 27, 2008

Retailers likely to be cautious in expansion, rents may undergo corrections to reflect the gloomy outlook

RENTS for prime retail space in Orchard Road could fall by as much as 13 per cent in 2009, while rentals at suburban malls are expected to ease by about 3 per cent, property analysts here said.

Cuts in consumer spending will be the key threat to rental rates. But rents will also come under pressure from the 3.2 million square feet of new retail space expected to come onstream next year – close to half of which will be along Orchard Road.

A poll of property analysts here showed that they expect prime retail rents to fall by anywhere between 5 and 13 per cent next year. But malls in the suburbs, where people go to buy their neccessities, are expected to fare better. Predictions for suburban rental growth range from ‘holding steady’ to a decline of up to 7 per cent. The consensus view is a fall of about 3 per cent.

By contrast, so far in 2008, prime Orchard Road rents fell 0.8 per cent year-on-year, while prime suburban rents rose one per cent, data from CB Richard Ellis (CBRE) shows.

Consumers are expected to cut back on spending on concerns of job and wage security, which will hit the sales of retailers, analysts said. Tourist arrivals are also expected to fall, which will depress sales further.

‘A prolonged depression in consumer spending could affect retailers’ ability to service their rents and we think it is possible that more retailers would renegotiate for lower rental rates, and retail mall managers may have to give in to avoid a high turnover in tenants,’ noted OCBC Investment Research analysts Foo Sze Ming and Meenal Kumar in a report.

Echoed Knight Frank: ‘Retailers will be more cautious in expanding their businesses and retail rents are likely to undergo corrections to reflect the gloomy outlook.’

In addition, more space is due to come onstream – some 5.7 million sq ft in the next two years. Of this, 20-30 per cent will be located along the Orchard Road belt. Another 21 per cent will come from the Marina Bay Sands resort. Some of the major retail supply due to be completed next year include Ion Orchard, The Marina Bay Sands Shoppes, Orchard Central, 313@Somerset and City Square Mall.

But in spite of all the new space, analysts here remain confident that the healthy take-up of retail space seen so far is likely to keep vacancy rates under control and prevent sharp rental declines caused by oversupply.

Most of the major upcoming malls – such as Ion Orchard, Orchard Central, Mandarin Gallery, 313@Somerset and Marina Bay Shoppes – have reportedly achieved pre-commitment rates of between 50 per cent and 70 per cent, said Colliers’ director for research and advisory Tay Huey Ying. And there should be interest for the remaining retail space, she said. The Orchard Road malls will ‘probably be the only new retail malls the market is likely to see on this prime stretch for a while’ and the Marina Bay Shoppes ’should also be sought after as the locality would be a new icon for Singapore’, Ms Tay said. ‘The challenge, therefore, is really in structuring a rental package that is win-win for both landlord and retailer in an increasingly trying time,’ she added.

Other analysts agreed, saying that the onus will be on landlords in 2009.

‘Prime properties will still be able to attract tenants, but developers must be more flexible with rental expectations,’ said Anna Lee, DTZ’s associate director for retail. ‘As consumers hold their purses tighter, landlords would have to spend more on advertising and promotion to entice more consumer traffic to their malls and translate that into spending.’ And to mitigate lower sales faced by their tenants, some landlords may offer rental rebates and lower turnover rents, she added.

Analysts also said that capital values are expected to remain steady in the retail sector. ‘Of note is that the retail sector remains defensive even during the Asian Crisis period, with rental rates and capital values remaining fairly stable during this period. Hence, we believe that a fair cap rate for the retail sector would remain in the 5-6 per cent range,’ said DBS Group Research analysts Mun Yee Lock and Derek Tan.

Source : Business Times – 27 Dec 2008

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