Braced for a property glut

Shahanaaz Habib

Everyone talks about rising residential property prices and high rentals because of rising demand and speculative activities. Now they are talking about the impact of GST too.

Shahanaaz Habib, The Star

IS a glut in residential property or a slowdown imminent? IFCA MSC Bhd chief financial officer Daniel Chow seems to think so.

Chow was an invited speaker at a significant property event last week where one of the key speakers showed that actual sales last year for all the major players in the industry, except for one, was much lower than their forecast.

“Everybody recorded negative. There was only one exception. The fundamental rule on economics is demand and supply. When there is oversupply, this is what happens.

“How much is the population growth in Malaysia? Less than 3%. And how much is your purchasing power growth? On average 6% to 7% year by year.

“But the increase in the supply of property is double digit every year. How can you expect the market to absorb all this? There is a limit,” he says in an interview.

For him, the introduction of the GST in April is not going to cause a spike in prices from April to December.

On the contrary, what he sees on the horizon is a glut by year end and the whole of next year.

He says this is when the properties under the (now banned) Developers-Interest-Bearing Scheme are completed and most buyers who paid only the minimum 5% down payment would have to start paying their monthly instalment and service their housing loan when the property is handed over to them.

“Most are just property flippers and their whole intention is to flip it for capital gain. But what if nobody wants to buy? Do they have the holding power? Some were greedy and put in RM10K into three different units instead of RM30K into one.”

So if the person cannot pay the monthly instalment or sell the unit then the bank will do a foreclosure.

“I expect to see cheap sales and bank lelong at the end of the year and early next year for certain types of properties in selected areas,” he says.

Chow believes the oversupply will create a downward pressure on the selling price.

As for the impact of the GST on the housing industry, he believes it will be “very minimal”.

Chow points out that non-GST factors are the reason the cost of building residential houses is so much higher now compared to five or 10 years ago.

He says developers are now forced to make “contributions” to utility companies like Tenaga Nasional, Indah Water Konsortium, and Syabas.

“It is not a voluntary contribution. And this ‘contribution’ has been increasing substantially over the last five years. This increase over the last five years has translated into higher overall infrastructural cost and higher cost per house.

“Not forgetting the fact that land cost too has gone up because land owners are greedy. These things have nothing to do with the GST and that increase is much higher than the GST impact.”

When the GST is implemented in April, residential property including SoHo will be exempt supply, meaning buyers will not need to pay the GST on it. But commercial property including SoFo, SoVo and SoS would be subject to the 6% GST.

Construction material such as cement, sand and bricks for both residential and commercial properties will also be subject to the 6% GST.

So will heavy machinery like cranes.

Chow says property developers normally do not buy the heavy machinery but rent them from the contractor. But this too has to be factored into the construction cost.

He believes the GST will impact the smaller developers less than the bigger players because the smaller ones do the construction themselves unlike the bigger players who engage an external construction arm and outsource their work.

He estimates that the GST would increase cost of houses by 2.1% to 2.2%, which is minimal, but he doubts that “developers have the ability to push prices up by even a single per cent” because of the pressure from the oversupply.

“I have served as an accountant and financial controller in three different property development companies, and I started my career in a tax consultancy firm and I have been in the property and construction sector for 22 years.

“And I can tell you that for a financial controller in a property development company, the biggest fear is not being able to draw down on its bank loan. The draw down depends on the percentage of sale.

“For example, if I am launching 300 condominiums, the first tranche of loan can be drawn, say, when 20% of the units are sold, the next tranche when 50% are sold and maybe if I have 60% to 70% sold I can then draw down 100% of the loan.

“If I try to push the selling price higher and my sales drop to a worrying level, I may be stuck on my draw down because that is based on percentage of sales. And developers don’t want that.”