Demand For Residential Property In M'sia To Remain Soft

Standard & Poor's Equity Research, the leading provider of independent equity research, believes that rising inflation and interest rates will continue to have a dampening effect on the demand and prices of residential properties in Malaysia in the short term, but expects a recovery over the medium to long term.

Its Equity Research Associate Director, Tam Ching Wah said the Malaysian residential property market is still in a consolidation phase with sales remaining subdued. "However, in the medium to long term, demand and prices of residential properties should recover, with income per capita growing at a robust rate of 6 percent to 7 percent per annum and a young growing population," he said.

The implementation of the Ninth Malaysia Plan by late 2006 or early 2007 onwards should have a favourable spillover effect on the property market. The number of transactions of residential units declined by 6.9 percent year-on-year in 2005 while sales of new units in the primary residential property market fell at a proportionately higher 42 percent.

The number of transactions of residential units continued to decline year-on-year in the first quarter of this year in most states, except Selangor, Kuala Lumpur, Perak and Sabah. "We expect the number of property transactions and property prices to remain subdued for at least one to two more quarters," said Tam.

Although rising interest rates may have dampened sentiment, S&P Equity Research is not overly concerned with the affordability of residential properties as the affordability ratio is at one of its lowest points in the past three decades. Of concern is the oversupply situation, with take-up rates for newly launched housing schemes on the decline since 2002, possibly due to the strong supply of residential units in the past five years, he said.

The number of completed housing units between 2001 and 2005 exceeded the government's target housing requirements in the Eighth Malaysia Plan by 37 percent compared with the Fifth Malaysia Plan period when it only achieved 43 percent of its target housing requirements.

Nevertheless, Tam noted that some of the small and mid-cap property companies in Malaysia offer good value as the current share price levels of these companies have generally reflected the poor sentiment in the residential property market. He said to create value in terms of profitability in the current oversupply situation, developers need to have a good reputation, efficient cost management, low gearing, and the ability to create innovative products for target niche market segments.

They should also own strategically located land bank at low holding cost or have the ability to source such land bank at competitive prices, he said. "Companies we like have either some or all of the advantages that enable them to create value in the current competitive environment."

He said developers with new innovative products in good locations are still enjoying good demand and commanding relatively higher prices regardless of whether they are in the fast growing Klang Valley or in Johor, which has the highest property overhang. A number of these developers are involved in building both traditional mass housing projects and niche projects, he added.