www.property-report.com: 29 September 2007

Malaysia’s housing market is expected to recover strongly in the second half of this year.

Malaysia´s housing market is expected to recover strongly in the second half of this year, with buying interest in the low end and mid range property ignited by government incentives to
bolster sluggish sales.

While sales in the high end housing market have always been robust, those in the middle and lower price range started to pick up at a steady pace from April this year after languishing
for more than two years. Between April and June this year, the housing property market saw investor activities across all segments of the market as a result of the exemption of the real property gains tax (RPGT), which came into effect in April.

According to the Ministry of Finance´s (MOF) Economic Report 2007/2008, the residential sector moderated in 2006 following higher inflation and interest rates.

Low-and-medium property developers deferred their new launches, resulting in lower housing starts of 65,045 units during the first half of 2007, down 23.5 per cent from 85,025
units a year earlier.

However, the report said purchasing sentiment picked up in the second quarter of 2007 as reflected by the take-up rate of newly launched residential units, which improved to 30.8 per
cent from just 11 per cent a year earlier.

Valuation & Property Services Department under the Finance Ministry said in a report that the existing stock of residential units stood at 3,944,825 units at the end of the second quarter of this year.

During the four quarters to the end of June 2007 a total of 129,128 units were completed, ranging from 37,048 units (Q1 2007) to 55,864 units (Q2 2007). The incoming supply was reduced by 6.5 per cent to 590,667 units from the corresponding period of Q2 2006 (631,790 units).

It said 87,518 units started construction in the past four quarters. The planned supply increased to 644,452 units from the corresponding period of Q2 2006 (631,443 units) but slightly lower than Q1 2007 (650,005 units). The department attributed the lower number of the planned supply to higher number of buildings that started construction and decreased number of building approvals.

OUTLOOK:

The number of developers with positive outlook on the housing market has doubled to four per cent in the first half of this year compared with the same period last year, the Real Estate and Housing Developers Association (REHDA) said. REHDA deputy president Michael Yam said the property players achieved better sales after the government introduced incentives, including real property gain tax exemption effective from April 1 and the removal of Foreign Investment Committee approval.

The maximum tax on property gains was 30 per cent for individuals and corporations previously.
Other positive factors include Malaysia´s improving economy, availability of loans to foreigners and no restriction to number of units that can be purchased.

"These factors contributed to renewed interests in the property market and have resulted in more enquiries which translated into better sales," he said.

Yam said those surveyed were likely to raise prices by between 10 per cent and 20 per cent, reflecting the increase in material costs and robust demand for properties in Kuala Lumpur
and Selangor. Construction costs continued to climb, reaching 30 per cent year-on-year.

For the first six months of 2007, 86 per cent of the respondents that launched new projects said sales improved or remained the same compared with only 38.8 per cent year-on-year.

He said 36 per cent of the respondents reported improved sales during the first six months of 2007 compared with 14.9 per cent in 2006 while the percentage of developers with softer sales plunged to 14.1 per cent from 61.2 per cent last year.

However, 66 per cent of the respondents said they had unsold stocks due to market-related factors such as Bumiputra quotas, unavailability of financing, wrong location of project, pricing and location of units.

Yam said most of the unsold stocks were properties below RM250,000 and were most likely to be located in Malacca and Ipoh where some developers had reported worst sales.

Allan Soo, managing director of Regroup Associates, said that between April and June this year, the housing property market saw investor activities across all segments of the market as a result of the exemption of the real property gains tax (RPGT), which came into effect in April.

"The mood was decidedly upbeat at the start of the second quarter of 2007 and many real estate agents interviewed remarked on the positive effect this government measure had on the property market," he said.

"The overall consensus among real estate agents is that the residential property market is hot, although the bulk of investor activity appeared to revolve around properties in the vicinity of KL City Centre (KLCC). There were generally more enquiries and sale transactions across the board, whereas rentals remained stable in this quarter," he said.

The buoyant mood in the primary market appears to have spilled over to the secondary properties in nearby areas. The survey conducted for The Edge/Regroup Klang Valley Housing Property Monitor show that values increased by about 2 per cent to 4 per cent.

However, Soo said the price increases are unlikely to continue as prices in the secondary market are already high. Soo said: "It´s unlikely that the market will be able to support any more increases, especially in the suburban locations. The mood for the rest of the year will still be
positive, but we´re not expecting more growth."

Some real estate agents confirm that the secondary residential market for 2-storey houses in certain prime areas in the Klang Valley remains slow despite the real property gains tax exemption and relaxation of Foreign Investment Committee rulings.

Real estate agent Annie Liew said there is demand for such houses in popular locations such as Bandar Utama, Taman Tun Dr Ismail and Damansara Heights but sellers are asking for a
premium.

"Some of the houses here are basic and old, and buyers are reluctant to pay a premium for the property," she said. She said owners are not in a hurry to sell and are holding on to their properties. However, sales of 2-storey terraced houses in the mid-end market appear to be more active. Other agents said there is rising interest in secondary homes as newer properties are getting more expensive.

"For instance, if a new unit costs some RM400,000, they would not mind forking out an additional RM100,000 to get a unit in more established areas," one agent said. Regroup Associates´ Soo said growth will likely occur in the primary market, particularly in choice locations such as the KLCC area.

He said some projects near the Petronas Twin Towers are fetching RM1,800 psf, with prime units sold up to RM2,000 psf.

"Real estate agents dealing with primary and secondary transactions of luxury apartments in the city centre have remarked on the high transaction volume and keen interest shown by investors in properties located the KLCC area," he said.

But some analysts said prices seem to have risen too high in KLCC. This year, about 1,000 units will be added to the market, with the completion of Dua Residency (288 units) and Marc Service Residence (607), excluding those in the U-Thant area. Next year, more than 10 projects will be ready for occupation. This will be adding slightly more than 1,000 units to the market.

In a situation such as this, Rahim & Co managing director Robert Ang said it is very important to be the first in the market. In 2004, Rahim & Co exclusively marketed Dua Residency, the two-block development beside the Singapore High Commission. Today, Robert Ang and his team are focusing on the resale and rental market.

Prices for Dua Residency have moved up, from around RM550 to the current price of RM800 per sq ft (psf). Monthly rental is between RM9,000 and RM12,000. Property prices around KLCC have moved between 25 per cent and 30 per cent since their launch, which is "very healthy," Ang said.

He said an average increase of that size over a two- to three-year period does not represent a bubble, especially if the Malaysian economy is expected to grow 6 per cent annually. The price hike in that location is due mainly to foreign interest after the real property gains tax (RPGT) exemption and faster approval of foreign purchases by the authorities.

Henry Butcher Marketing Sdn Bhd chief operating officer Tang Chee Meng said the interest is mainly due to foreign buyers´ expectations of further price rises. They feel there is room for prices to go up unless the Malaysian economy suffers a sudden setback.

He cited reasons for their optimism. Kuala Lumpur´s residential prices are relatively cheap compared to the major cities in the region. KL´s luxury condo prices are only a fifth or less of Singapore´s equivalent. However, he acknowledged that the price increase has to be backed by a corresponding increase in rentals as otherwise, the yield will drop.

Aseambankers analyst Ong Chee Ting believed the current high-end residential prices are sustainable and may continue to set new records if the political and economic climate in
Malaysia and the rest of the world remains favourable, and Malaysia remains business friendly.

He said unlike the typical residential-type property investor who seek returns in the form of rentals, buyers of high-end residential property are motivated by less tangible factors such as prestige, exclusivity or for speculation.

The strengthening of the ringgit also augurs well for the high-end residential housing market, he said. Other analysts said the recent economic uncertainties, brought about by the subprime troubles in the US, has made foreign investors more cautious. Some investors seem to be holding back on further investments until a clearer trend emerges.

Although the property sector has received significant incentives this year, analysts feel that it is still lagging its regional peers. CIMB Securities head of research Terence Wong said Malaysia´s property market still lagged behind markets in Singapore and Hong Kong.

"We´ve only just begun (to rally). Singapore´s property market has had a good run for the past two years," he said. He believed the domestic housing sector should remain robust as long as US subprime mortgage problems are reined in. "It´s status quo for us as we expect Bank Negara to maintain interest rates at the current level," he said.

He said the recent 50 basis points interest rate cut by the US Federal Reserve was not likely to affect Malaysia´s property.

Wong said, however, that property prices had become competitive regionally as a result of free market forces. "It´s a buyers´ market and this has led developers to becoming innovative such as offering properties based on lifestyle themes," he added.

Another analyst said Malaysia´s developers had to improve the quality of their products to effectively compete with markets such as Singapore. However, she said the Government´s efforts to exempt real property gains tax will spur foreign direct investment (FDI) and help grow the high-end property segment.

"There is an overhang of low-to-mid end properties. A boost in the high-end sector could create a trickle-down effect and boost the mid-end segment," she said. The Malaysian Institute of Estate Agents (MIEA) said the property market is expected remain bullish in the next two years following the measures under Budget 2008 to increase property sales and attract more foreign investors.

"With such a positive move by the government, we expect to see an increase in sales and more foreign investors coming into the market," MIEA president K. Soma Sundram said. He said the government´s decision to reduce stamp duty by 50 per cent on properties will help boost property investments by the middle income group.

He said another government decision to offset existing housing loans from money accrued in Account II of the Employees Provident Fund (EPF) would help to reduce non-performing
loans. Government officials said Malaysia wants to attract US$20 billion worth of foreign investments in its property market over the next 10 years.

The government has made it easier for foreigners to buy properties in Malaysia and it also scrapped a tax on the sale of properties. Minister in the Prime Minister´s department Datuk Mohd
Effendi Norwawi said the government may introduce more incentives to achieve this target.

But the private sector is more bullish, expecting foreign investors to put in US$5 billion a year, provided the public and private sector work closely.

"They are already working closely. Recent developments indicate that foreigners view Malaysia as an attractive place to invest in properties," he said.

Malaysia is targeting various market segments and the country´s major foreign property buyers so far are from the Far East, the Middle East, Southeast Asia and Europe. Mohd Effendi said recent incentives announced in the Budget 2008 is expected to contribute to the volume of property
transactions by local and foreign buyers in the last quarter.

Property transactions in the first half of 2007 increased three per cent to 135,189. Mohd Effendi said to accelerate the growth of the construction sector, the government is working closely with the private sector including REHDA and the Malaysian chapter of the International Real Estate Federation.

Industry officials said the property sector is a major contributor to growth and source of wealth creation in Malaysia. The property market usually continues to stay buoyant and provide a cushion against any hard landing.

According to REHDA president Ng Seing Liong, "Property is a productive economic sector with significant contribution to a country´s gross domestic product (GDP) and growth. "Locally, more than 140 industries and 2.5 million people are related to, either directly or indirectly, the construction and property sector," he said. "As for Malaysia, the strong property markets have driven its economic growth."

He said the Construction Industry Development Board´s projection of 4.2 per cent growth for the construction sector this year against a decline of 0.5 per cent in 2006 augurs well for the property sector.

MAJOR PLAYERS:

Glomac Berhad (KLSE:5020) has posted first quarter pre-tax profit of RM16.4 million (US$4.8 million), up 152.3 per cent year-on-year as the developer benefits from the current buoyant
property sentiment. Group revenue for the three months ended 31 July 2007 climbed 56.3 per cent to RM82.5 million from a year earlier, it said in a statement on Wednesday.

Group Executive Chairman, Tan Sri Dato F.D. Mansor, said, "The stronger performance reflects the current buoyant property market."

"Our strategy to build a diversified portfolio of projects has been successful in capturing demand across the spectrum of the market, boosted by the government incentives towards the property sector."

He said the Glomac was confident of delivering a strong financial performance going forward. "Our unbilled sales remain high at RM342 million, and recent sales have continued to be robust," he said.

F.D. Mansor said Glomac´s township development in Bandar Saujana Utama has continued to chalk up healthy sales, and Suria Stonor, its high-end condominium development in Kuala Lumpur, is seeing strong interest from foreign buyers, with recent sales transacting at RM1,100 per square foot. The project is now more than 80 per cent sold.

He said: "This is another exciting year for us ahead. We expect to launch more than RM1 billion worth of projects in our current financial year ending April 2008."

New projects will include Glomac Galleria, a commercial project in Sri Hartamas, Glomac Tower in the vicinity of Kuala Lumpur City Centre, Phase 1 of Sri Bangi at Bandar Baru Bangi, as well as Phase 1 of mixed residential and commercial development in Jalan Damansara, Kuala Lumpur.

SP Setia Bhd, a major housing developer, said its third quarter net profit plummeted 15 per cent due to lower profit from a its Duta Tropika project and the delayed launch of two other projects. It posted a net profit of RM53.8 million for the quarter to July 31 2007.

Revenue fell two per cent to RM294.6 million. in the third quarter from RM299.92 million a year earlier while earnings per share (EPS) fell to 7.99 sen from 9.51 sen. For the nine months to July 31, its net profit slipped 4.48 per cent to RM160.27 million from RM167.78 million a year earlier, while its revenue dropped 4.64 per cent to RM836.65 million from RM877.33 million.

However, SP Setia expects its full year performance to be better than that in 2006 due to the sale of land in Johor. "This is due to the expected completion by Oct 31, 2007 of the sale of a 37.78-acre piece of land by Bukit Indah (Johor) Sdn Bhd (BIJ) to Raion Capital Bhd (RCB)," it said.

Earlier this year, SP Setia´s unit BIJ had entered into an agreement with RCB to dispose of the land for RM106.97 million cash. The company attributed the decline in profits to lower contribution from the Duta Tropika project that was completed at the end of the previous financial year.

SP Setia said the group´s revenue and profits were largely contributed by projects in Setia Alam at Shah Alam, Duta Tropika at Sri Hartamas, SetiaHills at Bukit Indah Ampang, Bukit Indah at Bandar Nusajaya, and Setia Indah and Setia Tropika in Johor. SP Setia was among the first few Klang Valley-based developers to venture into Penang, which is regarded as having  vast potential.

The group has three property projects in Penang -- Setia Pearl Island, Setia Vista and Setia Duta View -- with a combined gross development value (GDV) of about RM1.1 billion. The company has put on hold its Setia Vista project, which has an estimated GDV of RM150 million.

"Based on the three projects, we forecast Penang to account for about 9 per cent to 10 per cent of SP Setia´s operating profit for the year ending Oct 31, 2009," it said, adding that the company may carry out more projects in Penang as it has a solid balance sheet.

Mah Sing Group Bhd has reported a 13 per cent rise in third quarter net earnings to RM16.7 million for the quarter to September 30. Out of its RM117.9 million revenue, 78 per cent came from properties and the rest from its plastics division. It plans to raise RM134 million from new share sales to help fund new projects in the Klang Valley and Johor.

"We will be able to capitalise on further business opportunities due to its enlarged capital base," group managing director Datuk Leong Hoy Kum said. Mah Sing enjoys a 24 per cent development margin compared with 18 per cent in 2005.

"This is attributable to the group´s focus on the right products in the right segment and the right location, and further cost savings measures the group is embarking on," Leong said.

Explaining the reasons for the company´s success, he said:"We are into medium to high-end products, where the demand outstrips supply, and the target market is more resilient to
inflationary pressures."

The group concentrates on semi-detached homes and bungalows in the Klang Valley as this sub-sector account for only 5 per cent of the total residential supply here.

GOVERNMENT REGULATIONS:

The government offers incentives to developers under the build-and-sell concept. The incentives include speedy approval of land matters and development plans. Such approvals normally take one to two years but will be expedited and shortened to four to six months.

Developers who opt for the concept will also be exempted from paying the RM200,000 deposit and stamp duties. In the Budget for 2008, Prime Minister Datuk Seri Abdullah Ahmad Badawi announced 50 percent stamp duty exemption on documents of transfer for the purchase of one house costing not more than RM250,000. The proposal is effective for sale and purchase agreements executed from Sept 8, 2007, to Dec 31, 2010. This measure will reduce the cost of purchasing a house by up to RM2,000.

He also announced that the government will allow monthly withdrawals from savings at the Employees Provident Fund to service mortgages.