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Risks of Investing in Malaysian Properties

by Speedprop on December 6, 2018
Risks of Investing in Malaysian Properties
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The oversupply of Malaysian properties came to the fore in 2015 and has continued well into 2017 and 2018 as developers launch new projects that are undersold due to lack of demand.

Yields are are only half of what they were for the same type of properties 10 years ago. For instance, landed residential units now bring in rental yields of 2-2.5% versus 4-5% a decade ago, while high-rise units command yields around 3.5% compared to 7-9% 10 years ago.

Since the General Election of 2018 however, risks are only bound to increase for property investors, such as:

TODs not safe bets anymore

In 2017, residential overhang ballooned a whopping 67% to almost 25,000 units with value rising 83% to RM15.6 billion, according to figures from the government’s Valuation and Property Services Department.

That’s almost RM16 BILLION worth of unsold residential properties.

By the first quarter of 2018, Bank Negara recorded unsold housing units at 146,196. The value has of these empty homes would be astronomical.

Despite the warning signs of an overheated market, developers — with a 3-year construction periods — continued launching projects, pinning their hopes on transport-oriented developments (TODs).

These would be built around the MRT, LRT and HSR lines. Buyers too, were seeing these TODs as safer investment bets.

Not anymore. In May 2018, the new Pakatan Harapan government swept to power and quickly put paid to these hopes.

The HSR — which would have raised property prices in satellite cities in southern Klang Valley as well as Negeri Sembilan and Johor along the track — is now on hiatus until at least May 2020.

While not cancelled, the LRT3 project has had 6 stations cancelled, directly affecting developers and early buyers of TOD units close to those stations, especially mixed developments with commercial elements looking to benefit from increased footfall. Properties which were previously safe bets are not safe anymore.

On top of that, the LRT3 completion date being pushed back 4 years to 2024 means a longer ROI period for investors in TODs near other stations.

The hammer has not fallen on MRT2 yet, but it is being actively reviewed for cost-cutting which will almost certainly signal stations cut from the route, as well as postponement of from the initial completion date of 2022. Yet more “safe bets” will fall by the wayside.

Influx of Office Units

Oddly enough, the new government has kept on mega projects that would add even more supply to the overhang in office buildings.

These include the Tun Razak Exchange and Merdeka 118 projects, which will collectively add 25 MILLION SQ FT in gross floor area in office, retail and hotel units, the majority being office skyscrapers like Exchange 106 and PNB 118.

Add to that record-low rental yields from office and shopping mall units at 4-6%, and it is still a wonder that developers and landowners are rolling out more commercial mega projects.

The massive influx of office space even has Bank Negara worried, and the central bank has warned that this glut may result ONE-THIRD of offices being empty by 2021.

With the postponement and cancellation of rail projects, the investor proposition for these — already inflated, overpriced — projects falls further.

Furthermore, the rising number of mobile workforces and increased co-working spaces mean fewer SMEs will commit to long-term office leases. That leaves only MNCs as tenants for such offices, with only a few investors set to profit.

What Foreign Investors?

For years, Malaysian properties was seen as a foreign investment destination, next to Singapore and Australia.

Recent years saw projects like Forest City and Iskandar Puteri flooded by foreign investors, but that too started tapering off as China clamped down with capital controls on both retail investors and Chinese developers.

In August, the Malaysian government joined in on the clampdown, saying that foreigners will be blocked from buying units at Forest City and refused visas to live there. Since then the uncertainty has only grown as Chinese developer Country Garden and Johor politicians have come up with conflicting statements.

Though the comments were only targeted at Forest City, foreign investor sentiment on other properties will likely be tepid as long as policy uncertainties remain.

Conclusion

These added risks do not mean the Malaysian property market is off limits. Now more than ever, savvy investors need to be savvier on when and where to put their money.

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