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Malaysia's ban on development no relief for property glut

Central bank and analysts warned of worsening situation

Unoccupied rooms are seen at the shopping mall in Kuala Lumpur. (Photo by Shinya Sawai)

KUALA LUMPUR -- Property agent Jackson Sim sits on a chair in a dimly lit sales office, waiting for customers all morning. His company Dukes Agencies handles sub-sales and rental for a completed 33-story serviced apartment block with retail outlets along Jalan Kuching, a major thoroughfare that connects to Kuala Lumpur's city center 15 minutes away. "Sales inquiry is poor," he said. "What the owners offer do not match tenant's asking price."

Although 80% of the apartments had already been sold, only about 10% is occupied, according to Sim. Across the country, there are apartment blocks that share the same fate. Bank Negara, Malaysia's central bank, warned recently of the supply glut in commercial and high-rise residential property markets. 

"If we are not careful, the oversupply [in the property market] could have a negative impact on the economy," said Governor Muhammad Ibrahim on Nov. 17. In a study, the central bank said office vacancy rate in Kuala Lumpur and its surrounding areas could rise from 24% currently to a record high of 32% by 2021, surpassing levels reached during the Asian financial crisis in the late 1990s.

Total property transaction nationwide dropped 6% in the first half 2017, according to government data. In a series of conflicting statements in November, the government said it would impose a ban on the development of luxury condominium units and commercial properties in a bid to ease the glut.

In the retail complex sector, the average occupancy rate has been declining over the past six years and is now hovering at a five-year low of 86%, said Nawawi Tie Leung in a research note recently. The Malaysian house price index's annual growth has been sliding from a high of 10.1% in the second quarter of 2014 to 5.6% at the end of June this year.

In a sign of how many shopping malls had been built over the years, the retail space per capita in the booming northern state of Penang alone exceeded both Singapore's and Bangkok's in 2016, said the real estate consultant. 

The report added that the underlying stress in the retail sector was not just the typical demand-supply disequilibrium that could be resolved through the passage of time, rising affluence and an expanding population. Rather, structural changes including shopping habits, socio-demographics and technology would continue to impact the market. 

Even with the government's ban, the market can still expect supply from a number of key real estate developments to flow through, adding pressure on the market. 

One such development is Mitsui Shopping Park Lalaport Kuala Lumpur, a 50:50 joint venture between Mitsui Fudosan Asia and BBCC Development, collectively owned by state agencies and a local developer. When completed in 2021, the five-story mall will offer 82,600 sq. meters of leasable space, part of a bigger development that includes condominiums, hotels and offices in a built-up area of over 600,000 sq. meters with a gross development value of 8.7 billion ringgit ($2.1 billion).

Vessels reclaiming the sea in Straits of Malacca for a massive real estate development in Melaka.

Big-ticket developments are also underway in other provincial states such in Melaka where China state-owned Powerchina International Group and local partners have started reclaiming in the Straits of Malacca for a massive real estate project. Known as the Melaka Gateway, part of China's Belt and Road Initiative, the abandoned commercial development in Melaka town will be transformed into an "international maritime gateway," the project architects promised.

Under the plan, there will be three artificial islands for tourism-related activities, commercial centers and industrial park. A multipurpose deepsea port will also be constructed on an existing uninhabited island and managed by Chinese companies.

But locals cast doubt on the feasibility of such development. "How are they going to sell? We are just a small town," said a Melaka-based property agent when asked about the prospect of the project, about two hours away from Kuala Lumpur. Demand for terraced houses is still strong, especially for units that cost below 250,000 ringgit, a level still deemed affordable for Malaysian families. But high-end condominiums like those planned in Melaka Gateway don't have a market, said the agent. 

The existing number of unsold and vacant properties coupled with supplies coming online are enough to stifle the market, warned Moody's Investors Service in a credit outlook note late November. Simon Chen, the rating agency's senior analyst, said the supply glut could raise the risk of a material decline in property prices that would impact the country's banking system. "We believe that suspending new property development will not correct the oversupply situation over the next five years when projects now in development enter the market," added Chen.






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