Still some momentum ahead

Still some momentum ahead
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By ONG CHEE TING

The Government may be considering measures to encourage more property ownership for the mass market after the earlier initiatives to spur activities in the medium to high-end segment.

SINCE the relaxation of residential ownership rules for foreigners and the real property gains tax (RPGT) waiver, high-end residential properties in Malaysia have attracted a fair amount of interest from abroad.

The changes initiated by the Government, which were targeted at stimulating property activities in the medium- to high-end segment, have thus far mainly benefited the high-end segment of the market.

In the last six months, we have seen greater interest from foreign buyers (as well as local buyers) looking to get into the Malaysian residential property market, which is relatively cheaper vis-à-vis global prices. The RPGT waiver was therefore timely in speeding up acquisitions in Kuala Lumpur.

With the recent spike in property prices, land prices around the KLCC vicinity are also seeing a spike
With the anticipated 4.3% appreciation of the ringgit against the US dollar to RM3.30 (from RM3.45 currently) by year end and eventually RM3.10 by end-2008, the investment proposition in Malaysian assets has an added sweetener.

Developers with ongoing developments were seen raising selling prices by 5% to 100% year-on-year from their launch prices. Just last year, eyebrows were raised when high-end properties around the Kuala Lumpur City Centre (KLCC) were going for RM1,000 per sq ft (psf). Today, the upcoming Four Seasons is said to fetch RM2,000 psf.

We expect the pricing gap between mass market and high-end residences in Malaysia to continue to widen in line with the regional phenomenon, as petrodollars and stock market wealth continue to have spill-over effects on property demand in Malaysia as prices remain cheap vis-à-vis regional peers.

With the recent spike in property prices, we are also experiencing a spike in land prices around the KLCC vicinity. We understand that a piece of land along Jalan Kia Peng, where the present Hakka Restaurant is located, was sold via tender for over RM1,300 psf in 2Q07 – a record price.

This was more than 30% above Glomac’s recent purchase of 1.3 acres of freehold commercial land at RM1,000psf (at the junction of Jalan P. Ramlee and Jalan Pinang) in 4Q06.

We believe the current high-end residential prices are sustainable and may continue to set new records as long as the political and economic climates of Malaysia and the world remain favourable, and Malaysia remains business friendly.

Unlike typical residential investments which require investment returns (in the form of rental), the high-end residential game plan differs with the surplus liquidity in the world. Buyers of these properties have varying reasons for such purchases – speculation, prestige, address, excess cash, and status, to name a few. We understand that high-end residences in Dubai are a classic example, whereby rental returns are almost non-existent, despite soaring prices of over US$1,000 psf.

More incentives to come

Following the initiatives benefiting high-end residences, we believe the Government is also looking at options to encourage more property ownership for the mass market. Among the speculated measures that the Government is considering are:

# Restructuring of EPF depositors’ acco-unts to allow for more withdrawals. We understand that there may be plans to restructure the monthly contribution to Accounts I and II from 70%:30% presently to about 50%:50%; and/or to allow simultaneous withdrawals from Account II for purchases of second houses without the need to sell the first house funded by EPF savings.

# A potential temporary waiver or reduction of stamp duty tax, as was the case in 2003, where for a period of one year starting from June 1, 2003, purchases of houses priced at RM180,000 and below from the developers were eligible for stamp duty exemptions, and the secondary market was exempted from RPGT.

# Further relaxation of property ownership. There are talks that the Government may consider extending the relaxation of rules to commercial properties, to encourage more direct investments. However, we note that foreign ownership remains a delicate issue in the country. And without a comprehensive restructuring plan to liberalise the economy in place, any long-term benefits of such a measure remain opaque.

# Fine-tuning the Malaysia My Second Home Programme. The present Malaysia My Second Home programme has had mixed results, with some suggesting that it is drawing the wrong group of people into the country. The Government is mindful of the present outcome, and we understand regulations may be fine-tuned to attract the “right” group of people to stay in Malaysia.

While this initiative is unlikely to have a significant impact on the property market in the short term, it will nonetheless draw more foreign investments into the country over the longer run and benefit retail spending, tourism and the healthcare industry in the country.

# Non-competitive REIT structure. One of the common complaints we gathered from local and foreign investors in our past roadshows, is a lack of tax incentives for real estate investment trusts (REITs) in Malaysia. Despite Malaysia’s introduction of a lower 15% withholding tax (WHT) for individuals (previously at individuals’ prevailing tax rates) and 20% WHT for institutional investors (previously at the corporate tax rate of 28%) in last year’s budget, Malaysia’s attractiveness as a REIT investment destination still lags behind its peers in the region.

Further REIT tax incentives to revive interest

The current withholding tax structure for Malaysian REITs is generally seen to be hampering REITs’ price performance, and an obstacle in attracting new equity issuances among existing players.

The existing structure is also discouraging others from joining the bandwagon, as potential players are enticed by better valuations in other regional markets.

We believe the Government is aware of the need to provide more incentives to make our REITs more competitive and on par with the regional peers.

We remain overweight on the property sector, as it is set to gain further boost ahead of the upcoming general election.

Among property sector players, we like Sunrise and YNH Property for exposure to high-end developments, Mah Sing for its unique business model, SP Setia and WCT Land for their exposure to the mass market, and Sunway City for both property development and asset reflation play.

Among REITs, we prefer exposure to commercial related REIT