Friday, December 26, 2008

Revised Outlook For Malaysian Property

Readers of this blog will know that I have been pretty bearish on Malaysian properties, but even more so for Singapore and HK properties. The latter two have seen a 10%-15% price correction across the board. The funny thing is that Malaysian property is holding up pretty well.

Over the last few days a couple of things struck me about Malaysian properties, which have eluded me, and many property analysts. We always look at the same indicators: affordability ratios, employment trends, rental vacancies, occupancy rates, ratio of income to mortgage, etc.

Somehow there are a couple more reasons which seem to dictate the underlying strength of local property prices.

a) Open economy - The more open your economy is to free trade, the more susceptible you are to global financial turmoil. Hence explaining much of the distress in HK and Singapore economies. Theoretically speaking Malaysia should be affected just as bad, but we are not. I would like to cite this as the Shenzhen effect. Malaysia has what I would coin as the "Shenzhen effect". Its when a place can be used to produce goods and services more cost effectively. We also must remember that we are in a massive globalisation mode for the past 15 years, with the pace rising over the last 5 years. There is no way you can bring back those jobs to Singapore, HK or the US unless maybe if the Sing dollar goes to 1.5 vs the ringgit or the HKD drops to 15 HK dollar to the USD.

The key point is that when global companies decide where to cut cost or restructure, they now tend to leave Malaysia alone. You cannot cut manufacturing outright, you reduce shifts and capacity. But you can cut services and managerial headcount easily and the numbers make more sense out of places such as Singapore and HK.
I give you another example, in investment banking, a senior analyst may be paid a US$300,000 package in South Korea or HK, but a similar position in the same firm in Malaysia may be paying just US$120,000. Its not all equal. And when top managers strategise on where to lop off manufacturing and investments, Malaysia will almost be the last to be chop.

Why? Multi lingual work force, relatively hard working staff (I said relatively), very cheap land cost, very cheap building and facility cost, excellent ports and road networks to ship in and out, reliable and effective air travel hubs in the country, much safer and stable politically, less risk of war or internal unrest, high degree of safety from terrorism, its Islamic yet Islamic neutral for businesses which is a highly coveted position to all, strategically, its position is important for shipping services.

b) Many have
over invested in India and China, hence some operations investing may be delayed or see its capacity being shrunk there. HK and Singapore are the high value add sectors and are also highly leveraged to global financial markets, they cannot hide. Hence we cannot and should not lump Malaysia together with HK and Singapore. yes we will see some jobs lost but it should not be anywhere near the cuts we are seeing in HK and Singapore.

We always just talk about speculation in markets, but we should also look at sectors or countries that have over invested (either from domestic or foreign sources). Singapore has over invested in private bankers, same with HK. Singapore has over invested in Sentosa and the outlying real estate areas where prices are totally out of whack - we are seeing Monaco prices and the weather is too damn hot! China has many areas that have seen over investment as well.

In terms of speculation, Singapore is topping the charts with the en bloc sale, which proceeds are then geared up to speculate in the many luxury condos. Enough said. Specuation is there in Malaysian properties, in particular the high end condos - we have never been able to maintain very high prices in condos because most people still prefer houses and land. The only time we see RM1,500-3,000psf is in a bubble. The correction will be most severe in those above RM1,000psf which may see a 15%-20% drop. The RM500-999 psf may see a drop half of that. Landed properties below RM1.5m are still pretty solid and may only see a 5% drop from their peaks. Those under RM3m may see a slight ease off but it should not be major. Higher than RM3m, they are in a world of their own.

c) The stock market effect - If you were to look at the financial turmoil in the past, namely, the mid-late 80s, the blip in 1994, the major monster of 97, the internet bust, the SARS effect, the tsunami effect and now the credit implosion... you can chart a very useful multiplier effect from losses in the stock markets. Prior to 2000, any kind of financial bust ups will see a lot of havoc and bad debts, ask any remisier... Following moves to limit contra and contango trades, this has removed a HUGE "leveraged disaster" from the domestic economy.

I can give you the excellent example of my 6 analysts working with me in mid 90s, their monthly salaries between RM3,000-10,000 and basically under 30 and real net worth probably zero. But each and everyone of them will have zero deposit with 2 or 3 remisiers, but personally will have a contra position of between RM100,000-300,000 in a few stocks depending on the mood of the market. This is not unique to my team of people, everybody everywhere were doing it. Naturally we always see a huge multiplier effect when the market corrects 10% over a week.

Since 2000 any major financial calamity has not seen similar catastrophic personal financial aftermaths.
Now you try to buy RM50,000 worth of share with zero deposit, your remisier will ask you to fly wau. This market correction was also unique to the majority of retail stock players. Many were able to sell down most of their stocks or just stop playing stocks when the market retreated from 1,400 to 1,200... sure some will still hold a few stocks in their portfolio but many have been able to avoid the carnage. When a market falls from 1,400 to 850 its the holders of the shares that bear the brunt.

This time around retail players have been able to sidestep much of the disaster movie, its the funds that got whacked royally this time, ... local, hedge and foreign.
Thus this will further help explain why most Malaysians are still relatively cash rich and under invested. Fewer job losses and fewer after effects from the stock markets = less likelihood to need to sell properties in desperation.

I am working on a big piece on the Market Prognosis for 2009, stay tuned, will be out in a couple of days.

photos: Pace Wu Pei Ci


yj said...

pls recommend some stocks for 2009

walla said...

you have a job for a downloader?

KoSong Cafe said...

I wish to comment on share trading and the ups and downs of a remisier.

An intermediary of a very rich man's son approached a remisier to open an account. Just imagine the surprise and elation of the remisier's reaction. Orders were taken from the intermediary in almost all transactions. Then came the horrible bear. This particular modus operandi was probably carried out in almost all the stock broking firms and a few counters were supposed to have been cornered. But the losses were too huge to cover and the account holder probably turned round and said he did not directly deal with the remisier, which was true!

More recently, aggressive banks' marketing staff actually approached customers of broking firms to take up personal loans without security. Again it was godsend to those stock market gamblers who would end up losing their shirts again with the bearish market.

Somehow, I can imagine some young investment savvy guys would be tempted to have taken advantage of their positions (willingness of banks or broking firms to lend) and knowledge (but more likely overconfidence) to take risks which they could ill afford.

Well, risk takers will see the rise of new millionaires and fall of some old. That's what makes life interesting I suppose. Who would be interested in caution and more caution?

easystar said...

Hi Dali,

Unfortunately, I do not share your optimism. Malaysia is just 12 months out of the cycle that started in the US and the worse is just starting (that is why you see Gov keep revising down growth rate).

It is true that stock leverage is way down, but credit cards debt are not.

Also, where to close factories will depend on lots of factors. Most bases in Malaysia are low value (vs innovation centre) where people can be retrenched and rehired without too much training.

Further, there are political issues brewing now where it will become more unacceptable for a French company to leave a Malaysia site alone but firing their French employee (this probably also apply to Japanese, but to a much less extend with US co etc)

see said...

I am pretty optimistic that M'sia won't be as badly whacked as HK or S'pore simply because we never really were part of the global financial services boom like S'pore with its private banking boom. Every tomdickandharry is private banker there. Also our property market was not red hot booming except the KLCC condos which were only midway of taking off & certainly not to the extent of HK & S'pore. In short, M'sia just did not ride with the global boom. They grew but we stagnated. But as they say the higher you rise the harder you fall. An interesting thought: why is our employment situation pretty stable, (with the exception of exports/electronics sector of course). IMHO the structure of our economy is still pretty protected which pretty much explains why our wages cannot compare with the likes of HK or even S'pore. Also stable employment could be due to a large number employed as civil servants. The question is will the fallout in the export sector have a big impact on our economy considering many of them are manufacturing bases for re-exports. Are a lot of local SMIs dependent on these export oriented MNC? Think this is key to the answer on how our economy will fare.

Another point is I believe there has been a structural change ever since adopting T+3. No more speculation craziness that an office boy can play RM1mil of stocks on contra in the old days. Also kudos to Bank Negara for reigning in potential substandard credit given by banks and not giving in to allow structured products pushed to retailers (as aggressively pushed by a certain investment bank) else we have ahmas & ahkongs crying over loss of their retirement funds from their Lehman minibonds like in S'pore