Property Bubble Concerns Across Asia-Pacific

Asian countries fearing a disastrous US-style property bubble are striving to cool down their real-estate markets as the region powers out of the global financial crisis. Policymakers are worried that excessive exuberance could push property prices far above their real value, only to crash and bring down with them banks that lent money too freely and individuals who borrowed beyond their means.



"It is better to pre-empt a bubble than wait for it to get serious and have to take more drastic measures," Singapore Prime Minister Lee Hsien Loong said last month after the city-state took fresh measures against speculation. Low interest rates, strong demand and speculation have pushed property prices in many Asian cities higher, in some cases surpassing peaks reached in 2007.

"The risk of an asset bubble is quite high in certain (economies) such as China, Hong Kong and Singapore," said Chua Yang Liang, head of Southeast Asia research at property consultancy Jones Lang LaSalle.

In China, property prices in 70 major cities hit a 21-month high in January.Beijing has tightened lending, requiring buyers of second homes to put up a downpayment of at least 40 percent, and they also face higher interest rates on their mortgage loans. In Singapore, where housing prices have been heating up since last year, the government slapped additional duties on sellers who flip a residential property within a year of buying it.

Home buyers are also now limited to borrowing up to 80 percent of the property's value, instead of 90 percent.In densely packed Hong Kong, home to one of the world's most frenetic property markets, authorities are fretting about a surge of speculative money since late 2008.

Starting April, the territory will increase the stamp duty for sales of flats worth 20 million Hong Kong dollars (2.6 million US) or more from 3.75 percent to 4.25 percent. Prices of some Hong Kong luxury flats have returned to 1997 boom levels.

Australia's central bank on Tuesday lifted interest rates afresh. One factor it cited was a "solid" increase in mortgages, "and dwelling prices have risen significantly over the past year". Median house prices in Sydney rose 12.1 percent in 2009 and 18.5 percent in Melbourne, and observers said the rise was likely to continue.But Simon Vinson, head of Asian property at AMP Capital Investors, said he did not see the overall Asian market overheating.



When you ask around, most will cite bubble conditions in HK, Singapore, Australia and China. But somehow no one seems to think Malaysia is having a property bubble as well???!!! Do I think there is a bubble in Malaysian property, oh yes! Ask me that question again during the talk.

How do you know there is a bubble? When everyone cites only the positives: low interest rates, comparative valuations ... I see big bubble in HK and Singapore, driven by truckloads of buyers from China. In Singapore, they cite the inflow of PRs pushing up prices in private apartments and HDB housing. The whole thing reside on the recent financial crisis which saw truckloads of stimulus left, right and center, but Asian banks and corporates were really not that badly affected. Properties in Asia DID NOT go to the extremes like in the US subprime party or CDOs driven gains in most of Europe, in particular the UK and smaller European nations. Now with the stimulus, we have too much liquidity swishing in the system. Most Asian central banks are still keeping rates low to keep in step with US and EU rates as exports and real economy are still recovering. I see liquidity being diverted into property in Asia-Pacific.

Yes, some countries are hotter, such as Australia, HK and Singapore. China is next but Malaysia is not far behind. In Malaysia there are two markets, its the new developments that are getting the bulk of the funding and cheap financing. Seriously, look at our affordability ratios, how can families keep up with RM500,000-RM800,000 loans??? Unless I am mistaken, most middle class families don't make more than RM10,000 a month.

Have a look at just completed properties over RM1.5-2.0m, even after 6 months, more than half are empty. Those below RM1m still mainly owner occupied. Many of the higher priced ones are people's second or third investment homes or owned by foreigners. We all know what kind of yields these properties can get locally don't we.... lucky to get 3% yield. However, the party is still on because the foreigners are mainly Asians and they are riding on a good property wave in their own turf, hence no need to sell. See if there are buyers for properties above RM2m in the secondary market... very very few.

Of course no property developers would be caught dead saying its bubbling over. So, how will the whole thing unwind, we need one major market to correct and then you see the domino effect. Property markets are different to stock markets, their bull run is more sustained and the unwinding takes a lot longer. When you are in the property markets, its hypnotic and crowd driven. Every profitable sale gets whispered louder and louder, do you want to miss that. I have a friend who bought a Desa Park City link house and it has risen by RM400,000 in 6 months, how to argue that that is wrong.

Safe to say that a lot of new developments are still being built, even the super luxury condos in KL and Bangsar are mostly still under construction. It takes time to see a correction but its coming. You just cannot make a timeline prediction. Unless you can see a normal executive in their 30s being able to buy at RM1m, without any help from their parents, then you can say its affordable.

The worse defense is that Malaysia is still cheap compared to Singapore or HK .... so what???!!! When is there an average for Asian property prices??? That argument is the same as saying my salary in Malaysia will soon double because its so far from Singapore's salary - yes, quite bullshitty. So, make your money while the sun shines, and then hope that it is sufficient to cover the losses when they correct.

p/s photos: Titi Kamal

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Friday, March 10, 2006

Asian Real Estate

Or Why Malaysian Real Estate Is So Cheap

Did you know that KL real estate is one of the cheapest in Asia - another reason why 5 star hotels in Malaysia are also among the cheapest in the world. One can understand if Malaysian real estate values lag those of more developed nations such as Singapore, Hong Kong, Seoul or Tokyo... but KL even lags Indian cities, Bangkok and certain places in Jakarta. We can understand why Shanghai or Beijing would be more expensive too compared to KL - population, out-sourcing and investment.

Is this a correlation to our GDP per capita (roughly translated is how much money a citizen earns in a specific country a year). The figures were obtained from CIA files, yes the American Central Intelligence Agency for 2005: www.gov/cia/publications/factbook/rankorder/2004rank.html

1) Luxembourg US$62,700
2) Equatorial Guinea US$50,200 (where is that, I want to move there ... but a cafe latte will probably cost US$15)
3) Norway US$42,400
4) USA US$41,800
8) HK US$36,800
16) Canada US$32,800
18) Australia US$32,000
20) UK US$30,900
22) Japan US$30,400
26) Singapore US$29,700
36) Taiwan US$26,700
41) New Zealand US$24,100
42) Brunei US$23,600
51) South Korea US$20,300
82) Russia US$10,700
83) Malaysia US$10,400
86) Mexico US$10,000
88) WORLD AVERAGE US$9,300
97) Thailand US$8,300
118) China US$6,200
132) Philippines US$5,100
150) Indonesia US$3,700
155) India US$3,400
229) Somalia US$600
231) Gaza Strip US$600
232) East Timor US$400

If you look at the table above, it bears little correlation. A poor country can have high city real estate values - hence a big factor is city population. You need to cram a lot of people into a tiny space, then real estate values will soar - take New York, Tokyo, HK, Singapore, Bangkok, Shanghai, Shenzhen, Karachi, Mumbai ... many are in the region of 10-30 million city population. KL has about 5 million but it is also quite spread out. So, another factor is it has to be CRAMPED - or rather business activity CBD has to be cramped.

Another factor for high real estate values is whether you are a financial center. Is your city a crucial outpost to doing business in the region - HK, Shanghai, Singapore, Tokyo, Mumbai, New York, etc... KL is neither here nor there. What about Bangkok? Well, it has a super duper population (have you seen the weekend exodus from Bangkok every Friday). Even though it is not a financial center, it the the center for a country with a decent population size. If your capital city is the center of a country with a decent population, you can be assured of good commercial real estate values - e.g. Thailand, Taiwan, South Korea. We need Malaysia to move quickly from 26 million to at least 60 million. Then you can have some good ripple on effect on real estate values.

If you are not a financial center, you can still command high rates if high-value services businesses are aplenty. Hence Singapore's commercial real estate will have a very strong long term uptrend as it does not depend on its reputation as a financial center/port/MICE biz like HK but moves higher up the value-added curve by encouraging designers/inventors in animation, biotech, education, etc. Does KL look like a city with good high value added industries?

Good amenities and public infrastructure would not be a bad thing, look at Tokyo, HK, Singapore or even New York - but infra is not crucial in giving higher real estate values. If you look at the capital cities of the high GDP per capita countries such as Oslo, Amsterdam, Stockholm, etc.. you will find that good infra is a good thing but not necessarily stratospheric real estate prices.

Lack of good quality commercial space will also spruce up real estate values. Just look at Indian cities, cities in Vietnam or even Jakarta. We in KL, unfortunately builds okay buildings cheaply as land is cheap and plentiful. I mean, KL commercial just keeps getting drawn wider and wider. First the CBD, then the city kind of move wider to include PJ, then it moves out to Shah Alam, now Klang. Too much cheap flat land.

So, commercial real estate value in Malaysia will lag the rest of Asia, even some cities in Vietnam (my gawd), and it will not change until the fundamentals change. The only exciting part for Malaysian real estate is residential, and you know how people get crazy with houses, every now and then, good houses in good locations will have its own bull run. The rental yields never match the house prices - but hey, who the heck cares. Commercial and retail, fergedaboudit!

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

How Bad

Datuk has left a new comment on your post "Morgan Stanley Asia Not So Bearish":

I think KLSE has dropped more than 45% today compared if peak point. Do you think 45% of down turn in index is not enough for us to consider collapse ? In fact, KLSE is in line with other bourses in the region ...virtually in collapsing situation! The only difference is the dropped in the KLSE index is less severe compared its peers.

Obviously, there were several factors for that:

i)In the most recent bull cycle, the performance of KLSE has been well below its peers in Asia region. Hence, it's within our circle of expectation that the down turn in KLSE will be less severe compared other region.

ii)KLSE is supported by two of our natural endowments, petrol and palm oil. The prospect for these commodities only changed negatively and drastically in August-September period. Thus, the negative impact for big cap in KLSE is less clear to most of the investors and research houses.

iii) The petrol hike in June this year and its hyper inflationary impact across all sectors had destroyed the market demands among the middle class and damanged the consumer sentiment. The sudden changes in the macro and micro economy climate caused, small investors and local institutional buyers will shy away from the equity market. Thus, foreign funds are not be able to liquidate their investment timely. Otherwise, it would incur hugh losses. That's the explanation of foreign stake in bursa is lingering in the range of 19-20%. (I think foreign funds have liquidated Malaysian stocks way earlier than other Asian markets such as Singapore, HK, Thailand, Japan and Indonesia. The only other one which fell earlier like Malaysia was South Korea - in hindsight, Malaysia was sold down on heightened political uncertainty, which now looked like a blessing in disguise. Korea had other fundamental issues which brought the market there down earlier. The current foreign shareholding level in KLSE is pretty low, only long term funds are in. To say that foreign funds did not have a chance to sell is flawed. If they want to sell, they will sell regardless what the price is. Sell IOI at 6, np... how about 5, still ok, 4... hmmm just do it... errr 3... I SAID SELL...)

Having said that.....in my opinion, KLSE will be in down south direction in the next 2 years when corporate earnings are heading in the similar direction.

Thus, when the dropping momentum in index is slow, the recovery momemtum in index is expecte to be slow.

Hence,it's not easy for the small investors to timing for good entry point as the future direction is not clear and the tendency to compare prices by using the previous peak point which is no longer relevent as the earning equation is less visible.

Stay out from the market is more pragmatic as i don't believe anybody can spot the recovery at this juncture. Worse is yet to come. (Agreed, there is absolutely no hurry to buy stocks. Many still are oblivious to the coming down trend. Ask any real estate agent... give the seller a 15% lower price as a bid, the seller will say they can still make payments, and will hold out for the price when things are better in 3 months... if that is not ignorance, I don't know what is. The slowdown may not cripple Malaysia, will see its usual cascading effects. Stock markets have lost 40% from its high.

The usual yardstick is property will see a 6 month delayed effect. Its usually the last thing to go. Finances are structured this way:
1) New loans shrinked considerably (happening already).
2) Reduced wealth effects from stock market.
3) Spending curtailed. Nice to have items first to go such as overseas holidays (happening already), and new car purchase.
4) Our biggest sector is electronics, not oil and gas or palm oil, guess the impact on jobs there.
5) Credit card defaults rise, go ask your banker friend of the trend there.
6) Next to go will be car payments, look for repossessed cars, ask your repossesor friend of the trend there.
7) Jobs stagnant or being cut, we must also remember that every day there are new graduates entering the workforce.

I am not saying that we will see a 30% price correction in properties, but at least 15%-20% in most areas and some sub sectors will see 30%. The worst hit is likely to be the high end condos and unoccupied high end bungalows. Yes, they are rich people but a lot of these have been bought by HKers, S'poreans and Indonesians... and not one or two lots, but a few lots. The leasehold types over RM2m will go down first. Things are going to go down 20% at least in Singapore and HK, Malaysia will feel those effects. Beng able to afford repayments is only one part of the equation. People will hold or maintain their leverage when the assets are steady or going to go up. If things are not going up, they will go down. Even if those people can afford these properties, they will be sold just like stocks. Many of these are ready for occupancy now. Try and rent out the RM2m condos at RM5,000... good luck, and thats just a gross yield of 3%... Buyers of any property above RM1.5m will at least have 2 or 4 more somewhere else. You do the math. Properties below RM1 may see a more subdued loss of 10%-15% and may be able to ride them out better.

Just imagine even when you want to sell, how much harder is it now for people to commit to a RM500,000 or RM1m housing loan... and don't you think the banks will make lending that sum a lot harder now).

p/s photos: Haruna Yabuki

Asian Real Estate

Or Why Malaysian Real Estate Is So Cheap

Did you know that KL real estate is one of the cheapest in Asia - another reason why 5 star hotels in Malaysia are also among the cheapest in the world. One can understand if Malaysian real estate values lag those of more developed nations such as Singapore, Hong Kong, Seoul or Tokyo... but KL even lags Indian cities, Bangkok and certain places in Jakarta. We can understand why Shanghai or Beijing would be more expensive too compared to KL - population, out-sourcing and investment.

Is this a correlation to our GDP per capita (roughly translated is how much money a citizen earns in a specific country a year). The figures were obtained from CIA files, yes the American Central Intelligence Agency for 2005: www.gov/cia/publications/factbook/rankorder/2004rank.html

1) Luxembourg US$62,700
2) Equatorial Guinea US$50,200 (where is that, I want to move there ... but a cafe latte will probably cost US$15)
3) Norway US$42,400
4) USA US$41,800
8) HK US$36,800
16) Canada US$32,800
18) Australia US$32,000
20) UK US$30,900
22) Japan US$30,400
26) Singapore US$29,700
36) Taiwan US$26,700
41) New Zealand US$24,100
42) Brunei US$23,600
51) South Korea US$20,300
82) Russia US$10,700
83) Malaysia US$10,400
86) Mexico US$10,000
88) WORLD AVERAGE US$9,300
97) Thailand US$8,300
118) China US$6,200
132) Philippines US$5,100
150) Indonesia US$3,700
155) India US$3,400
229) Somalia US$600
231) Gaza Strip US$600
232) East Timor US$400

If you look at the table above, it bears little correlation. A poor country can have high city real estate values - hence a big factor is city population. You need to cram a lot of people into a tiny space, then real estate values will soar - take New York, Tokyo, HK, Singapore, Bangkok, Shanghai, Shenzhen, Karachi, Mumbai ... many are in the region of 10-30 million city population. KL has about 5 million but it is also quite spread out. So, another factor is it has to be CRAMPED - or rather business activity CBD has to be cramped.

Another factor for high real estate values is whether you are a financial center. Is your city a crucial outpost to doing business in the region - HK, Shanghai, Singapore, Tokyo, Mumbai, New York, etc... KL is neither here nor there. What about Bangkok? Well, it has a super duper population (have you seen the weekend exodus from Bangkok every Friday). Even though it is not a financial center, it the the center for a country with a decent population size. If your capital city is the center of a country with a decent population, you can be assured of good commercial real estate values - e.g. Thailand, Taiwan, South Korea. We need Malaysia to move quickly from 26 million to at least 60 million. Then you can have some good ripple on effect on real estate values.

If you are not a financial center, you can still command high rates if high-value services businesses are aplenty. Hence Singapore's commercial real estate will have a very strong long term uptrend as it does not depend on its reputation as a financial center/port/MICE biz like HK but moves higher up the value-added curve by encouraging designers/inventors in animation, biotech, education, etc. Does KL look like a city with good high value added industries?

Good amenities and public infrastructure would not be a bad thing, look at Tokyo, HK, Singapore or even New York - but infra is not crucial in giving higher real estate values. If you look at the capital cities of the high GDP per capita countries such as Oslo, Amsterdam, Stockholm, etc.. you will find that good infra is a good thing but not necessarily stratospheric real estate prices.

Lack of good quality commercial space will also spruce up real estate values. Just look at Indian cities, cities in Vietnam or even Jakarta. We in KL, unfortunately builds okay buildings cheaply as land is cheap and plentiful. I mean, KL commercial just keeps getting drawn wider and wider. First the CBD, then the city kind of move wider to include PJ, then it moves out to Shah Alam, now Klang. Too much cheap flat land.

So, commercial real estate value in Malaysia will lag the rest of Asia, even some cities in Vietnam (my gawd), and it will not change until the fundamentals change. The only exciting part for Malaysian real estate is residential, and you know how people get crazy with houses, every now and then, good houses in good locations will have its own bull run. The rental yields never match the house prices - but hey, who the heck cares. Commercial and retail, fergedaboudit!