Economic growth will help sustain real estate
By Joseph Wong
The economic landscape in 2024 will have a direct impact on both the residential and commercial real estate markets, influencing demand and the influx of new supply. With a more stable economic environment, it is anticipated to boost consumer confidence and spending power. Moreover, with expectations of declining interest rates, mortgage costs are likely to decrease throughout 2024. This should make home purchases more affordable, potentially attracting a greater number of owner-occupied and investor buyers to the market.
The anticipated rise in tourism may generate increased demand for short-term rental properties and vacation homes, especially in popular tourist destinations like George Town or Langkawi. This surge in demand could result in higher returns for investors holding properties in these areas.
The implementation of the Progressive Wage Policy has the potential to enhance the affordability of housing for low-wage workers, subsequently increasing the demand for affordable homes over time.
Malaysia’s GDP should pick up from 4% this year to 4.3% in 2024, according to Irhamy Valuers International founder and chief executive officer Irhamy Ahmad. “While we predict 4.3% growth, the Finance Ministry expects it to come in between 4% and 5%. If we are right and GDP growth hits 4.3% in 2024, that would be lower than the 4.9% forecast I made five months ago because of weaker international trade.
“Inflation was the big challenge of 2023, but Bank Negara and the government’s fiscal restraint have done a good job of bringing inflation down to the target range. That means we may see a decrease in the Overnight Policy Rate (OPR) in the first half of 2024. That would help further stimulate the economy,” the chartered valuation surveyor said.
Factors driving Malaysia's GDP growth
Tourism is expected to be one of the big drivers of the nation’s Gross Domestic Product (GDP), according to the statement from Irhamy Valuers International, which is a part of Juwai IQI. Anticipated is a further rebound in tourism, with an interesting aspect being its significant employment generation. Termed employment intensive, the expansion of tourism is expected to directly benefit numerous households by creating job opportunities.
The economic challenges during the pandemic years were exacerbated by the collapse of international travel, particularly by Chinese consumers, significantly impacting the tourism industry. As international travel resumes, Malaysia's tourism sector is on the path to recovery. In 2022, tourism contributed to 14% of GDP, showing improvement compared to the 15.9% recorded in 2019 before the pandemic.
“We expect a strong tourism market in 2024, which may stimulate new investment in the hospitality sector, including in hotel, retail, and other hospitality-related property. Meanwhile, Penang’s Silicon Island and other infrastructure projects will create new jobs and economic activity. Along with the gathering shift to higher-value manufacturing, that should mean higher demand. Expect more buyers for commercial and industrial real estate such as offices, manufacturing facilities, technology parks, and specialised high-tech manufacturing and research and development facilities.
“My short take is that Malaysia's steady GDP growth and fiscal and monetary policies should positively influence both the residential and commercial real estate markets. Expect more activity and slightly higher prices. On the downside, watch out for a decrease in external trade, which could weaken economic growth from the projected 4.3%,” said Irhamy.
More exports
The Malaysian economy relies on both domestic and export demand. In 2024, there is an expectation that Malaysia will experience a gradual increase in export sales compared to 2023.
The anticipated rebound in Malaysian exports is attributed to a heightened demand in North America and the Eurozone. The World Trade Organisation forecasts a 3.3% climb in world merchandise trade volume next year. If major economies manage to surpass inflation and reduce interest rates earlier than anticipated, export growth could accelerate.
During the second half of the year, my team facilitated the relocation of a factory from Malaysia to Mumbai, India. This factory, which manufactures sanitary wear for hospitals, serves as an illustration of lower-value industries moving out of Malaysia to jurisdictions where operational costs are lower.
Malaysia is currently undergoing a transformative shift from low-value manufacturing to the production of higher-return products.
“Penang’s Silicon Island project reveals the other half of that transition from low to high value. Silicon Island will become a hub for high-technology industries and export-oriented growth, enabling Penang to continue expanding despite the limited available land.
“Silicon Island will see a total investment of RM74.7 billion and the creation of 2,300 acres of new land via dredging. The benefits from Silicon Island will include RM1.1 trillion of economic activity and 220,000 jobs.
“For comparison, Silicon Island will have nearly double the 1,380 acres of the famous Palm Jumeirah in Dubai. And, instead of expensive houses like in Dubai, Malaysia’s new island will host high-value industrial and commercial property that could help our economy soar,” said Irhamy.
The stakes are significant as Penang contributes to approximately 5% of global semiconductor exports and more than half of Malaysia's electrical and electronics exports, positioning the country as one of the world's top 10 semiconductor manufacturers.
Thanks to the robustness of the industry and the contribution of Silicon Island, PwC anticipates that Malaysia's semiconductor sector will experience a compound annual growth rate of 7%. By 2028, it is expected to achieve an output of US$4 bil (RM212.52 bil).
Both large and small infrastructure projects play a crucial role in the economy, given the substantial total investment required for their realisation. Notable among the new infrastructure projects in 2024 are the RTS Link with Singapore, the Central Spine Road, and the Pan Borneo Sabah and Sarawak highways.
Risk factors
In 2024, two big game changers present significant upside risk to this base case outlook. The new no-visa entry policy for Chinese and Indians and the introduction of the new progressive wage policy next year.
Introduced in November and to begin this year with a pilot project involving 1,000 companies, the Progressive Wage Policy is designed to eventually benefit 1.05 million low-wage workers. If the program can scale quickly in 2024, it could add a significant boost to the economy. While the policy will directly benefit low-wage workers, once a large number of workers have been enrolled, it will have wider positive benefits. That is because, when low-wage workers receive extra income, they are more likely to spend it locally, thus injecting that money back into the economy.
There is a great need for programs like this because the wage gap between low-skill and high-skill workers has widened by 37.4% since 2010 to 2,474 ringgit per month, according to data from The World Bank.
Visa-free entry
In December, the government initiated a visa-free entry program allowing stays of up to 30 days for citizens of China, India, and several Middle Eastern countries, including Saudi Arabia, Kuwait, Oman, Qatar, the United Arab Emirates, Iraq, and Iran.
This visa program is anticipated to aid the recovery of the tourism industry from the impact of the Covid downturn. Additionally, it will help Malaysia retain tourism income that might otherwise be diverted to other Southeast Asian countries that have also implemented visa-free entry. Tourism and hospitality play a crucial role in the economy, providing employment opportunities at various skill levels, particularly benefiting lower-wage workers.
Even a modest 1% increase in tourism resulting from visa-free entry could translate to an additional spending of RM282.3mil. On average, each tourist visiting Malaysia spends RM2,800, according to data from Tourism Malaysia. While a 1% increase may be conservative, it would still have significant economic benefits.
The primary downside risk in 2024 is a potential further reduction in global trade. Although Malaysia is witnessing GDP growth, exports saw a 12% decline in the third quarter due to slowdowns in Europe, North America, and China. The trade slump commenced in the fourth quarter of 2022. The WTO predicts a 3.3% growth in world trade in 2024, but if the decline persists, it may pose challenges to Malaysia's export expansion.
Regional outlook
In the Asia-Pacific region, 21 out of 25 cities monitored recorded positive annual price growth in H2 2023, with Singapore registering as the top-performing market with 13.7% year-on-year growth, according to Knight Frank.
“The residential market experienced a surge in the past six months, following the FED’s decision to pause rate hikes, which encouraged potential buyers who had been waiting on the sidelines to make purchasing decisions. Ongoing constraints on the supply side, including input costs, labour shortages and construction delays, have played a role in supporting prices in numerous cities across the Asia-Pacific region. Notable performers such as Singapore, Sydney, Brisbane, Perth, Manila, Delhi, and Bengaluru have benefited from factors like the wealth effect, demand exceeding supply, and optimistic economic growth prospects,” said Knight Frank Asia-Pacific managing director Kevin Coppel.
Despite facing unexpected challenges such as geopolitical issues and ongoing inflation, the real estate market in the Asia-Pacific region is exhibiting a more positive outlook entering 2024, said Knight Frank Asia-Pacific research head Christine Li.
While Greater China and South Korea contend with regulatory scrutiny and increasing interest rates, the overall region has witnessed buoyant sales, with pricing staying resilient and showing an upward trend. The annual growth rate of 4.5% has countered initial pessimism in sentiment, and the robust economic momentum is expected to uphold positive homebuyer sentiment throughout 2024.
In addition, Knight Frank Property Hub managing director Enoch Khoo pointed out that Budget 2024, presented last year, placed emphasis on key initiatives aimed at positively impacting the local real estate market despite inflationary pressures and elevated OPR, therefore encouraging the market is moving positively with increased sales volume, new launches and successful completions.
Khoo holds an optimistic view for Malaysia.
A decrease in OPR will help further stimulate the economy, Irhamy said.
Stay ahead of the crowd and enjoy fresh insights on real estate, property development, and lifestyle trends when you subscribe to our newsletter and follow us on social media.
