Land constraint: Land, being a state matter, has put a constraint on the development of a national housing policy.

IT has been a decade since the 2008 financial crisis. The economies of most developed countries are steady, though not strong. Property prices are generally high in both the developed and developing world with a shift and clamour for more affordable housing.

Malaysia is going through what other countries are experiencing. In the midst of all these, for the first time in years, interest rates are finally rising. US and Japanese unemployment rates are the lowest in 17 and 24 years, respectively.

In the midst of this world economic and financial drama, real estate has risen in status as an asset class. And this is particularly obvious in Malaysia given how properties have been viewed, speculated and traded, and the youthfulness of some buyers this past decade. So it is natural to wonder how residential prices will hold as interest rates return to normal.

But it is in the commercial sector – office and retail space – that the real worry lies moving forward.

Just as Malaysia’s Federal Constitution provides the basis how the state should evolve over time and generations, no matter who is in power, a national property policy provides direction for the sector in the overall scheme of things.

As 2018 rounds the corner, maybe now is as good a time as any to take stock how the sector needs to be managed considering its links to the financial and lending sector.

Says Khong & Jaafar group of companies managing director Elvin Fernandez: “Malaysia lacks an overall property policy, and one is sorely needed in the housing market.

“Because land is a state matter, it is not easy to put into place an overall policy. In countries where you don’t have a federal system, it would be easier.

“This is a constraint on the development of a national housing policy that would otherwise evenly administer housing issues,” he says.

This constraint means more thought and efforts are needed to make this happen.

“A central concept that must be in this housing policy – to be part of the overall property policy – is that house prices must have a relationship with household income over the long term.

“It cannot be one totally ignorant of the other. This must be the final aim in this relationship between prices and household income. And that is how the overall policy must be administered – in terms of compliance cost, the need to control cost through industrial building systems (IBSs) in order to bring down costs and to reduce the risks in the system,” he says.

The policy must have a clear rationale for compliance cost and the policy writers must know how costs of complying with the various authorities at the state levels add to the cost of the end product (which are then borne by buyers).

Policy writers must also know how compliance costs – when it goes out of control – impacts the price of the end product.

This is the cost imposed by various local authorities at the state level.

But there is also a cost at the national level and this is the cost in the industry, although there are ways to bring that down; the use of IBSs being one of them.

Therefore, there is the need to balance the local and the national level costs and this leads to the third factor – reducing overall risk.

All this can help to bring down cost in the housing industry over the longer run, says Elvin.

Population

While the policy should enable cost to come down over the longer term, it must also take into account population growth.

Bank Negara reported unsold and unutilised units of 130,690 units, which include small offices home offices (SoHos) and developments in this genre which are built on commercial land as well as unsold units during construction.

The National Property Information Centre (Napic) reported an overhang of 20,876 units, and excluded SoHos and similar genre. It defined overhang as unsold units which are certified fit for occupation.

SoHos and the like can also be rather speculative in nature and the last several years saw a proliferation of these units. Developers cut the units small in order to bring down the absolute price and marketed them as flexibile office/home units.

A property consultant who declined to be named says SoHos is another area that needs closer scrutiny.

Although developers may be able to market them successfully, its utilitisation rate is poor.

There must be a more productive use of money, he says.

Having removed this non-mainstream form of housing from the residential overhang and unsold units during construction, “the picture is not as bad as painted,” says Elvin.

“There is also inherent strength in housing. Prices are generally sticky on the downside and does not tumble because it is owned by a diverse group of people.

Bank Negara’s macro-prudential policies have also put paid to speculative pressures.

“So the picture is not as bad as painted,” he says.

Office space

The office space market, however, can be quite worrying, particularly in Kuala Lumpur.

It is “substantial” and it is “still growing,” says property consultancy VPC Alliance director James Wong. Malaysia’s total office space is 169.37 million sq ft, and 126,35 million sq ft in Greater Kuala Lumpur, at the close of 2017.

If 20% is vacant, this equals 33.87 million sq ft in Malaysia, and 25.27 million sq ft in Greater Kuala Lumpur.

“This is alarming,” says Wong in an email.

What is particularly of concern, he says, are low occupancies among new office buildings in the outskirts of Kuala Lumpur and in Putrajaya.

There is a planned supply of about 9.14 million sq ft at end of the first half of 2017, compared 4.32 million sq ft in 2012.

Napic’s planned supply takes only into consideration projects which have been issued development orders (DO) while there are a lot of projects, particularly in the Klang Valley, where the DOs have not been issued.

So the planned supply is actually “understated” to a large extend. This is where the danger lies, both Wong and Elvin say.

When there is a large supply like what the country has today, there will be pressure on rental rates.

There is a relationship between value of a building and rental. The value is driven by rental.

Over a five-year period, office rental in the city grew marginally.