The True State of Malaysia’s Property Overhang

The fact that years after the first time we talked about Malaysia’s Housing Boom or in other words: Malaysia’s Property Overhang is still an issue today, is disappointing to say the least.

Combined with the incoming Covid-19 Recession which is upon us, this oversupply looks like it’s going to have some pretty damning consequences for the property market in the coming years.

In January 2020, CBRE said that, “The current property overhang is unlikely to be resolved within the next 5 years.”

And even went on to say that, “If you look at these high-rise units like the SOHO, SOVO and Serviced Apartments, if there is no major price correction, I don’t think it would even clear in the next five years because you have to provide drastic measures in terms of pricing and to be able to entice people to buy.”

Do bear in mind that they said this before the MCO was even a consideration and at a time when the world still felt Covid-19 was just another SARS type situation.

What does this mean now with Covid-19 clearly wreaking havoc upon our economy for such a prolonged amount of time?

Simple supply and demand dynamics will tell us that when there is ample supply of something without enough buyers, its price will drop and when there are more buyers than supply, its price will rise.

So, in the case of an oversupplied housing market… Housing prices should drop.

Is this going to be the case for us in Malaysia?

For us to really understand what a property oversupply can do to a market, we can look to other countries that have faced similar situations and expect there to be similar outcomes for the Malaysian market as well.

This is not to say that the Malaysian market is exactly the same as these markets, but it should give us a better idea of what to expect.

Singapore
Singapore is currently facing a property oversupply and has been since early 2019. The Urban Redevelopment Authority (URA) revealed an overhang of 31,948 units in end September 2019, with sales averaging around 2,500 homes per quarter that year.

If sales were to continue at this rate, it would take the country approximately 4 years to clear the overhang completely.

The Monetary Authority of Singapore (MAS) then warned the people in November 2019 that this oversupply could result in downward pressure on property prices.

Private property in the country is down only about 1% since then but experts have said that it is unlikely there will be massive corrections in the market as, “Many property measures have already been put in place over the past years to ensure financial prudence among buyers. The possibility of many homeowners slashing prices or defaulting on housing loans is not high,.”

It was also mentioned that, “Deeper-pocketed developers may not see a need to adjust prices drastically now, as their balance sheets are still relatively healthy.”

Is this the same case for the bulk of Malaysian developers I wonder?

Looking at housing prices however it did show that there was almost a negligible change to housing prices. Despite a quarter-on-quarter fall in prices by about 1%, year-on-year prices were still up by 2.2%.

It would seem that despite the oversupply the effects are not exactly very prominent in the short-term.

Dubai
Dubai had more than 550,000 units of unsold residential properties in 2019 with another 49,000 more expected to be completed this year.

Two years prior to this the country reported 491,000 units of unsold residential properties in 2017.

This has been a long-standing issue in Dubai without the Government taking any real action to stave off developers from continuing to build relentlessly without any penalty for unsold units.

New projects are reporting only a 30% occupancy rate following handover. Yet, it looks like only now, with the Covid-19 crisis that developers are considering holding off on further developments.

Experts in Dubai have said that “If this oversupply continues it will be a disaster, “The banking system will get affected and that’s something we can’t afford.”

“The developers would benefit from cutting back on the supply because that would raise the prices in the long term, so far they’ve chosen short-term interest by maintaining the cash flows even at the cost of lower prices.”

It is estimated that Dubai can only roughly sell 15,000 – 25,000 units per year meaning that it could take Dubai more than 20 years to clear off their existing supply completely.

This extreme oversupply in Dubai has seen their property prices come down more than 30% over the last 5 years.

How would we deal with a housing price crash on a scale like this in Malaysia?

Home Sweet Home
These are obviously two different markets facing two different extremes, one where the impact of the oversupply was so drastic that it basically led to collapsing prices across the entire market and another where the market has been somewhat unscathed by the oversupply.

Let’s take a closer look at the numbers back here in Malaysia to get a better understanding of what we can expect from our own oversupply issues.

*All data freely available from JPPH Website (Valuation and Property Services Department)

The overhang problem has somewhat accelerated since 2016 with a reduction finally taking place from 2018 – 2019 and a further reduction coming into 2020.

This is definitely a good thing as increasing the number of overhang units by 10,000 each year was definitely not going to be sustainable.

However…

Before we dismiss the overhang problem as being on its way to being solved, I noticed some interesting things when sifting through the data.

The overhang is somewhat understated in the figures above as residential units do not include serviced apartments or SOHOs.

Just how many serviced apartments and SOHOs were in the overhang as of Q1 2020?

It turns out that there were a whopping 16,942 serviced apartment and 1,979 SOHO units.

I can understand that SOHO units are not always used as residences but I can’t seem to understand why serviced apartments are not included.

If we included these units into our total overhang of residential units, it would bring the total number to 48,619 units in 2020!

Also if we compare the overhang of these serviced apartments and SOHO units from Q1 2019 – Q1 2020, the percentage increase is 30.2% and 28.8% respectively.

Is the overhang really being reduced or…

Have the growing number of excess units simply been parked under a different category so the figures make it seem like the residential overhang problem is actually being reduced?

To make matters worse there is an incoming influx of units that are currently unsold but under construction. This meaning that these units upon completion will be added to the property overhang figures.

Just how many units are in this ‘Unsold but Under Construction’ category?

Get ready for it…

73,971 Residential Units, 36,113 Serviced Apartment Units and 4,308 SOHO units!

That’s a total of 114,392 units which have a timeline of up to 36 months to be completed (according to the Housing Development Act (HDA) in Malaysia, by which all developers need to adhere to, should they want to avoid LAD payments).

If we distribute this amount evenly over the next 3 years assuming that the projects are completed on time and finish completion evenly, that would mean another 38,130 units per year to be added to the overhang which is actually about 8,000 units more than our TOTAL current overhang of residential units! Added each year!

Conclusion  
I’m not one to bring doom and gloom but I feel that Malaysia’s property overhang issue that we are facing needs to be talked about and upon digging around realized that the issue has been downplayed and severely understated.

I know that the government has put various measures in place such as extending the HOC campaign for another year, allowing some states to reduce the foreigner purchase cap and reducing the OPR but will it be enough?

Looking at the two examples above in Singapore and Dubai, things could either go relatively unnoticed or they could impact the market tremendously.

We are not in as bad a state as Dubai and we are fairly worse off than Singapore, if we go by the number of overhang units alone.

I do  know that Malaysia is different from both these countries and it is hard to say how much the Coronavirus Recession will impact the property market and Malaysia’s property overhang as a whole.

How much will this overhang affect the market?

I cannot say for sure.

We can only wait and see but the government needs be aware that this does not bode well for the property market in general.

I believe further drastic actions need to be made to clear the overhang before we see a potential nationwide slump in the property market.

The true state of Malaysia’s property overhang is significantly worse than most people think it is.