We recently had the opportunity to interview Dato’ Mani Usilappan for his thoughts on the general property market in Malaysia. Amongst other things, we asked him if the property market was going to crash and what his advise was for first time property investors.
Mani is a very accomplished professional in the property sector. He is a Chartered Surveyor and served as the Director General of the Valuation and Property Services Department, Ministry of Finance. His portfolio includes serving as an Independent Non-Executive Director, an Audit Committee Member and Chairman of the Risk Management Committee of Keretapi Tanah Melayu Berhad. He is an expert in the area of valuation and estate agency.
Mani’s insights were very sharp and he shed light on areas that would interest any keen property enthusiast. Inevitably, we probed a lot and Mani had a lot to dish out. This was an exciting interview that we present to you in 2 parts.
DP: Dato’, is the property market going to crash? This seems to be on top of most people’s minds.
Certainly not. There are no indications that the property market will crash. I always find it odd when people say that the property market will crash. The property market is not a separate market. It is not a market that works on its own. The property market is part of the national economy.
If the national economy goes down then you can’t prevent the property market from going down as well. So it is a derived market. It is not an independent market. It is dependent and derived from the national economy. When the national economy is performing well, there is no reason to believe or to anticipate or to expect or even to worry about the property market crashing.
You’ll always have indications from the general market, the stock market for example will be affected when other stock markets are affected. In a global downturn, where our economy is holding good, there will be a kind of plateau or wait and see attitude. The sub-primes are a very good example.3 or 4 years ago, in Europe and America, the economies and the property markets went down but it did not affect us. There was a wait and see attitude, people were a little worried. But realizing that our property market is not shored up by dubious loans, it held its own. It didn’t go down. In fact when people realized that every thing was okay, it went up to new heights, from 2009 to 2010 to 2011.
I believe the reason that the property prices have gone up tremendously is because of Real Property Gains Tax (RPGT). The government decided to reduce the tax to zero some time ago. They did not remove it but they reduced it. So people started trading property as though it was stock. And it went on a spiral. I buy at RM 1,000 per square feet (psf) and sell at RM 1,200 psf. The guy who buys at RM 1,200 psf sells at RM 1,400 psf and so forth. Nobody had to pay any tax. So it became like a medium for transactions, just like the stock market. However, there was no real value in the increases. They were not being supported by rental or investment fundamentals.
When the govt decided, wisely, to bring back the RPGT, it wasn’t much in my opinion (5%), it put a halt to unrestricted speculation and prices retracted somewhat. At least in the areas where it had gone up too much – in the KLCC area for example.
Large scale speculation was only happening in certain areas in the Klang Valley (KV). Not throughout the country, not throughout the KV. So prices in some of these places retracted back a little and people thought there is a bubble. This was not the case.
The government, I think, made a mistake in reducing the tax. So people had the opportunity to push up prices. These increases were not supported by fundamentals. It was speculation for quick gains. Having gone up to the heights it reached, it has since come down and pretty much stabilized at around RM 1,000 psf to RM 1,200 psf for condominiums in the KLCC area. Now that has sort of set a mark.
Prices in the KLCC area now hover in the RM 1,000 psf to RM 1,200 psf range
Having said that, the fundamentals are still there, the economy is still growing at about 4% – 5%. It has grown in this range over the last 3 years or so and there is no indication that the general economy is due for any correction. Fundamentally the agriculture side is quite strong, the petroleum income is still very good, and the manufacturing sector is doing well. We’re still exporting to many countries, including trading partners like the US and traditional partners like Japan and China.
Electronic goods are doing well and the services side is also good. So I don’t see anything that indicates the property market is headed for a crash. Prices though have gone up a bit too high. Especially in certain areas in the KV where properties are at what we would term ‘beyond the affordable bracket’. Personally I do not know what is affordable in the KV. We do not know what is the real average household income in the KV.
Statistics indicate that the average income per household is about RM 6,000 per month.But if you translate this into affordability, there is no house in the KV that is affordable. Going by the 1/3 ratio, the average household can only afford monthly installments of RM 2,000 on their home loan. For RM 2,000, you can only borrow up to about RM 230,000 or RM 240,000.
I have done enough calculations to know that there are no houses available around that price region unless you go for low cost. Even low cost houses in the secondary market fetch over RM 150,000. Therefore, the average person cannot buy a house which is launched today if we go by the statistics. So something is not right. I assume we do not know what is the actual income of the average KV household and I suspect it is more than what the statistics are telling us. Otherwise, I cannot explain how developers are able to sell houses at RM 600,000 or RM 600 psf, RM 700 psf, RM 800 psf, and they’re all taken up.
DP: Could it be an influx of foreign investors?
No. The foreigners are not buying those kind of houses. There’s no reason why they should or have to or want to. They will buy in very select areas. If they are looking for investment then they will go for areas like KLCC or Mont Kiara or other well established areas.
They will not venture into many of the areas which are more popular with the locals. Just like we would not go into unknown areas in England. We would rather stay or invest in cities that we know, like London or Manchester. Hence, foreigners will go for certain places in KL. They will not go to places like Cheras or Kepong or the back of Brickfields.
DP: Could we the assume that banks are over-lending?
Banks have been lending quite a bit to the property market. If you look at Bank Negara data, you’ll find that something like 47% of all bank lending is to the broad property sector. That includes construction, purchase of housing, purchase of non-housing property, and also other real estate. If you take away construction, you will find that something like 33% to 35% of all lending is to the purchase of properties, out of which the bulk is for housing.
In 1994, if I remember correctly, it was about 23 – 24% and we thought it was a little high. Now it is 47%. Generally speaking, compared to most countries this is high. In developed countries, lending to the property sector would probably be below 20%. But since we are a maturing economy, and housing is a prime necessity, there is significant lending to the property market. This is not bad in a growing economy.
Back to your question, I don’t think banks are over-lending. Banks are quite prudent in their lending. For example, they ask quite a number of professionals for an opinion of value before lending. The unfortunate thing is that banks don’t want to pay a valuation fee. What they do is they pick up the phone and ask people whom they know practice valuation as to what they think the value will be. They want a verbal opinion.
On the one hand they want to encourage more lending but on the other hand they want the cost related to it to be low. I don’t know why banks fail to realize that a risk management tool for lending is to get a professional opinion of a valuer who is already protected by professional liability insurance. If anything goes wrong with the lending, the banks can always pursue recourse through the valuer who provided the opinion and thereby shift the risk from the bank to the valuer.
DP: Most people prefer freehold property but are there any advantages to leasehold properties? What are the risks associated with a leasehold?
In reality there are only 2 types of titles. Whether you are in the U.S or in Australia or any country for that matter, they recognize 2 types of titles. One is called a ‘Grant in Perpetuity’, and the other is called ‘A Lease for A Term’. Common words used for these are ‘freehold’, which is an ownership in perpetuity, and ‘leasehold’ which is a lease for a period of years.
We derive our land laws from UK, where in the past, all land were freeholds owned by dukes and duchesses and earls and so on. Whenever a common person wanted land to do some work, a lease was drawn up. That’s how this thing started. You want to farm my land, I will give you a lease for 10 years, 15 years, 20 years, or 99 years. At the end of the lease you must return the land.
So there were landlords and the rest of the common people were tenants or lessees who were holding on to a lease. The government also leased out land by giving out a crown lease for 999 years. Not quite in perpetuity but long enough. In Malaysia, if you go to Penang, Perak, and Malacca you will find that there are crown leases for 999 years.
A Crown Lease is for 999 years
In Malaysia, the leaseholds started where there was a temporary need for land. For example during the emergency, there was a need to re-group people from one place to another. They set up new villages. These new villages were all on short term leases, 20 to 21 years. P.J and Jinjang were new villages with short leases. The fact of the matter is that this land was supposed to be given for a short term until the inhabitants were resettled somewhere.
Subsequently in 1965 when the National Land Code came in, it recognized 2 types of titles, the freehold and leasehold, and 99 years became the maximum number of years that a lease can be issued. From thereon the government started giving leases for 99 years. However, the National Land Code has been amended in such a way that all new land alienated to individuals will only be 99 years. No more alienation of freeholds.
Obviously with freeholds there are more advantages. Freehold means you own the land in perpetuity and you can pass it on to generation after generation. A leasehold will be owned for a period of time, 99 years, after which it must be returned to the government. So you own the property for 99 years and after that you give it up.
When you buy a leasehold you determine the value of it based on what you have ownership for. There will certainly be a price difference between a freehold and leasehold, because freehold is in perpetuity and leasehold is for a period of time. You are not going to pay the same price. If you pay the same price, something is not right. When you buy a property, you must take that into consideration. You also cannot assume that the lease will be 99 years forever.
Now coming back to the reality of the situation, when a whole area becomes leasehold, and you have a thriving population, it becomes difficult for the government to re-zone the land. It creates socio-economic problems, which will tie back to political problems, which translates into who comes into power.
For people living in a leasehold area, they will have nowhere to go when their leases expire. The government will need to re-house them. So one of the easier ways of doing it is to give them the same type of title back again.
Of course there are some people asking why can’t the government convert leaseholds into freeholds. There will be a price to pay for that, the difference between a leasehold value and a freehold value. But right now the position is that only leaseholds are granted under the National Land Code. There is absolutely no provision for converting leaseholds into freeholds but the state authority has the final say in this. Land is a state matter.
The state authority can decide to convert leases. We hear of this happening in Perak for example. If you look at the bigger picture though, in terms of revenue for the government, quite a fair bit of revenue comes from land and land based taxes. Countries like Singapore and Hong Kong are dependent almost totally on revenues from income tax and land based taxes such as property tax.
Stay tuned for Part 2 of this installment next Sunday.
The €580 million (£460m) plant is operated by a consortium called TSI, which is lead by French renewable energy firm TIRU Groupe. Waste firm SITA is the other partner, and takes control of the recycling facility.
