Published November 7, 2008

KL luxury condo sector in for tough times

Analyst sees severe drop in rental yields from 5-7% now

By PAULINE NG
IN KUALA LUMPUR
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A DELUGE of supply combined with a slump in demand could make 2009 'a year of reckoning' for Malaysia's luxury condominium sector, an analyst report warns.

Still building: Even without the spectre of an economic slowdown and softer demand, the flood of projects in the pipeline has the potential to drag prices down

More than 5,000 high-end units are expected to come onstream in the Klang Valley alone by the end of this year, followed by a similar number in 2009. As a result, rental yields, which now average 5-6 per cent gross in the Kuala Lumpur city area and about one percentage point more in the Mont Kiara area, are expected to be severely depressed by the end of next year.

Even without the spectre of an economic slowdown and softer demand, the flood of condo units in the pipeline - particularly in the Klang Valley and Penang - has the potential to drag prices down, OSK property analyst Mervin Chow says in a report.

Luxury condos benefited from the last property upswing, with prices generally doubling from 2006. In the KL city centre, for example, prices have risen to more than RM1,400 per square foot, from RM700 psf then. In the other popular area of Mont Kiara, average prices have gone as high as RM900 psf, from RM450 psf.

Projects seen as most likely to be hit if the axe falls are those launched in the past 12 months - at record prices.

Property consultants say that a slowdown in launches and softer demand is to be expected, given fears of lower economic growth of 3-plus per cent next year, down from 5-plus this year.

But not everyone sees a condo bubble about to burst. 'The market will be down but we won't have a crash,' says Zerin Properties chief executive Previndran Singhe. At worst, prices could come off 10-20 per cent, according to him.

A commercial sale he helped close recently was transacted at RM580-RM600 psf in the tech city of Cyberjaya - an indication that prices are holding up so far, he says.

In his 30-plus page report, OSK's Mr Chow sees one bright spot on the property scene. Mid to higher-end landed real estate will be next in line for a price boom, he reckons.

In economic downturns since 2000, higher-end landed property has shown resilience amid tough economic conditions.

But first, the current pall over property has to pass, says Mr Chow, who does not see a recovery until the second half of 2009 at the earliest. Going by previous trends, he expects the next up-cycle to kick in in early 2010, or 2011 if the downturn is worse than expected.

Why - barring a recession - is higher-end landed property a likely safer bet? Factors include a tendency for affluent investors to hedge their wealth in prime real estate when there is a flight to quality, and these investors having strong holding power, Mr Chow says.

Capital appreciation in Kuala Lumpur has also been decent on average, plus incoming housing supply is 'still manageable'.