MALAYSIA RESIDENTIAL:

EXPECT FLATTISH HOME PRICES OVER THE NEAR TERM

PENNY YAW, CFA HSR Research HSR INTERNATIONAL REALTORS PTE LTD

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Property Take
20 Sep 2013

Expect Flattish Home Prices over the Near Term

Highlights
We think that there is high likelihood that overall home prices will be relatively flat in the next 2 years based on incoming supply data, annual demand estimates and household income. The best-case scenario over the near term is that the annual growth in home price index will revert to its historical average of 5% (based on quarterly data since 1Q1999) after taking into account the macro challenges, slower GDP growth (on 21 August, the Malaysian government revised its GDP forecast downwards to 4.5-5% from 5-6%) and the fact that banks are more cautious in lending. In our view, double-digit growth in home prices is not sustainable unless there is a corresponding increase in household income. Malaysias All House Price Index registered a CAGR (2009-2012) of 9.4% compared to the mean and median household income CAGRs (2009-2012) of 7.5% and 8.5% respectively. This suggests that home prices have not gone up by that much more relative to income and Malaysians are only slightly worse off. The average person on the street might argue otherwise. Complaints about skyrocketing property prices is more location specific. After a lull in 4Q2008-1Q2010, construction starts began to increase in 2012. If all goes according to schedule, we expect rising completions in 2014 and 2015. The expected date of completion from the date of signing of the sales & purchase agreement in Malaysia is 2 years for landed homes and 3 years for non-landed homes. The starts for non-landed residential units peaked at 17,540 units in 1Q2013. Most of the starts in the past 4 quarters, were in Selangor (29% of total), Kuala Lumpur (25% of total) and Johor (21% of total). The data on incoming supply (represents accumulative totals and includes delayed units) show that there are 654,563 units at end-2Q2013p. Of Malaysias total incoming supply, 22% was located in Selangor, followed by 17% in Johor and 9% in Negeri Sembilan. By averaging the incoming supply number over 3 years, we find that there will be a supply of slightly above 200,000 units per annum, compared to annual demand of close to 100,000 units based solely on natural population growth. Historically moderate home price growth except in 2011 and 2012. Malaysias equity market has historically been known for its defensiveness relative to the regional markets and we see a similar quality in the countrys overall Home Price Index. Even during the Global Financial Crisis (2007-2009), Malaysias All House Price Index did not fall, while the High-Rise Price Index recorded a moderate decline of 1-3% from 4Q2008 to 3Q2009. The All House Price Index for Malaysia has grown approximately 5% YoY (simple average) based on the historical quarterly data since 1Q1999. Based on the All House Price Index Chart, we noticed that there was a jump from 1Q2011 to 4Q2012. The spike was even more apparent in the non-landed segment, with the quarterly High-Rise Price Index rising by 9-18% YoY (1Q2011 to 4Q2012). We see a bit more volatility in the High-Rise Price Index, with a decline of 4-7% (1Q2002-2Q2002) that coincided with the end of the dot-com bubble. In our opinion, the double-digit growth in home prices will be difficult to sustain unless there is a corresponding increase in household income. Our analysis of the All House Price Index growth rate compared to household income reveals that Selangor home price recorded a 12.2% CAGR in 2009-2012 but the mean and median monthly household income growth lagged at 5.6% and 7.5%, respectively. This was also the case for Malaysias All House Price Index, which posted a CAGR (2009-2012) of 9.4% compared to the mean and median household income CAGRs (2009-2012) of 7.5% and 8.5%, respectively. We can expect a similar pattern for Johor when the next set of statistics is publish.

Malaysia: Residential

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20 Sep 2013
Growth in Home Prices vs. Household Income 2007 House Price Index All House - Malaysia All House - Johor All House- Selangor All House KL All House - Penang Mean Monthly Household Income Malaysia Johor Selangor Kuala Lumpur Penang Median Monthly Household Income Malaysia Johor Selangor Kuala Lumpur 2,552 2,726 4,046 3,697 2,841 2,958 4,306 4,409 3,626 3,650 5,353 5,847 8.5% 7.3% 7.5% 9.9% 7.3% 6.0% 5.8% 9.6% 3,686 3,457 5,580 5,322 4,004 4,025 3,835 5,962 5,488 4,407 5,000 4,658 7,023 8,586 5,055 7.5% 6.7% 5.6% 16.1% 4.7% 6.3% 6.1% 4.7% 10.0% 4.8% 124.0 90.6 119.2 139.4 131.8 131.8 95.5 123.6 142.0 145.4 172.8 113.9 174.5 198.6 183.6 9.4% 6.0% 12.2% 11.8% 8.1% 6.9% 4.7% 7.9% 7.3% 6.9% 2009 2012 CAGR (2009-2012) CAGR (2007-2012)

Penang 2,902 3,200 4,039 8.1% 6.8% Source: Valuation & Property Services Department MOF, Department of Statistics Malaysia, HSR Research

Index

All House Price Index

14% 12% 10% 8% 6% 4%

200 180 160 140

120
100 80

2%
0%

Source: Valuation and Property Services Department MOF Malaysia, HSR Research

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2Q 2000 4Q 2000 2Q 2001 4Q 2001 2Q 2002 4Q 2002 2Q 2003 4Q 2003 2Q 2004 4Q 2004 2Q 2005 4Q 2005 2Q 2006 4Q 2006 2Q 2007 4Q 2007 2Q 2008 4Q 2008 2Q 2009 4Q 2009 2Q 2010 4Q 2010 2Q 2011 4Q 2011 2Q 2012 4Q 2012 2Q 2013p
All House Price Index All House YoY Chg

20 Sep 2013
Index 200 180 160 140 120 100 80

High-Rise Price Index

20% 15% 10% 5% 0% -5% -10%

Source: Valuation and Property Services Department MOF Malaysia, HSR Research

Starts have risen since 2012. From the data on starts and completions, we see that starts began to increase in 2Q2012. Starts comprises buildings where the foundation and footing works of low-rise buildings or works below ground level including piling and foundation of high-rise buildings have started but it does not include site clearing, levelling and laying of infrastructure. Starts fell during the Global Financial Crisis and only picked up in end-2010. In 2009, property developers started offering Developers Interest-Bearing Schemes (DIBS). Under the scheme, the property developer absorbs the home loan interest of the buyer during the propertys construction period. SP Setia popularied this scheme in January 2009 when it introduced the 5/95 home loan package. Under that package, the buyer made a 5% down payment, with no other cash outflow until the property was handed over. SP Setia bore all legal fees, stamp duty on the sale and purchase agreement, loan agreement and memorandum of transfer in addition to servicing the interest during the construction period. Subsequently, more developers jumped on the bandwagon to provide more incentives. Starts were low during this period (4Q2008 1Q2010), which partly reflected the challenging sales environment especially in 2Q-3Q2009. Completions expected to increase in the next 2-3 years. Completions have been on a declining trend in the past few years but we expect them to rise in the next 2-3 years, especially for non-landed homes. For landed residential properties such as terrace houses, semi-detached houses and bungalows, the expected date of completion is 2 years from the date of signing of the sales & purchase agreement and for non-landed subdivided building such as apartments, condominiums and flats, the expected date of completion is 3 years. Starts for non-landed residential units peaked at 17,540 units in 1Q2013. Most of the starts in the past 4 quarters were in Selangor (29% of total), Kuala Lumpur (25% of total) and Johor (21% of total). In the past 4 quarters, non-landed starts accounted for close to 98% of the starts in Kuala Lumpur. We see a fairly equal split between landed and non-landed starts in Selangor during the 3Q2012-2Q2013 period. In Johor, the split between landed and non-landed starts during the same period was 55:45.

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2Q 2000 4Q 2000 2Q 2001 4Q 2001 2Q 2002 4Q 2002 2Q 2003 4Q 2003 2Q 2004 4Q 2004 2Q 2005 4Q 2005 2Q 2006 4Q 2006 2Q 2007 4Q 2007 2Q 2008 4Q 2008 2Q 2009 4Q 2009 2Q 2010 4Q 2010 2Q 2011 4Q 2011 2Q 2012 4Q 2012 2Q 2013p
High-Rise Price Index High-Rise YoY Chg

20 Sep 2013
Units

Starts and Completions (excluding low cost units)

32,000 28,000 24,000 20,000 16,000 12,000 8,000 4,000 -

Starts - Landed Completions - Landed

Starts - Non Landed Completions - Non Landed

Source: Valuation and Property Services Department MOF Malaysia, HSR Research

Incoming supply highest ever. Apart from the starts and completions data, we also took a closer look at the incoming supply data for 2Q2013 (refer to Incoming Supply tables). Incoming supply comprises units where the physical construction works are in progress. This includes starts and projects with certificates of fitness (CF)/temporary certificates of fitness (TCF) that had not been issued during the review period. The incoming supply figure represents the cumulative total and includes delayed units. Note that incoming supply data in 2Q2013 (654,563 units) is the highest ever historically (based on quarterly data since 2002). Prior to this, the high was in 2Q2006 (642,935 units). Of Malaysias total incoming supply at end-2Q2013, 22% was located in Selangor, followed by 17% in Johor and 9% in Negeri Sembilan. In terms of housing types, the largest incoming supply in Selangor is terrace houses, which account for 32% of the state total, followed by condominiums/apartments at 24%. In Johor, the largest incoming supply is terrace homes, which constitute 40% of the state total, followed by flats at 14% and serviced apartments at 13%. In Negeri Sembilan, the bulk of the incoming supply is terrace homes, which account for 55% of state total.

Incoming Supply Landed Residential Units by Type 2Q 2013p Terrace SemiDetached Detached Town House Cluster Low Cost House 351 5,553 1,146 3,890 3,627 88 7,127 6,117 7,412 607 163 1,651 1,747 39,479 Subtotal

Kuala Lumpur Putrajaya Labuan Selangor Johor Penang Perak N. Sembilan Melaka Kedah Pahang Terengganu Kelantan Perlis Sabah Sarawak

1,763 413 86 46,102 45,597 15,531 23,376 31,506 8,628 18,447 11,556 5,581 9,235 1,487 10,615 14,198

479 272 18 13,599 8,150 5,320 4,910 3,905 3,358 10,925 5,764 2,980 1,004 828 1,351 3,431

386 36 5 5,609 2,328 2,557 2,088 7,462 2,103 1,983 1,654 5,705 2,806 140 322 139

171 3,603 472 677 306 1,117 190 80 60 154 120 28

3,372 3,694 1,659 1,065 183 144 148 56 24 200 108 107

2,799 721 109 72,636 65,794 26,890 35,635 47,800 14,511 38,710 25,207 21,856 13,652 2,818 14,167 19,650 402,955

Malaysia 244,121 66,294 35,323 6,978 10,760 Source: Valuation and Property Services Department MOF Malaysia, HSR Research

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20 Sep 2013

Incoming Supply Non-Landed Residential Units by Type 2Q 2013p Flat Service Apartment Condominiu m/Apartment SOHO Low Cost Flat 436 13,893 5,034 4,145 80 3,283 1,212 2,379 445 2,851 160 6,085 888 Subtotal

Kuala Lumpur Putrajaya Labuan Selangor Johor Penang Perak N. Sembilan Melaka Kedah Pahang Terengganu Kelantan Perlis Sabah Sarawak

374 7,490 15,743 7,619 240 603 182 357 948 64 1,000 7,452 144

21,951 16,734 14,756 869 42 2,072 1,027 457 -

22,034 785 240 34,630 12,256 8,553 2,131 5,904 1,520 406 3,605 33 1,509 746 10,937 2,030

949 660 1,665 -

45,744 785 240 73,407 47,789 21,186 2,451 9,832 4,986 3,142 6,025 2,948 3,126 746 26,139 3,062 251,608

Malaysia 42,216 57,908 107,319 3,274 40,891 Source: Valuation and Property Services Department MOF Malaysia, HSR Research

Summary Incoming Supply of Landed and Non-landed Residential Units 2Q 2013p Landed Non-landed Total Incoming Supply 48,543 1,506 349 146,043 113,583 48,076 38,086 57,632 19,497 41,852 31,232 24,804 16,778 3,564 40,306 22,712 % Landed % Nonlanded

Kuala Lumpur Putrajaya Labuan Selangor Johor Penang Perak N. Sembilan Melaka Kedah Pahang Terengganu Kelantan Perlis Sabah Sarawak

2,799 721 109 72,636 65,794 26,890 35,635 47,800 14,511 38,710 25,207 21,856 13,652 2,818 14,167 19,650

45,744 785 240 73,407 47,789 21,186 2,451 9,832 4,986 3,142 6,025 2,948 3,126 746 26,139 3,062

5.8% 47.9% 31.2% 49.7% 57.9% 55.9% 93.6% 82.9% 74.4% 92.5% 80.7% 88.1% 81.4% 79.1% 35.1% 86.5%

94.2% 52.1% 68.8% 50.3% 42.1% 44.1% 6.4% 17.1% 25.6% 7.5% 19.3% 11.9% 18.6% 20.9% 64.9% 13.5% 38.4%

Malaysia 402,955 251,608 654,563 61.6% Source: Valuation and Property Services Department MOF Malaysia, HSR Research

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20 Sep 2013

Annual house demand based on natural population increase. The total population in Malaysia stood at 29.3 million at end-2012. With reference to the Average Household Size table, we see that the average household size in Malaysia fell to 4.31 persons in 2010 from 5.22 in 1980 due to rising urbanisation. The average household size is expected to continue to decline over time, in line with developed countries. The average household size in Singapore was 3.53 persons in 2012 (Department of Statistics, Singapore) and 2.59 persons in the United States (2010 statistics from United States Census Bureau). By assuming population growth of 1.3% (actual population growth rate in 2011 and 2012) in the next 3 years and average household size of 4 persons, home demand would be close to 100,000 units per annum.
Average Household Size 1980 Malaysia Kuala Lumpur Selangor Johor 5.22 4.87 5.33 5.50 1991 4.92 4.69 4.93 4.89 2000 4.62 4.24 4.59 4.51 4.38 2010 4.31 3.72 3.93 4.17 3.94

Penang 5.48 5.00 Source: Department of Statistics Malaysia, HSR Research

Commonly Used Abbreviations & Glossary 2Q2013p preliminary 2Q figures MOF Ministry of Finance Malaysia CAGR Compounded Annual Growth Rate Mean the arithmetic average of a set of numbers Median is the middle value in the list of numbers

Penny Yaw, CFA; (pennyyaw@hsr.com.sg)

This report is for information purposes and has been prepared by HSR Research based on sources believed to be reliable. Any opinions or estimates in this report are that of HSR Research as of this date and are subject to change without notice. The company and its directors and staff may have an interest in the properties mentioned. Issuance of the report by HSR Research is not an offer to sell or a solicitation to buy the properties covered in the report and HSR Research shall not be responsible for any consequential loss or damage, whether direct or indirect.

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