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Kuala Lumpur’s Property Market Is “Frightening”

The property bubble in Kuala Lumpur may very well implode late this year or early next with an oversupply of new high-end condominiums expected to hit the market this year and for several years to follow.

A local property consultant has labelled the situation outright “frightening.”

Malaysian property consultant CH Williams Talhar & Wong Sdn Bhd’s (WTW) managing director Foo Gee Jen said he expects 5,000–6,000 units to hit the market over the next nine months.

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Moreover, another local real-estate professional, Siva Shanker, President of Malaysia Institute of Estate Agents (MIEA), thinks a “price war” will break out within the rental market driving prices downwards as owners scrap to secure tenants. Although he feels what he calls the “super luxury” units won’t be hit as hard due to their niche market.

According to WTW, the overall supply of luxury condos in KL rose to 26,163 units in Q3 2013 from 25,796 units during the previous quarter. They noted that the majority of the supply concentrated in the KLCC area, with 43% of the total supply in KL or 11,181 units.

The amount of luxury condos in KL is extraordinary to say the least. For a country whose average monthly income is RM5000 (US$1,500), or RM8,586 (US$2,700) in KL, it’s not exactly clear how robust a secondary market will be for all these high-end condos once it’s time to sell. Or by what basis will luxury properties keep rising, outside of foreign money interests, to justify all the units set to hit the market in the next few years.

Of course that’s just it, as of now, mainly buyers from China, the Middle East, and to a lesser extent Japan, have been propping up the luxury real estate market in Malaysia over the years—but for how long can this be milked? And on what fundamental investment basis are these foreign investors basing their decisions? Or is it just a case, as with other countries like in the United States, that this foreign capital is not based on any sound investment principle but just on good old fashioned money laundering?

Vacancy rates have already been steadily rising. In 2008, rates were around 26%. They grew to 35% by 2012. I could not find any recent relevant data, but one can only assume vacancy rates have continued to climb when new units are flooding the market and cranes seem to dot the skyline at every turn.

Developers also are already feeling the squeeze, especially considering since January 1 of this year the Malaysian government raised the minimum price of property that can be purchased by foreigners from RM500,000 (US$150,000) to RM1million (US$300,000).

Speaking strictly from my own personal experiences this year searching for a new rental unit to move into in the KL area, it was not out of the ordinary to find many “new” units that had been sitting for 2–4 years without ever having the benefit of any occupants. I finally settled on a place built in 2011 in a prime area that had sat vacant the entire time. Disappointing though, the owner refused several of my bargaining attempts acquiescing only slightly on his listed rental price, but not nearly as much as I had imagined or hoped. In retrospect, maybe I should have waited a bit longer, no?

Regardless, much has been said about the Singapore property bubble since the beginning of this year, but I believe that Kuala Lumpur’s is also one to seriously watch (maybe even more?), especially considering Malaysia has one of the highest debt-to-GDP ratios (government, pubic, and corporation) in the Asia region. Household dept-to-GDP stands at 80% plus and doesn’t show signs of slowing. Although, more specific details and further analysis on Malaysian household finances is not easily available making the situation, in my opinion, even more unsettling.

As with any real estate market built on wild amounts of easy credit, cheap money, and overly enthusiastic MBA’s, the reality of the situation will come roaring back and then all those we once trusted in regards to their expertise in the industry will say, “We never saw it coming!”

The big question waiting to be answered is how much of Malaysia’s success over the years was simply built on the back of this real estate and debt bubble?

Many questions, but I’m betting we won’t need to wait too much longer for those answers….

H/T: The Star

  • Ping

    I see Chinese hot money doing this to every country in Asia. Thailand got popular from a movie in China after China hot money poured into Thai. China property bubble extends everywhere.