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Pain on the Horizon for Kuala Lumpur (UPDATE)

As knowmadic news reported last year, many real estate professionals in Malaysia have labelled Kuala Lumpur’s property market “frightening.” With hindsight being what it is, that sentiment now seems rather generous, as things could (and probably will) turn even uglier in the next several years unless something turns around fast.

Property consultants are expecting an estimated 6,000 units to hit the market within that period, with many more units to follow. These units are not residences that typical Malaysians can afford. Instead, they are “luxury” condominiums targeted at overseas investors, expats, and Malaysia’s affluent.

The problems now stem not just from overly enthusiastic property developers but also from more complex global and domestic issues.

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Malaysia is an oilgas producer, and in case you haven’t noticed this industry is getting beat up, with its largest number of layoffs in over a decade. Bloomberg reported last year that the industry had exceeded 100,000 layoffs and counting. Moreover, there is now talk of “negative oil prices,” and resumed heated tensions between Saudi Arabia and Iran—two of the largest and arguably most important oil producers.

This certainly does not bode well for a luxury real estate market that caters predominantly toward the highly paid engineers and executives of the oilgas industry.

In addition to the disappearance of high-paying jobs, many Malaysians have become 6% poorer as the government ushered in its Goods and Services Tax (GST) last year. Many mom-and-pop shops had already closed down prior in anticipation, and even more are expected to fold in the coming years.

Although Malaysia’s wealthy have been used to GST for some time—mainly on luxury items—condominium owners are also experiencing the burden now, especially when selling their older units to the next generation of middle-class buyers. Some luxury buildings around the city are already on the wrong side of a decade old, and any hopes of a robust secondary market may be wishful thinking when the budding middle class become poorer.

The problem too is that GST will invariably burden many owners, suppliers, and service providers with higher costs. Maintenance fees have to be raised due to the tax increase on all third-party vendors that buildings and owners rely on. This will affect high-end buildings as well as middle-end apartment complexes.

Added to all of this has been the strong U.S. dollar. Emerging economies have taken on a lot of U.S. dollar-denominated debt over the years, especially corporations. A strong dollar makes this burden of debt even harder to bear for many. It has also been noted that many corporations transact with each other in dollars. But with a strong dollar and the potential of another U.S. Fed interest rate hike on the horizon, dollars will be squeezed thin and transactions and trade will fall victim to stricter terms.

Although many emerging market economies might ultimately benefit from a strong dollar because their products become more competitive in the United States, it is also a situation where all global products across the board become aggressively cheaper. South Korean TVs become cheaper in the United States, but so do Japan’s electronics, and Taiwan’s, and China’s. As such, any advantage is competitively negated.

Christine Lagarde, Managing Director of the International Monetary Fund (IMF), had warned emerging markets to prepare for a rate hike that would bring massive capital outflows similar to 2013 following the Fed’s move to cut back on its quantitative easing (QE) program. It’s difficult to tell if that warning was heeded, but it remains clear that it still stands as much higher rates are inevitable. Many central bank’s monetary easing programs have continued to disappoint and more of the same could prove to be disastrous, so more rate hikes over QE programs are the most likely outcome.

All of these factors are going to cause huge reverberations in a real estate market already showing signs of extreme dislocations. It’s not easy to find reliable data on the real estate market in Malaysia, but anyone on the street can see the inevitability of where the market is headed. There may be many cranes in the sky, and many buildings already built… but a leisurely drive in the evening reveals the reality of all these dark and lonely buildings in some of the city’s most popular neighborhoods.

Couple all of this with the fact that Malaysia’s debt-to-GDP is the highest in Asia—especially household debt, which sits at nearly 90% to GDP—and the real estate market looks even scarier.

Savvy investors and global retirees should take note, as Malaysia will no doubt be having a fire sale soon. Their pain will be your gain if you so desire.