August 24, 2008

Bears at the Residential Gate

By Anna Chidambar

HIGH fuel prices, escalating construction costs, rising inflation affecting buyers' sentiment and affordability, squeezed profit margins and intense competition are spooking developers.

Many are guarded about launching new projects, intent on clearing stock instead.

In this prelude to what developers are doing in these changing market conditions, and what buyers can expect, NST-Property spoke to Glomac Bhd group managing director Datuk FD Iskandar Mohamed Mansor, who's also Real Estate and Housing Developers Association (Rehda) vice president and Rehda Selangor chairman.

Here are his comments:

What are your plans to weather the softening market?

The property market slowdown is inevitable and developers are gearing up for tough times. Hardest hit are residential properties priced below RM250,000 whose buyers are mostly in the lower and middle income brackets. In the last four months, developers experiencing profit margin erosion have deferred new releases.

Fortunately, Glomac's involvements in a variety of developments such as townships as well as commercial and luxury projects stand it in good stead.

What are the pressing industry issues and how can these be addressed?

Although the increased cost in construction materials is occurring worldwide, the government should lower the cost of doing business and raise the people's purchasing power.

While the current market price of steel billets and bars ranges from US$900 (RM2,997) to US$1,100 (RM3,663) a tonne and Malaysia is Southeast Asia's largest steel producer, the local steel price is still higher than that in Singapore.

A critical factor in the high price of steel billets and bars locally is the government's export oriented policy that resulted in protecting the exporters more than local businesses.

For example, China had an oversupply of the items in early March and contemplated re-exporting to Malaysia. Its plan did not materialise due to an earthquake there which needed the surplus. Otherwise, the local market would have received China's surplus steel at a cheaper price.

Another area that needs to be addressed is hoarding, which has resulted in soaring material prices. Unless enforcement is strong, the industry will continue to be plagued by rising costs.

Export markets are important, but the government should also nurture the import market. Currently, no levy is imposed on goods for export but most imported construction materials have a 15 per cent levy imposed. As a result, the playing field is not level.

A year ago, local steel price was RM2,350 a tonne and it was a controlled item. At the current market price, it should be below RM4,000 but why are we paying over RM4,000 a tonne?

Perhaps it's time the government bans the export of steel billets and bars until the supply and demand situation adjusts itself. It can do this by creating a stockpile by purchasing the steel and redistributing it at a fixed price.

If the price hike persists, many developers may not be able to survive.

Financial institutions should also be encouraged to offer zero- cost entry and other products to tide customers over these trying times.

But all things considered, Malaysia still offers some of the most competitively priced properties in the region, reasonable yields of between six and nine per cent, and relatively high capital appreciation. With prudent planning and management, developers should be able to weather the slowdown.

How are you reaching out to savvy buyers?

Our main challenges are to be cost effective and generate profit for our shareholders. Property investors in the Klang Valley demand steady yields and constant capital appreciation, which translate into reasonably priced houses in good locations.

Bearing this in mind, a developer's reputation is important as buyers don't mind paying a premium for the right project in the right location. Glomac has built up an image as a developer of a good range of successful projects.

Early this month, we launched 12 units of shopoffices of five and eight storeys which are a part of the Glomac Damansara project in Jalan Damansara, Kuala Lumpur, pegged from RM4 million. All the units were sold, which shows there's still strong demand for niche products catering for the discerning and informed investor.

How long do you expect the weak market conditions to last?

Twelve to 18 months before things start to improve. A lot will depend on how proactive the government, financial institutions and industry players are. If all parties work closely together and with Malaysian properties still holding well in the region, we should emerge stronger.

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