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4 Understanding the Property Market. Objectives of lecture: Discuss the property market and its constituting elements: Expected learning outcome: * Explain the concept of market * Discuss the nature of property market * Discuss the aspects of property market operation.
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Objectives of lecture: Discuss the property market and its constituting elements: • Expected learning outcome: * Explain the concept of market * Discuss the nature of property market * Discuss the aspects of property market operation
Today’s topics • What is market? • Nature & characteristics of property market
What is a market? • A setting, an environment…? • A place…? • Buyers and sellers • Those parties representing them…who are they? • What they do basically?
Characteristics of Property Market • The types of properties • Characteristics of land properties • Types of property market • Basic structure of a property market • Property market performance
Concept of Performance • Conduct and performance: how the market behaves and how well it performs what the society and market participants are expecting of it • Related to market perfection and imperfection as discussed in Chapter 3. • Pro-competitive conduct and anti-competitive conduct. • Expected conduct: * serve the basic economic functions: facilitation of exchange, expansion or contracting of space, and land use allocation on a laissez faire basis. * Creating social and political stability through market activities (free or managed).
ASPECTS OF REAL ESTATE MARKET CONDUCT AND PERFORMANCE • Sectoral growth, • Stock market, • Capital gains, • Liquidity, • Investment performance • Supply and demand; • Market competition; • GDP contribution of the real estate sector; • Real estate sector's contribution to employment; • Property investment; • Construction and transaction activities; • Property concentration; • Real estate price/value trend.
GDP Contribution • Moderate growth. • Reasons for it: * Slow start of construction of buildings, office space, commercial space, and high-cost condominiums (see Economic Report, 1997/1998). * [Low-cost housing, industrial, hotel and tourism projects were not affected by the slow start.] * Property levy; * Loan restriction by the Bank Negara; * Lengthy project approval.
Share Indices, Risk, and Return (contd.) • Property share index relatively more vulnerable to macro changes compared to other indices such as those of plantation and industry. • Negates the views that property asset price is relatively less vulnerable to changes in macro factors. • Can share indices be used to investigate the macro "behaviour" of property market. • Elements of the property market that may be influenced by * * * share index: * price? * supply and demand? * rental? * capital appreciation? * rate of return? what? • Are they influenced by changes in the share indices? • Is stock market behaviour related to real estate market performance?
Share Indices, Risk, and Return (contd.) • Property asset sub-markets are correlated with each other. e.g. * Office & residential. * Office & retail * Office & industrial • Back-to-back. Why?
Share Indices, Risk, and Return (contd.) • Performance of Malaysian residential property market based on risk-return • Top three perfoming residential markets: * Kuala Lumpur, * Penang, * Selangor. • Worst-performing market: Perlis. • Why?
Share Indices, Risk, and Return (contd.) Best four regions to invest in residential properties: * Johor Bahru, * Klang Valley, * Pulau Pinang, * Seremban-Sepang corridor Least favourable region: Ipoh-Kinta Why?
Share Indices, Risk, and Return (contd.) Best performing investment options: * detached, * semi-detached followed, * terrace house sub sectors.
Class Exercise Using the national data 1995-2004 from the Property Market Reports, measure the risk and return for these property categories. Comment on the investment performance of these properties. * Names start with A – F: Commercial/Retail * Names start with G – M: Office * Names start with N –P: Industrial * Names start with Q – Z: Agriculture
Property Transaction Property concentration • Situation in which the property market is dominated by a few main types of properties: * on the basis of production * on the basis of transaction. • Concentration can also be analysed by: * property type, * price range, * geographic area. • Concentration ratio: CR = Tj/TJ, • Concentration percentage: CP = Tj/TJ x 100 where Tj is the number of property transfers of a given property type j and TJ is the total number of transfers of all property types, where j = 1,2,.., N=J.
Per transfer value Industrial properties ranked highest: 3.2 times greater than APTV Commercial properties ranked second: 2.3 times greater than APTV Agricultural and residential properties third: 0.7 times greater than APTV Other categories: 2.6 times greater than APTV
Fluctuation in real estate prices • Housing: • ↑ DD for housing supported by ↑ bank loan • APTV ↑ very slowly over 1991-1995. • APTV ↑ slightly: a result of ↑ price of conventional houses. • Commercial: • APTV ↑ end of 1993; • Total value of transfer flattened during 1994-1995 • APTV ↓ a result of ↓ prices of shop-houses. • Industrial: • ↑ total value of transfer but ↓ APTV • Why? • Agriculture: • Stable, except 1994-1995 • 1994-95 larger proportion of agric. land into residential and commercial • Speculative phenomenon
Trend forecast of property value • Regression analysis • Scenario forecast. • Key factors: * the likely level of demand; * inflation rate; * consumer price index; * index of stock market;lending rate; * private/public mechanism (e.g. likely amount of housing loan approved by lending * institutions in of residential sub-market).
Measuring Performance Using Property Price Index • House price index shows a consolidating market in 1996 • Very slight fall in the percentage increase of prices of houses in Malaysia in 1996 • Slightly increasing over the nine-year period. • Increasing trend of per capita nominal income. • In tandem with house prices. • Price-income gap narrowing over 1994. • Gap may continue of converge: Income ↓, house prices ↓.
Figure 4.2 Malaysian Housing Price Index and Per Capita Income, 1988-1996 Source: Department of Property Valuation and Property Services (1997). Indeks Harga Rumah Malaysia. Kuala Lumpur: Ministry of Finance.
Recent Experience • DD for properties thrived in Malaysia's major cities. • In 1995 about 3-5% voids in office and retail. • DD for real estate ↑ substantially. • Strong purchasing power of the people. • Escalating rents and capital values. • Rental multipliers of value of residential reached 400 in 1994-995. • Property industry were overzealous. • Supporting factors: • * continued growth of the economy, • * increasing wealth of the nation, • * period of super bull run in the Kuala Lumpur Stock • Exchange, • * readily available and cheap credit facilities from the • * financial institutions • * flushing liquidity, • * attractive yields.
Recent Experience (cont.) • 1997-1998 characterised by a downturn after a 9-year 8.0% growth. • Five factors of downturn (Lim, 1999): • ▪ Bank and financial institutions did not press for market viability studies before lending out money. • ▪ Property developers did not see the need for conducting such studies as long as • banks were prepared to lend. • ▪ Local authorities did not bother to keep track of the number of types of project • approved and neither were they guided by updated structure plan; and local plans • were often non-existent. • ▪ Property buyers did not think twice before committing to a purchase. • ▪ Nobody thought the property bubble would burst.
Recent Experience (cont.) • Economic crises invading some Asian countries • People's purchasing power eroded. • Banks troubled by Non Performing Loans (NPLs) (30% in the property sector). • Rate of return from property investment ↓ • Projects abandoned or put to a halt • * funding difficulties • * plus the already weak demand.
Recent Experience (cont.) • Interventions by Bank Negara: • Base lending rate was raised to 9-10% (New Straits Times, 6 November 1997, p. 26). • - Many businesses were closed or scaled down • - Workers laid off and branch offices sealed off. • - Property sector “over-kill”. • * Already ceiling-high property prices • * Weakening ringgit and problems related to it.
Recent Experience (cont.) • In 1998-1999, property prices on a high plateau. • Demand for properties still could not be restored. • Measures to stimulate demand: • * Government-supported HOC • * Attractive loan packages: • - 95% loan margin (inclusive of mortgage reducing • term assurance - MRTA ); • zero-percent base lending rate; • low interest rate (e.g. 8.5% for the first two years); • free-interest loan for the first year; • rent-first-buy-then scheme; • waiver processing fees; • 10% discount for MRTA; • 15% discount for fire insurance premium for the first year; • free RM 10,000 personal accident insurance for one year, etc.
Property Value and Macro Factors • Consider the following model: Tt = f(GNSt, PLt, LPt, IPt, BLt, SCt, PIt) T = total value of transfers (RM) in year t, (residential, commercial, industrial, agriculture, and other property categories); GNS = gross national savings (RM); PL = amount of loan (RM) approved by lending institutions to the property sector; LP = labour participation (%); IP = property price index; BL = base lending rate; SC = speculative control (total value accrued from property gains tax or imposition of levy on property purchase); PI = capita income; t denotes year.
Growth Trend Sales Revenue = 42.961 + 1.146(Time) – 5.804(Economic condition) (14.489) (3.553) (-1.880) Increasing trend (positive growth) in the retailing sector About RM 1.15 billion in terms of sales revenue. Growth was affected by 1997 economic crash. Sales revenue in the bad economic condition RM 6 billion less than in other (rising and peak) periods.
