4 Understanding the Property Market

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• 4 Understanding the Property Market

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Objectives of lecture
To discuss the property market its constituting
elements
Expected learning outcome

• Explain the concept of market
• Discuss the nature of property market
• Discuss the aspects of property market

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Main Topics

• What is market
• The types of properties
• Characteristics of land properties
• Types of property market
• Property market conduct performance

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What is a market?

• A setting, an environment?
• A place?
• Buyers and sellers
• Those parties representing themwho are they?
• What they do basically?

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The types of properties

• Dwellings standard new homes, in developments
  and elsewhere not new but not yet obsolete
  obsolete houses special types such as town
  houses.
• Vacant land (agricultural, residential).
• Commercial properties stores shops office
  others.
• Industrial properties factories warehouse
  logistic buildings.
• Agricultural/forestry properties.
• Natural resource property mining (e.g. coal
  gold oil) quarries aquaculture-based others.

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Characteristics of land properties

• Immobility
• Durability
• Large amount of money involved
• Legality aspects
• Improvable by active management
• Differing income-value relationships
• Length of marketing

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Types of property market

• Perfect competition
• Imperfect competition
• Oligopoly
• Duopoly
• Monopoly

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Property Market Conduct 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.
• 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).

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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

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Growth in the Real Estate Sector
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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.

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Share Indices, Risk, and Return
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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?

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Share Indices, Risk, and Return (contd.)
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Share Indices, Risk, and Return (contd.)
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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?

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Share Indices, Risk, and Return (contd.)
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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?

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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?
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Share Indices, Risk, and Return (contd.)
Best performing investment options Detached
house semi-detached house terraced house
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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

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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,.., NJ.

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Property concentration
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Property concentration (contd.)
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Property concentration (contd.)
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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
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• Fluctuation in real estate prices

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• Fluctuation in real estate prices

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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

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Trend forecast of property value

• Regression analysis
• Scenario forecast.
• Key factors
• the likely level of demand
• inflation rate
• consumer price index
• index of stock marketlending rate
• private/public mechanism (e.g. likely amount
  of
• housing loan approved by lending
• institutions in of residential sub-market).

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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 ?.

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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.
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The 1997s Experience

• DD for properties thrived in Malaysian 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.

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The 1997s Experience

• 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.

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The 1997s Experience

• 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.

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The 1997s Experience

• 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

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The 1997s Experience

• In 1998-1999, property prices on a high plateau
• Demand for properties still could not be restored
• Measures to stimulate demand
• Government-supported Home Ownership
  Campaigns
• 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.

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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.

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Property Value and Macro Factors (contd.)
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Property Value and Macro Factors (contd.)
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Property Value and Macro Factors (contd.)
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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.
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• Thank you!