A rally also for Malaysia real estate?

September 10, 2015 / By  

Malaysia has recently made international headlines due to some domestic issues relating to the controversial investment fund 1Malaysia Development Bhd. In this politically sensitive period, external risk factors such as China’s economic slowdown, plunging oil prices and increased volatility in global markets before a US interest rate hike only amplify investor unease in the country.

Since June 2015, the Malaysian Ringgit has lost more than 10% of its value against the US dollar, trading around MYR 4.2 to USD 1 at the time of writing. This is a level unseen since the depths of the Asian Financial Crisis in 1997. Fitch, the international rating agency, has warned it would restore its negative outlook on the country again after a temporary sigh of relief was breathed when Malaysia escaped a sovereign rating downgrade in June and its outlook was upgraded from “negative” to “stable”.

Against the backdrop of negative sentiment, is it all gloom and doom for Malaysia’s property market? Not really. Having been tagged an “affordable” market for some time, there is always an investment appeal for quality assets in Malaysia. The weakening of the Ringgit adds to this appeal. While volatile currency drives investors away over the longer term, we think that the sharp depreciation of the Ringgit is due to sentiment, rather than economic fundamentals. Markets generally believe that the Ringgit is undervalued and it should trade below MYR 3.8 to USD1, a level it was pegged at in 1998.

Supply and demand indicators for the office sector in the Kuala Lumpur CBD


Source: JLL Research

What will likely shape the property sector is the interaction between the short-term demand and supply. For this, we would like to look at the office sector in Kuala Lumpur. Oversupply concerns in the office sector have been around for some time. JLL Research projects that over the next five years, the average annual supply in the Kuala Lumpur CBD and Kuala Lumpur Prime Fringe sub-markets will be sizeable when compared to the ten-year average annual take-up rate. While the supply schedule is packed, albeit uneven, for the foreseeable future, it should remain stable beyond the forecast period.

The sharp depreciation of the Ringgit reminds investors of the Asian Financial Crisis, which triggered the collapse of the stock market and the recession. The Malaysia House Price Index (MHPI) plunged 9.5% y-o-y in 1998 and returned to positive growth in 2000. The MHPI recovered more than 10% from its trough within five years and has recorded uninterrupted positive growth since then. This time, the Malaysian economy has become much stronger, evidenced by an average five-year GDP growth of 5.8% in 2010-2014, stable inflation, a low unemployment rate, and much higher foreign reserves.

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