Solving Malaysia’s oversupply problemNovember 30, 2017 / By
Last week, the Malaysian government instructed Kuala Lumpur City Hall (DBKL) to cease considering and approving the development of offices, retail malls, serviced apartments and luxury residential apartments priced over RM 1 million (USD 242,865) in Kuala Lumpur, effective from 1 November 2017. This freeze is intended to help ease the oversupply and affordability challenges in the market.
Planning applications, including variations to approved plans, must receive planning permission by January 2018 to proceed. The ban could last one to three years, depending on market conditions. The cabinet decision was made after Bank Negara Malaysia (BNM) analysed the substantial oversupply in Kuala Lumpur.
Positive for rental and capital values, investor confidence
We think that it is a positive sign that the government is responsive to market feedback and proactive in regulating the market. The oversupply situation in Kuala Lumpur has been highlighted for the last few years and it is assuring that regulators are taking steps to mitigate the glut. This would make Kuala Lumpur more attractive to real estate developers and investors.
How big is the glut?
Bank Negara Malaysia’s data indicates there was an increase in total unsold residential units in Kuala Lumpur in 1Q2017 which has more than doubled in volume compared to 1Q2012, with 83 per cent of the 130,690 unsold units priced above the RM250,000 (USD 60,716) mark.
Bank Negara Malaysia also projects that 61 per cent of the unsold units are high rise apartment units , that one in three offices in Kuala Lumpur would be vacant by 2021, and with 140 new malls entering the market the same year.
The latest property market data for 1H2017 released by the Valuation and Property Services Department of Malaysia (JPPH) revealed that the volume of residential property transaction has dropped by seven per cent, while the total residential property transacted value inched up by 0.5 per cent compared to 1H2016. The overhang units (completed units not sold nine months after launching) is at the highest level as of 1H2017, ever since 1H2013 when the bulk of the units were priced above RM500,000 (USD 121,432).
Government’s move could mean stronger rental growth in the medium term
The development moratorium imposed by the government is not unusual. For instance, Jakarta has imposed a moratorium on retail malls since 2011. The ban will reduce new supply of properties across all sectors and allow demand to gradually absorb excess supply.
The mayor of Kuala Lumpur has mentioned that exceptions would be made for prominent government projects like Bandar Malaysia and TRX and they would not be affected. These are strategic projects integral to the development of city infrastructure.
With stronger economic growth and healthy demand, we expect stronger rental growth in the medium term and a moderate rise in capital values.
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