Iskandar still having hangover from residential market overhang

Impact of lowering minimum price for high rise home purchases by foreigners from RM1 million to RM600,000 remains to be seen

Mon, Dec 02, 2019


WITH some Singapore-listed companies reeling from the impact of a lacklustre property market in Johor, the question arises whether plans by the Johor government to lower the minimum purchase threshold for foreigners could help to move the needle.

While the outlook for Iskandar Malaysia is generally expected to remain subdued next year, there could be a short-term lift for the high-rise residential market as the foreign ownership threshold eases from a minimum of RM1 million to RM600,000 for unsold, completed units. However, the lower threshold will apply only between Jan 1 and Sept 30, 2020, according to media reports out of Malaysia.

This comes as the supply of unsold, completed high-rise units in Iskandar, including residential and serviced apartments, has jumped significantly, shooting up from 867 units in 2015 to 15,970 units as at end June 2019, data from CBRE/WTW Johor showed. The overhang of landed homes is a more manageable at 2,500 in 1H2019.

Overhang units refer to those which are certified for occupation but have yet to be sold nine months after their launch.

Tan Ka Leong, branch director of CBRE/WTW (Johor), said: "The overhang issue is mainly caused by the overbuild of high-rise units in the region as well as the persistent mismatch in price, location and product."

He reckons that most property sub-sectors in Iskandar - except for landed residential and the industrial subsectors - will remain subdued for the next one to two years.

Residential demand in Iskandar has been on a downward trend since transaction volumes peaked in 2014.

Saleha Yusoff, executive director and regional head of research & consulting at Nawawi Tie Leung, said: "The rapid rise in prices has created concerns about the sustainability of prices, especially for high rise residential in Iskandar Malaysia, with the large incoming supply from mainland Chinese developers."

She added: "Completion of residential units has not been correspondingly matched by rising occupancy rates as many units were bought for investment in a weak tenant market, increasing the possibility of a 'ghost town' and affecting investment prospects for new potential purchasers."

As at end-June, the property overhang for Johor stood at 6,195 unsold residential units, and another 11,371 unsold serviced apartments/SOHO (small office, home office) units, according to data from Malaysia's National Property Information Centre (NAPIC).

The existing residential stock for Iskandar works out to 576,800 units, while the incoming residential supply - or units under construction - is 72,800 units as of end June, according to Savills Malaysia. The total planned residential supply is higher, at 114,400 units.

For Johor, the total residential stock (which covers houses, condominiums, serviced apartments and SOHO), stood at 895,020 units as at end-June, Nawawi Tie Leung estimates, based on industry data. Incoming supply is pegged at 98,621 units.

Capital World, Astaka Holdings and Pacific Star Development are among the SGX-listed property developers that have seen their financial performance dragged down by their projects in Johor. They did not comment on queries from BT.

Pacific Star - which is developing Puteri Cove Residences (PCR) in Iskandar Malaysia - flagged in its latest results that the high-rise condominium market sectors in its core markets Iskandar Puteri and Bangkok remain challenging "due to the glut of unsold completed condominiums and apartments".

For Q1FY20, it failed to recognise any revenue as its aluminium division (currently under liquidation) did not contribute any revenue while deposits from seven sale and purchase agreements for PCR totalling S$1.81 million were not recognised as revenue as they did not meet all the revenue recognition criteria.

For the quarter, the group recorded a net loss of S$6.22 million, compared with a net loss of S$435,000 a year ago.

Astaka Holdings is developing One Bukit Senyum, which includes two residential towers dubbed The Astaka, in the Iskandar region. For the year ended June 30 2019, revenue dropped 11 per cent to RM296.03 million (S$97 million), owing to lower revenue recognised from The Astaka, while the bottom line sank into the red to the tune of RM105.43 million in line with softer revenue and RM67.2 million in impairment losses on the carrying value of unsold units in The Astaka.

Capital World's Capital City Project in Johor did not see any new sales of property units in Q1FY20, prompting its revenue to drop 96 per cent to RM1.66 million and resulting in a net loss of RM7.62 million. The project features a hotel, serviced suites, serviced apartments and a six-storey shopping complex.

The auditors of Capital World and Pacific Star recently flagged uncertainties in the two companies' ability to continue as going concerns in relation to their financial statements for the year ended June 30, 2019. Both companies said at the time they can continue as going concerns.

To boost demand for the high-rise residential market, the Johor government is lowering the foreign ownership purchase threshold to RM600,000 per unit but this will only apply to existing units in the market, and excludes newly launched or upcoming projects.

It is also unlikely to affect first-time Malaysian home buyers as about 70 per cent of first-time home buyer loans were priced at RM500,000 and below, Savills said.

"Of the total unsold completed high-rise units in Iskandar Malaysia, approximately 70 per cent of unsold units are priced more than RM600,000 and would be made eligible to foreigners, especially Singaporeans," said Mr Tan, noting that Singaporean and Chinese buyers are typically the biggest foreign buyers in Johor. "We are of the view that this might help the sales of unsold completed high-rise units in Iskandar Malaysia."

Datuk Paul Khong, managing director of Savills (Malaysia), expects the new measure will help address the issue of overhang units in the short-term, but also noted that the move may be a temporary fix, given the current economic environment.

"We expect Iskandar to remain sluggish into 2020, with the main focus shifting to the industrial and retail sectors," Datuk Khong said. In the medium and long term, Johor still remains attractive, he added.

A major catalyst will be the Rapid Transit System (RTS) project, he reckoned, which could help to reduce overhang, ease congestion on the Causeway and revive the local property market.

The suspension of the cross-border RTS link project was recently extended to April 30, 2020.

Malaysia had previously requested to suspend construction of the RTS project for six months from April 1 this year as it studied ways to bring down the cost of the project.