Transcript 4 Understanding the Property Market  Objectives of lecture: Discuss the property market and its constituting elements: Expected learning outcome: * Explain the concept.

4 Understanding the Property Market
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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
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Today’s topics
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What is market?
Nature & characteristics of property market
What is a market?
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A setting, an environment…?
A place…?
Buyers and sellers
Those parties representing them…who are
they?
What they do basically?
Characteristics of Property Market
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The types of properties
Characteristics of land properties
Types of property market
Basic structure of a property market
Property market performance
Concept of Performance
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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
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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.
Growth in the Real Estate Sector
GDP Contribution
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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
Share Indices, Risk, and Return (contd.)
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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.)
Share Indices, Risk, and Return (contd.)
Share Indices, Risk, and Return (contd.)
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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.)
Share Indices, Risk, and Return (contd.)
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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
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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.
Property concentration
Property concentration (contd.)
Property concentration (contd.)
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
•Fluctuation in real estate prices
Fluctuation in real estate prices
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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
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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
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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 ↓.
300
I
N
D
E
X
INCOME
200
PRICE
100
0
1988
1990
1989
1992
1991
1994
1993
1996
1995
YEAR
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
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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.)
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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.)
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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.)
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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.)
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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
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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.
Property Value and Macro Factors (contd.)
Property Value and Macro Factors (contd.)
Property Value and Macro Factors (contd.)
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.
Thank you!