4 understanding the property market

4 Understanding the Property Market4 Understanding the Property Market

Objectives of lecture:Objectives of lecture:

Discuss the property market and its constituting elements:Discuss the property market and its constituting elements:

Expected learning outcome:Expected learning outcome: * Explain the concept of market* Explain the concept of market * Discuss the nature of property market* Discuss the nature of property market * Discuss the aspects of property market * Discuss the aspects of property market operationoperation

Today’s topicsToday’s topics

What is market?What is market? Nature & characteristics of property marketNature & characteristics of property market

What is a market?What is a market?

A setting, an environment…?A setting, an environment…? A place…?A place…? Buyers and sellersBuyers and sellers Those parties representing them…who are Those parties representing them…who are

they?they? What they do basically?What they do basically?

Characteristics of Property MarketCharacteristics of Property Market

The types of propertiesThe types of properties Characteristics of land propertiesCharacteristics of land properties Types of property marketTypes of property market Basic structure of a property marketBasic structure of a property market Property market performanceProperty market performance

Conduct and performance: how the market behaves and Conduct and performance: how the market behaves and how well it performs what the society and market how well it performs what the society and market participants are expecting of itparticipants are expecting of it

Related to market perfection and imperfection as Related to market perfection and imperfection as discussed in Chapter 3.discussed in Chapter 3.

Pro-competitive conduct and anti-competitive conduct.Pro-competitive conduct and anti-competitive conduct. Expected conduct:Expected conduct: * serve the basic economic functions: facilitation of * serve the basic economic functions: facilitation of exchange, expansion or contracting of space, exchange, expansion or contracting of space, and land use allocation on a laissez faire basis.and land use allocation on a laissez faire basis. * Creating social and political stability through * Creating social and political stability through market activities (free or managed). market activities (free or managed).

Concept of Performance

ASPECTS OF REAL ESTATE MARKET CONDUCT ASPECTS OF REAL ESTATE MARKET CONDUCT AND PERFORMANCEAND PERFORMANCE

Sectoral growth,Sectoral growth, Stock market, Stock market, Capital gains, Capital gains, Liquidity, Liquidity, Investment performanceInvestment performance Supply and demand;Supply and demand; Market competition;Market competition; GDP contribution of the real estate sector;GDP contribution of the real estate sector; Real estate sector's contribution to employment;Real estate sector's contribution to employment; Property investment; Property investment; Construction and transaction activities;Construction and transaction activities; Property concentration;Property concentration; Real estate price/value trend. Real estate price/value trend.

Growth in the Real Estate SectorGrowth in the Real Estate Sector

GDP ContributionGDP Contribution

Moderate growth.Moderate growth. Reasons for it:Reasons for it: * Slow start of construction of buildings, office * Slow start of construction of buildings, office space, commercial space, and high-cost space, commercial space, and high-cost condominiums (see Economic Report, 1997/1998).condominiums (see Economic Report, 1997/1998). * [Low-cost housing, industrial, hotel and tourism * [Low-cost housing, industrial, hotel and tourism projects were not affected by the slow start.]projects were not affected by the slow start.] * Property levy;* Property levy; * Loan restriction by the Bank Negara;* Loan restriction by the Bank Negara; * Lengthy project approval. * Lengthy project approval.

Share Indices, Risk, and ReturnShare Indices, Risk, and Return

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

Property share index relatively more vulnerable to macro changes Property share index relatively more vulnerable to macro changes compared to other indices such as those of plantation and industry.compared to other indices such as those of plantation and industry.

Negates the views that property asset price is relatively less vulnerable Negates the views that property asset price is relatively less vulnerable to changes in macro factors.to changes in macro factors.

Can share indices be used to investigate the macro "behaviour" of Can share indices be used to investigate the macro "behaviour" of property market.property market.

Elements of the property market that may be influenced by * * Elements of the property market that may be influenced by * * * share index:* share index: * price?* price? * supply and demand? * supply and demand? * rental? * rental? * capital appreciation? * capital appreciation? * rate of return? what?* rate of return? what? Are they influenced by changes in the share indices?Are they influenced by changes in the share indices? Is stock market behaviour related to real estate market performance? Is stock market behaviour related to real estate market performance?


Property asset sub-markets are correlated with Property asset sub-markets are correlated with each other. e.g.each other. e.g.

* Office & residential.* Office & residential.

* Office & retail* Office & retail

* Office & industrial* Office & industrial Back-to-back. Why? Back-to-back. Why?


Performance of Malaysian residential property Performance of Malaysian residential property market based on risk-returnmarket based on risk-return

Top three perfoming residential markets:Top three perfoming residential markets: * Kuala Lumpur,* Kuala Lumpur, * Penang,* Penang, * Selangor.* Selangor. Worst-performing market: Perlis.Worst-performing market: Perlis. Why? Why?


Best four regions to invest in residential properties: * Johor Bahru, * Klang Valley, * Pulau Pinang, * Seremban-Sepang corridorLeast favourable region: Ipoh-KintaWhy?


Best performing investment options:* detached,* semi-detached followed,* terrace house sub sectors.

Class ExerciseClass Exercise

Using the national data 1995-2004 from the Property Using the national data 1995-2004 from the Property

Market Reports, measure the Market Reports, measure the risk and returnrisk and return for these for these

property categories. Comment on the investment property categories. Comment on the investment

performance of these properties.performance of these properties.

* Names start with A – F: Commercial/Retail* Names start with A – F: Commercial/Retail

* Names start with G – M: Office* Names start with G – M: Office

* Names start with N –P: Industrial* Names start with N –P: Industrial

* Names start with Q – Z: Agriculture* Names start with Q – Z: Agriculture

Property TransactionProperty Transaction Property concentrationProperty concentration

Situation in which the property market is dominated by a few Situation in which the property market is dominated by a few main types of properties:main types of properties:

* on the basis of production* on the basis of production * on the basis of transaction.* on the basis of transaction. Concentration can also be analysed by:Concentration can also be analysed by: * property type,* property type, * price range,* price range, * geographic area.* geographic area. Concentration ratioConcentration ratio: CR = Tj/TJ,: CR = Tj/TJ, Concentration percentageConcentration percentage: CP = Tj/TJ x 100 where Tj is the : CP = Tj/TJ x 100 where Tj is the

number of property transfers of a given property type j and TJ is 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,.., the total number of transfers of all property types, where j = 1,2,.., N=J.N=J.

Property concentrationProperty concentration

Property concentration (contd.)Property concentration (contd.)

Per transfer valuePer transfer value

Industrial properties ranked highest: 3.2 times greater than APTVCommercial properties ranked second: 2.3 times greater than APTVAgricultural and residential properties third: 0.7 times greater than APTVOther categories: 2.6 times greater than APTV

Fluctuation in real estate pricesFluctuation in real estate prices

•Fluctuation in real estate prices

Fluctuation in real estate pricesFluctuation in real estate prices Housing:Housing: ↑ ↑ DD for housing supported by ↑ bank loanDD for housing supported by ↑ bank loan APTV ↑ very slowly over 1991-1995.APTV ↑ very slowly over 1991-1995. APTV ↑ slightly: a result of ↑ price of conventional houses.APTV ↑ slightly: a result of ↑ price of conventional houses. Commercial:Commercial: APTV ↑ end of 1993; APTV ↑ end of 1993; Total value of transfer flattened during 1994-1995Total value of transfer flattened during 1994-1995 APTV ↓ a result of ↓ prices of shop-houses.APTV ↓ a result of ↓ prices of shop-houses. Industrial:Industrial: ↑ ↑ total value of transfer but ↓ APTVtotal value of transfer but ↓ APTV Why?Why? Agriculture:Agriculture: Stable, except 1994-1995Stable, except 1994-1995 1994-95 larger proportion of agric. land into residential and 1994-95 larger proportion of agric. land into residential and

commercialcommercial Speculative phenomenon Speculative phenomenon

Trend forecast of property valueTrend forecast of property value

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

Measuring Performance Using Property Price Measuring Performance Using Property Price IndexIndex

House price index shows a consolidating market in House price index shows a consolidating market in 19961996

Very slight fall in the percentage increase of prices of Very slight fall in the percentage increase of prices of houses in Malaysia in 1996houses in Malaysia in 1996

Slightly increasing over the nine-year period.Slightly increasing over the nine-year period. Increasing trend of per capita nominal income.Increasing trend of per capita nominal income. In tandem with house prices.In tandem with house prices. Price-income gap narrowing over 1994.Price-income gap narrowing over 1994. Gap may continue of converge: Income ↓, house Gap may continue of converge: Income ↓, house

prices ↓.prices ↓.

YEAR

1996 1995

1994 1993

1992 1991

1990 1989

1988

I N D E X

300

200

100

0

PRICE

INCOME

Figure 4.2 Malaysian Housing Price Index and Per Capita Income, 1988-1996Source: Department of Property Valuation and Property Services (1997). Indeks Harga Rumah Malaysia. Kuala Lumpur: Ministry of Finance.

Recent ExperienceRecent Experience

DD for properties thrived in Malaysia's major cities.DD for properties thrived in Malaysia's major cities. In 1995 about 3-5% voids in office and retail.In 1995 about 3-5% voids in office and retail. DD for real estate ↑ substantially.DD for real estate ↑ substantially. Strong purchasing power of the people.Strong purchasing power of the people. Escalating rents and capital values.Escalating rents and capital values. Rental multipliers of value of residential reached 400 in 1994-995.Rental multipliers of value of residential reached 400 in 1994-995. Property industry were overzealous.Property industry were overzealous. Supporting factors:Supporting factors: * continued growth of the economy,* continued growth of the economy, * increasing wealth of the nation, * increasing wealth of the nation, * period of super bull run in the Kuala Lumpur Stock * period of super bull run in the Kuala Lumpur Stock Exchange,Exchange, * readily available and cheap credit facilities from the * readily available and cheap credit facilities from the * financial institutions* financial institutions * flushing liquidity,* flushing liquidity, * attractive yields.* attractive yields.

Recent Experience (cont.)Recent Experience (cont.) 1997-1998 characterised by a downturn after a 9-year 8.0% growth.1997-1998 characterised by a downturn after a 9-year 8.0% growth. Five factors of downturn (Lim, 1999):Five factors of downturn (Lim, 1999): ▪ ▪ Bank and financial institutions did not press for market viability Bank and financial institutions did not press for market viability

studies before lending out money.studies before lending out money. ▪ ▪ Property developers did not see the need for conducting such Property developers did not see the need for conducting such

studies as long as studies as long as banks were prepared to lend.banks were prepared to lend. ▪ ▪ Local authorities did not bother to keep track of the number of Local authorities did not bother to keep track of the number of

types of projecttypes of project approved and neither were they guided by updated structure plan; approved and neither were they guided by updated structure plan;

and local plansand local plans were often non-existent.were often non-existent. ▪ ▪ Property buyers did not think twice before committing to a Property buyers did not think twice before committing to a

purchase.purchase. ▪ ▪ Nobody thought the property bubble would burst.Nobody thought the property bubble would burst.

Economic crises invading some Asian countriesEconomic crises invading some Asian countries People's purchasing power eroded.People's purchasing power eroded. Banks troubled by Non Performing Loans (NPLs) Banks troubled by Non Performing Loans (NPLs)

(30% in the property sector).(30% in the property sector). Rate of return from property investment ↓Rate of return from property investment ↓ Projects abandoned or put to a haltProjects abandoned or put to a halt * funding difficulties* funding difficulties * plus the already weak demand.* plus the already weak demand.

Recent Experience (cont.)Recent Experience (cont.)

Interventions by Bank Negara:Interventions by Bank Negara: Base lending rate was raised to 9-10% (New Straits Base lending rate was raised to 9-10% (New Straits

Times, 6 November 1997, p. 26). Times, 6 November 1997, p. 26). - Many businesses were closed or scaled down- Many businesses were closed or scaled down - Workers laid off and branch offices sealed off.- Workers laid off and branch offices sealed off. - Property sector “over-kill”.- Property sector “over-kill”. * Already ceiling-high property prices* Already ceiling-high property prices * Weakening ringgit and problems related to it.* Weakening ringgit and problems related to it.


In 1998-1999, property prices on a high plateau.In 1998-1999, property prices on a high plateau. Demand for properties still could not be restored.Demand for properties still could not be restored. Measures to stimulate demand:Measures to stimulate demand: * Government-supported HOC * Government-supported HOC * Attractive loan packages:* Attractive loan packages: - 95% loan margin (inclusive of mortgage reducing - 95% loan margin (inclusive of mortgage reducing term assurance - MRTA );term assurance - MRTA ); zero-percent base lending rate;zero-percent base lending rate; low interest rate (e.g. 8.5% for the first two years);low interest rate (e.g. 8.5% for the first two years); free-interest loan for the first year;free-interest loan for the first year; rent-first-buy-then scheme;rent-first-buy-then scheme; waiver processing fees;waiver processing fees; 10% discount for MRTA;10% discount for MRTA; 15% discount for fire insurance premium for the first year;15% discount for fire insurance premium for the first year; free RM 10,000 personal accident insurance for one year, etc.free RM 10,000 personal accident insurance for one year, etc.


Property Value and Macro FactorsProperty Value and Macro Factors

Consider the following model:Consider the following model:

Tt = f(GNSt, PLt, LPt, IPt, BLt, SCt, PIt)Tt = f(GNSt, PLt, LPt, IPt, BLt, SCt, PIt)

T = total value of transfers (RM) in year t, (residential, T = total value of transfers (RM) in year t, (residential, commercial, industrial, agriculture, and other property commercial, industrial, agriculture, and other property categories);categories); GNS = gross national savings (RM);GNS = gross national savings (RM); PL = amount of loan (RM) approved by lending institutions to PL = amount of loan (RM) approved by lending institutions to the property sector;the property sector; LP = labour participation (%);LP = labour participation (%); IP = property price index;IP = property price index; BL = base lending rate;BL = base lending rate; SC = speculative control (total value accrued from property SC = speculative control (total value accrued from property gains tax or imposition of levy on property purchase);gains tax or imposition of levy on property purchase); PI = capita income;PI = capita income; t denotes year.t denotes year.

Property Value and Macro Factors (contd.)Property Value and Macro Factors (contd.)

Growth Trend 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 sectorAbout 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!Thank you!

4 understanding the property market

Documents

nature of property market

return share indices

concept of market

market perfection

market participants

real estate market performance

return contd

property levy