Formation of Malaysia Property Bubble - 2

4. Real Estate Developer

Real estate developer, is a business that got everyone envy & jealous recently, just the same when you mentioned you are an industrialist during the 1980s' in Malaysia. In order to understand how real estate become a hotcake in the recent year, we need to understand the process of how a developer launch and complete a project.

Nevertheless, land is the first issue, best scenario is a developer has land bank before market booming in year 2007, but suddenly... XXX logistic company, YYY trading company & ZZZ manufacturing company just decided to venture into real estate market, so a hanging project since 1998 Asian crisis, a land next to a public toilet or even a jungle 50KM away from Kuala Lumpur become valuable & precious for real estate development.

Anyhow, after a land being purchase, developer needs to hire land surveyor, town planner, architect, engineer & etc in order to obtain approval from authorities before launching the project. Its normally takes 6-12 months during the stage of planning & obtaining approval, but the crucial part is to get subdivision of individual title for landed property & strata title for high-rise building when the project completed in order to hand vacant possession & title to purchaser no more than 6 months. Sound like a developer needs huge capital to kick-start a project? Actually, they don't.

A developer can approach landowner for real estate development through joint-venture / profit sharing, so now the land is officially free. The developer will get the landowner to sign an agreement called Power of Attorney (PA), which means the developer has the right to develop and most important the right to mortgage the land. So now, a developer just need to get the landowner to sign a PA, and get a tight connection with bankers, and get a loan to start development. When the loan being obtained, developer already has the cash-flow to hire the professionals to get approval from authorities.

Next, project launching. Developer will get the very same bankers to be the financing panel for the project, and all the people will rush-in to the sales office, and beg for a property. To lessen purchaser's burden and allow them to afford more properties, developer will offer FREE legal cost, stamp duty, furniture, and some even shopping voucher, but all the FREE items actually comes from the selling price. Unable to pay for 10% down-payment? How about just by paying RM8000? RM5000? RM3000? Or RM1000 and you can own your dream property immediately...To good to be true? It's real! But, please provide your documents such as identity card, payslip, saving account and income tax receipt in order to get MAXIMUM LOAN AMOUNT.

Developers never care about the 10% down-payment, in fact, the balance of 90% for the selling-price is where they aim for. I called this strategy as 90-100 profit, you set your selling price by ignoring the 10% down-payment, and focus your profit in the 90% balance which you will collect. Is a very simple calculation, let's say i'm selling a cellphone, the cost is RM1000. I would buy a beautiful casing, bluetooth device and a memory card at a cost of RM200. I'm looking for a profit of 50% based on my cost (RM1200 x 50% = RM600), but i want you to pay nothing, so i will set my selling price by using this formula...(Cost + Profit)/90X100 = RM2000. All i need is to get a bank to finance this cellphone for a margin of 90%. So now, no 10% down-payment, and i'm giving you FREE gifts, and you can get a 90% loan for this cellphone. RM2000 (selling price) - RM1000 (cellphone cost) - RM200 (FREE gifts) - RM200 (10% down-payment) = Wulala... a handsome RM600 profit.

Did i mentioned developer get a loan on the land before launching the project? Yes i did. But how can the buyers apply for a loan for the very same project on the very same land which already has a loan? Shhh...this is some sort of developer-banker secret deal, please do not tell BNM. In fact, not every developer able to get this kind of financing from a bank, a loan to developer based on the land, another loan to the purchasers based on the project. You needs to be a Giant in the real estate industry, which means, you need to have huge loan amount with a bank that's too big to fail for the bank.

Developer Interest Bearing Scheme (DIBS), was a scheme introduced by developer during 2009-2013 before Malaysia government banned it during Budget 2014. This was a marketing tool that's so great in deceiving property buyers that they don't pay anything at all until the property completed. When you buy a newly launch project, developer will start to construct the building stage by stage, from foundation to structure, from structure to facility such as road & drainage. The developer will progressively claim the percentage of completion from the bank based on architect certificate. In another way, the bank doesn't release the full loan amount until your property is completed and the period of warranty is due. So a bank will allow two options for the customer, start the agreed loan installment amount for principal plus interest, or serving the interest only before the full loan release to developer. The DIBS scheme is the developer will absorb the interest amount before handing the vacant possession to the client. By serving the interest during the construction period, the amount might only be one-forth to one-third of the agreed loan installment amount. When the purchaser start to serve the loan after DIBS ended, they will realize that the principal of the loan is being untouched. Why the developer so generously to help the purchasers? Just using the 90-100 profit strategy.


5. Commodity Push

Malaysia economy highly dependable based on two oils - crude & palm.

                                                          Palm Oil Price year 1995 - 2015

                                                           Crude Oil Price 1995 - 2015                            

The above charts, tell me Malaysia is in the best years from year 2009-2014, as both prices was performed in the best in history. All i want to say is, may year 2015 onward, god bless Malaysia.

One thing worth mention, palm oil is planting on land, due to the history high of crude oil price in year 2011, many people bought agriculture land for palm oil investment, and guess what? Today palm oil price unable to sustain their loan anymore.


6. Speculation


"Our currency is depreciating, you should invest in real estate!" "If you do not buy it now, you, your grandchild, will be the homeless generation!" "Real estate is much better than equity, you can see it & touch it, and it just appreciate everyday!"

The above statements can easily be seen or heard everyday. Yes, the currency is depreciating, the saving rate is low and the equity market is in violate, but is all this factors driving the real estate pricing high and higher everyday?

My opinion, real estate is something tangible, but in a way, i believe the price of real estate is something so intangible. Maybe is the market force, but i have been seeing more and more symptoms which so similar during the 1997 Asian Crisis.

I still recalled what happened in 1997, when i was 11, and how my family struggled through the hard time, how the equity market brought a disaster to my family. I still recalled how my family been cheering during the 1995 & 1996, how we were having luxury dinner, shopping, enjoying oversea traveling.

There is so much similarity compare to now & the 1997 crisis, that almost every month a new project launch, just like almost every month a company being listed during the pre-1997 crisis.

Li Ka-Shing, one of the most successful entrepreneur in Hong Kong once mentioned:" when everyone is talking about the same investment portfolio, the crisis is around the corner."

Normally, before a crisis, fate will put all factors into the same basket, i think this time, the basket for real estate bubble...just being filled up.

Formation of Malaysia Property Bubble - 1

Malaysia's real estate pricing been skyrocketed after the Global Financial Crisis happened in year 2007-2008, up-to-date, a strange phenomenon is happening to me & friends around me, we can't afford to buy a house without parent's financial assistance! By the way, i'm only 30 years old, cute & little bit of chubby.

Real estate prices can't increased so much out of thin air, so i decided to hunt high & low and gather all the facts & truth, following is my findings:


1. Exemption of Real Property Gains Tax (RPGT)

RPGT is a taxation scheme introduced by Malaysia government in year 1995 to curb the speculation in property market, the intention of the Act? A property will be charged certain percentage of tax on the gain if being sold less than 5 years. 

Personally, i think this is great as no speculator will invest into something that takes five years to sell in order to get tax-free. Unfortunately, in 1st April 2007, Malaysia government decided to exempt RPGT. 

Soon after the RPGT exemption something miracle happened, real estate became a hot topic for everyone, suddenly, everyone get excited! Why? After almost 12 years (Year 1997-2005) of RPGT, property is a long-term investment in order to dispose without RPGT, but then, it became an investment you can dispose anytime for profit without tax. Let makes this clear, in Malaysia, a dividend you received from equity market no matter quarterly or annually, the dividend is subjected to tax, as it is a profit from business, but for real estate, sellers (individual or company) owe government nothing even they sell the property within a month.

Yup, your guess is accurate, the government reimposed RPGT on 1st January 2010 after more than 2 and a half years of exemption. During the period of exemption, a double storey terrace nearby my house at Cheras, has increased from RM350,000 to almost RM500,000. I recall my maths teacher did taught me percentage calculation during my school days, so it should around 43% increased in less than 3 years. So after RPGT being reimposed, after another 5 years, what's the price for the same type of terrace at the very same area? It is almost RM750,000 now. 

The increment of property price been slowing down after reimposed of RPGT in year 2010, but it's somehow in a faster pace compare to year 1995-2007. According to data, Malaysia's population growth rate is less than 1.8% from year 2010-2014, and it's decreasing from year to year. Based on my observation, Malaysia still has plenty of land to develop, but why the real estate market didn't cool down? My observation? Human behavior. Do not deny, human is greedy creature, when we get to taste something great, we want more.

My question is, if government wants to improve the economy condition during 2007 crisis, should it be gradually decreased the RPGT rate instead of exemption? Let' says you forbid your kid to eat candy for sometimes, and suddenly you are out of town and your house is full with candies, what will the kid behaves?


2. Hot Money Inflows

Ever heard of quantitative easing (QE)? After i studied the long & dull article about QE policy, i found the simple way to explain QE is: Printing Out the Money + Extremely Low interest rates. After 2007 crisis, USA been launching the QE policy in order to boost the economy, so here was how the story begun...

How can a government attract investors by filling the market with tonnes of money but keep the bond interest extremely low? They can't. Alternately, investors will take the money, i mean tonnes of low interest money borrow from banks, and invest elsewhere. So which region to invest? Europe was in deep water just like USA, and the region even got a country bankrupted, Africa market is too fragile, South America...hmmm, taken and under controlled. Yes, Asia seems nice, crowded, high saving rate, plenty of resources and most importantly, lack of financial rules & regulations compare to western countries.

Long story short, money is like liquid, when you splash it, large area will be wet. After QE launched by USA administration, Malaysia is one of the country affected by hot money inflows, according to an article written on year 2011, Malaysia is in the fifth place of hot money flow in Asia, not bad huh. As domino effect, foreign fund managers (mainly carried US dollor) invested in Malaysia equity market, share went up and more money transaction, bank with more saving, loan provided much more easily, and inflation shot up, so did real estate. It is healthy? For me, inflation is good as long as gradually, its get evil when it is speeding.


3. Cheap interest & easy loan

There is one rule never change if you do invest, higher risk comes with higher return. Here's the trap, and i do believe the whole world is making the same mistake...when a country's economy in expansion & growing, which mean bank facing lower risk to lend the money, as the chance of default is minimal due to everyone is doing well and employment rate is high. Let's us change the situation upside down, when the economy is facing crisis, unemployment rate is high, equity is dropping, the chance of bank to face credit default is maximal, what's shall the borrowing rate be? Your guess is accurate again, reduce the borrowing interest rate. Doesn't make sense right? Me think that too.

 

Above chart is the Overnight Policy Rate (OPR) set by Central Bank of Malaysia or Bank Negara Malaysia (BNM), why real estate price shot up? A smart businessman always borrow money when the interest is low, as to maintain the cost, so does a consumer. But bear in mind, a business loan doesn't repay the installment as long as mortgage loan, it can takes up to decades for repayment, as the property be the liability for borrower, but asset for the bank. 

One of the major income for Malaysia is exporting crude oil, when the global recession started in late of 2007 at USA, Malaysia was little affected as crude oil price been sharply increased until all time high at July 2008 (Almost USD140/barrel), it was then Malaysia started to face economy depression after the crude oil price decreased dramatically. After i compared both OPR & crude oil prices charts, i found that BNM started to cut OPR when Malaysia economy in the downturn.

After 3rd October 2010, BNM announced a policy which restricted borrower to lend only 70% of the house value if that is the third residential property. So let me be clear, during the period of year 2007-2010, investor able to avoid RPGT, enjoyed low borrowing interest and borrow 90% of the house value no matter how many housing loan you were serving at that moment. Great deal!

One of my own experience, i took a mortgage loan in year 2010 for a new project launched by a developer, the banker was introduced by the developer, not much documents requested but my payslips and ID, and i still recalled what the banker told me when the loan approved, he said:" you bought this property at the perfect moment." Until today, i still suspect how much commission the banker received.


To be continue...
I still have few points to share based on this Formation of Malaysia Propert Bubble, but i worry it might be too long & too dull to read the whole blog, and the crucial part is i'm feeling tired and exhausted at this moment.