Property Market Research (Lecture Note 4)

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 Objectives of lecture:Objectives of lecture:

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

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Today’s topics

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What is market?

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What is a market?

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A setting, an environment…?

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A place…?

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Buyers and sellers

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Those parties representing them…who are

they?

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Characteristics of Property Market

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The types of properties

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Characteristics of land properties

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Types of property market

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Basic structure of a property market

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 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 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,

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ASPECTS OF REAL ESTATE MARKET CONDUCT ASPECTS OF REAL ESTATE MARKET CONDUCT

AND PERFORMANCE AND 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;

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Growth in the Real Estate Sector

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GDP 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;

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Share Indices, Risk, and Return

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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?

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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

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Performance of Malaysian residential property

market based on risk-return

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Top three perfoming residential markets:

* Kuala Lumpur,

* Penang,

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Share Indices, Risk, and Return (contd.)

Best four regions to invest in residential properties: * Johor Bahru,

* Klang Valley, * Pulau Pinang,

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Class Exercise

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.

* 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

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Property Transaction

Property 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.

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Property concentration

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Property concentration (contd.)

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Property concentration (contd.)

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Per transfer value

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Fluctuation 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

commercial

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Trend 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;

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Measuring Performance Using Property Price

Index

 House price index shows a consolidating market in House price index shows a consolidating market in 1996

1996

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

houses 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 ↓.

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Recent 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

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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 project types of project

 approved and neither were they guided by updated structure plan; approved and neither were they guided by updated structure plan;

and local plans and local plans

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 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).

 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.)

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 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).

 - 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

Recent Experience (cont.)

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 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.

Recent Experience (cont.)

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Property 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 (%);

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Property Value and Macro Factors (contd.)

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Property Value and Macro Factors (contd.)

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Property Value and Macro Factors (contd.)

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Growth Trend

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