IMAGINE a crossroads. The traffic lights are not working and the junction is heavily congested with vehicles, with angry drivers stuck in the logjam for hours, honking and cursing each other.

There is no way out of it because no one will give way.

Now, you could take a bulldozer to sweep away all the vehicles, destroying them in the process. It is highly effective but also very destructive.

Alternatively, you could get things to move by removing the vehicles one at a time. Imagine a crane lifting up one car, then another, until there is space for others to slowly ease out of the gridlock and let traffic flow again. It takes a little longer but no vehicle will be destroyed.

This analogy is often used by The Edge to illustrate the property overhang problem. The difference this time is the crane, which is akin to the government’s latest attempt to ease the property market gridlock in Malaysia.

As at the second quarter of 2019, a total of RM19.76 billion was stuck in unsold residential bricks and mortar, of which RM8.3 billion was in the form of high-rise properties, especially those in the country’s main economic hotspots, namely Greater Kuala Lumpur, the Klang Valley, Penang and Johor.

Imagine the multiplier effect on the domestic economy if half of that were cleared — billions in capital would be freed up, creating a tremendous flow of liquidity into the system. And that, according to captains of industry and an economist whom The Edge spoke to, is exactly what the government wishes to accomplish.

The government has proposed lowering the threshold of high-rise property prices in urban areas for foreign buyers to RM600,000 in 2020, from RM1 million currently. Finance Minister Lim Guan Eng, in his Budget 2020 speech in parliament on Oct 11, said this is to reduce the supply overhang of condominiums and apartments, with a value of RM8.3 billion. But over the past week, the proposal has attracted much criticism. Some quarters claim the new threshold could open the floodgates to foreigners and lead to a chain effect whereby developers will push up property prices.

Some even go as far as to say it is akin to bailing out the developers.

But are these criticisms valid and what is so bad about the proposal? What will be the consequences if nothing is done to address the property overhang?

Freeing up capital

Over the past six years, there has been a noticeable and prolonged slowdown in the local property market.

To curb excessive speculation, cooling measures were implemented, lending regulations tightened, the developer interest-bearing scheme banned and the threshold for foreign buying raised. As a result, housing sales were affected, which ultimately led to a rising property overhang, with more units completed and remaining unsold for more than nine months.

Given the property boom in previous years, it is taking even longer for the market to recover. Simply put, developers are facing a slow death and desperately need a shot in the arm.

According to Real Estate and Housing Developers’ Association Malaysia (Rehda) president Datuk Soam Heng Choon, lowering the price threshold for foreign buyers will help developers during the current difficult time.

“We don’t expect a rush of foreign buying to clear off all the overhang units overnight but something is always better than nothing. When you have 10 unsold units and two are taken up by foreigners, at least your holding costs will be eased,” he tells The Edge.

Most developers only intend to liquidate their existing stocks, turn them into cash and reinvest in affordable housing projects, he explains. In other words, local buyers will not be neglected.

“Developers, like other businessmen, will not sell products the public doesn’t want. We cannot have a product only targeted at foreign buyers — it is not sustainable,” he says.

He dismisses the claim that the lowered threshold is to bail out developers.

“We must look at it from the perspective of the industry as a whole. We don’t want to have a situation where we have excessive inventory and developers cannot reinvest. If we are stuck, how can we do affordable housing?”

Glomac Bhd managing director Datuk Seri Fateh Iskandar Mohamed Mansor, popularly known as FD Iskandar, concurs.

“We want to survive. Everybody is asking us to build affordable homes, which we did. But the fact remains that there is still an overhang of condominiums and apartments worth RM8.3 billion,” he stresses.

“If we were to open it up to foreigners, imagine the capital inflow into our country. If we don’t, they might just take the money and go to other countries. Isn’t that a shame when we have a lot of capital but it is tied up and we are unable to reinvest in the domestic market, which will create more jobs?”

Which states are most affected?

So, just how serious is the high-rise property overhang in Malaysia?

Data from the Valuation and Property Services Department of Malaysia (JPPH Malaysia) shows that Kuala Lumpur, unsurprisingly, has the highest overhang of unsold completed condominiums and apartments. As at the first quarter of 2019, the high-rise overhang in KL stood at 2,544 units, worth about RM2.338 billion, followed by Penang with 2,684 units valued at RM2.13 billion, Selangor (2,113 units; worth RM1.144 billion) and Johor (1,974 units; RM1.163 billion). (See chart)

Collectively, these four states have a high-rise property overhang of 9,315 units valued at RM6.775 billion.

In KL and Penang, the overhang is mainly in the high-rise segment, whereas Johor and Selangor have their fair share of problems with landed properties.

Economic Affairs Minister Datuk Seri Mohamed Azmin Ali had clarified that it is up to the state governments to implement the lower threshold for foreign ownership.

The Selangor government is reviewing the price threshold to address the problem of unsold luxury homes in the state. Menteri Besar Amirudin Shari said the Selangor Housing Real Estate Board is discussing whether to lower the current RM2 million threshold or to maintain it.

Eco World Development Group Bhd president and CEO Datuk Chang Khim Wah is of the view that the proposed move should be implemented in all urban areas in every state where there is overhang and not just at the federal level.

“The current level of foreign ownership in Malaysia is extremely low — less than 3% of real estate in the country, according to Fiabci Malaysia. Clearly there is room for this percentage to grow in a healthy manner in keeping with our status as an open and progressive economy and one of the larger trading nations of the world,” he says.

At the national level, says Chang, RM8.3 billion is a huge sum. If the proposal is able to clear even 50% of the overhang, it will mean more than RM4 billion of fresh funds from overseas will be injected into the Malaysian economy.

“Apart from clearing the overhang stock, developers receiving these funds will then be able to reinvest the monies in new projects and fresh launches more suited to the needs of their respective markets. Given the sector’s huge multiplier effect, this release of funds can provide a significant boost to the economy and support wage growth and job creation,” he adds.

A timely move

Given the growing political unrest in Hong Kong, developers says lowering of threshold is timely to attract Hong Kongers seeking to move out.

Sunway University Business School’s Dr Yeah Kim Leng is of the view that middle-income investors from Hong Kong will find Malaysian properties more attractive because the entry point is lower now.

“I think this is a very good and appropriate move. It is also complementary to other initiatives to boost foreign investment. People are concerned about ownership but this is just a temporary measure. If we look at a broader perspective, the country is actually leveraging foreign capital inflow to boost the local economy, which will benefit even more people,” says the economics professor.

A Mah Sing Group Bhd spokesman says the group aims to capture potential Hong Kong home buyers seeking safe-haven real estate and a second home for retirement.

“The Malaysia My Second Home (MM2H) programme, which has garnered growing interest in Hong Kong recently, has also helped us gain more traction in sales to Hong Kong buyers. We see further potential to grow there as we have the right products at the right locations in Malaysia to cater for the needs of that market,” she explains.

Based on the feedback received, Hong Kong buyers are attracted to Malaysia because of the tropical weather, cleaner air, good education system, attractive properties and mix of Asian values and Western infrastructure, she adds.

“Lowering the threshold is timely but the feedback we have from buyers is that they are looking at both completed units and newly launched projects.”

Eco World’s Chang suggests that if the proposal to lower the price threshold is packaged with the MM2H programme, it can attract good quality long-term visitors from all over the world and not just Hong Kong.

“The merits of the MM2H programme are undisputed. A relaxation of the foreign property threshold will help send a positive message that we welcome long-term foreign participation into our country and property market,” he says.

Debunking misconceptions

Nevertheless, certain quarters remain sceptical about the proposal.

A major concern is that developers will turn their attention away from the needs of the market to launch properties priced beyond RM600,000 to cater for foreigners at the expense of locals.

Some even claim developers might arbitrarily raise property prices to above RM600,000 so that they can sell to foreigners, and that locals will be left behind with the influx of foreign buyers.

However, many may not be aware that the proposal covers only existing units for a limited period of one year, and does not involve newly launched parcels.

“The government has made it very clear that this is only for unsold completed projects, not new projects. This is just to help developers clear some of the stocks that local buyers don’t want to buy,” Rehda’s Soam explains.

He adds that developers need to get advertising permits and approvals for the selling prices of properties, which come under the Ministry of Housing and Local Government.

“How is it possible for them to simply increase the price just to sell them to foreigners? They will be blacklisted.”

Glomac’s FD Iskandar points out that the overhang units are those that local buyers are not buying.

“If they wanted to, they would have bought them already. So, why don’t we allow the foreigners to do so? This will attract capital inflow and benefit our domestic economy,” he says, urging the sceptics to give developers a chance.

“Yes, we are facing a problem, and now, the government is helping us to resolve the problem. Give us a chance. Don’t shoot it down before we even get a chance to resolve it,” says FD Iskandar.

Wealth destruction

Dr Yeah warns that the government needs to be mindful of the knock-on effects of the property sector on the economy and ensure the market remains healthy.

“If the property market collapses and developers go bankrupt, a lot more people will suffer. There will be retrenchment across many other sectors. We might face an economic downturn. It could even trigger a recession,” he says.

“When asset prices come down, consumption sentiments will also be affected. That is why the government needs to ensure there is no excessive volatility in the property market. Over the past decade, we have been worried about the property bubble. But now that the cooling measures have been successful, we need to make sure that we can have a soft landing,” he says.

Considering the property sector has multiplier effects on more than 140 industries, Soam says any property market crash will lead to wealth destruction for the people.

“Property and asset prices will drop substantially and everybody will suffer. There will be default on bank loans for existing properties. There will also be retrenchment by companies and the unemployment rate will go up,” he says.

“Some sceptics have very narrow thinking. They don’t look at the big picture. They don’t realise that their own wealth will be destroyed as well if we don’t resolve the overhang issue. Some of them just oppose the proposal for their own selfish gain. If the property market is not doing well, lawyers, banks, media, construction, architects — all will be affected,” he warns.