The Star
Even before the physical presence of the property developers from China can be seen in Johor Baru, the psychological impact the builders have on the industry as a whole in Malaysia is already being felt.
The fear of developers from China flooding the market with their large-scale development is real among property developers, not only in Johor Baru but also the country at large.
This is because all the big boys of the property sector have a presence in Johor Baru, or Bandar Iskandar. Without a project in the southern tip of the peninsula, a property developer is not considered to have “arrived”.
That is the clout that Johor Baru commands, thanks to the initiative of the federal government to make Iskandar Malaysia the thrust of its development of the southern economic corridor.
The might of the China developers was well displayed when Country Garden Holdings Ltd launched 9,000 apartment units in August, of which 6,000 were taken up within two months.
The Malaysian market is not used to developments of such a scale, for sure.
What now that the property market is already softening in Iskandar Malaysia?
The latest launch in Puteri Harbour by a Singapore-based developer saw a booking rate of only 25%, according to a report by a business weekly.
Puteri Harbour is about the most strategic of locations in Bandar Nusajaya, which is the hub of Iskandar Malaysia. It faces the Straits of Johor and is near the second link connecting Malaysia and Singapore.
Some 18 months ago, sales were brisk in Puteri Harbour, with prices transacting at around RM700 per square foot (psf).
The latest project launched by Pacific Star Development Pte Ltd is being marketed at between RM1,300 and RM1,600 psf. Property agents feel that the pricing is the reason for the poor take-up rate.
The view of most developers is that as long as the developing company has the ability to hold on to the property, it will be sold eventually. The critical factor is that the developer has to have deep pockets to weather periods of slowdown.
In this respect, there is a view that developers from China indeed have deep pockets and would be able to hold on to their projects and continue to develop them even if demand is poor.
Lastly, the developers from China are not dependent on buyers from Malaysia but from their country itself, where there is supposedly still strong demand from a select group of investors.
Put in a nutshell, the presence of developers from China is projected as not having any adverse impact on the local property market.
Is this really going to be the case?
Closer scrutiny, however, suggests that it may not really be the case after all for several reasons.
Firstly, there is a property slowdown in China impacting all developers there.
It is already being reflected in the share prices of the likes of Country Garden and Greenland Hong Kong Holdings Ltd, which have lost more than 40% of their market capitalisation in the last six months.
Property prices are stable in the tier-one cities and showing little weakness in tier-two cities. But in tier-three and tier-four cities, there is a massive oversupply of properties and prices are coming down.
Funding for developers with projects in the least-preferred cities has practically stopped, and authorities are looking at ways to ensure that new supply slows down and existing projects are completed.
The slowdown in the property sector in China has a spiralling effect on the economy as a whole.
In the past decade, the property sector has grown 10-fold in China and played a big role in keeping its economic growth vibrant. According to Moody’s Analytics, the construction of apartments accounts for some 23% of China’s economic growth.
Apart from keeping the industries growing, the proceeds from the sale of land is one of the major income earners for local authorities.
Now, new land sales are being transacted at lower prices compared to previous years.
This has allowed new developers to price their products cheaper, putting investors of older developments in a spot. House buyers are already complaining of new projects coming in at cheaper prices, causing an erosion in value of existing projects.
The developers from China are coming to this part of the world because of weak demand in their own country and to position themselves as being able to offer their customers properties overseas.
But Malaysia has imposed restrictions on foreigners buying properties that are only above RM1mil, meaning US$300,000 and above for buyers from China.
With prices in China falling and the yuan depreciating, would buyers from China be attracted to properties worth RM1mil and above in Johor Baru?
Wouldn’t the buyers be able to find bargains in China itself, given that the prices there are already falling in the less-preferred cities?
Finally, funding for developers from China for their overseas projects is also taking a beating.
Because it is difficult to take money out of China, developers use offshore companies to raise debt that are backed by the financial resources of the onshore company.
The arrangement is called the “keepwell” agreement, where the onshore company backs up the debt with a promise to inject liquidity or buy up the bad assets. The lenders to the offshore companies are foreign investors.
But increasingly, the foreigners are not lending to offshore companies or seeking higher rates for loans because of the fear of defaults.
History has shown that foreign developers tend to flock back to their homeground when there is a slowdown.
The Middle East developers came in a big way when Iskandar Malaysia was being promoted prior to 2008. They prided on having an abundance of oil money and being able to splash it around in Islandar Malaysia, come what may.
However, when the property bubble in the Middle East burst, they dropped everything in Iskandar Malaysia to consolidate their positions in their home country.
So, why wouldn’t the developers from China do the same?
