Lock, Stock & Barrel: Exercising Discretion in Luxury Projects

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This article first appeared in The New Straits Times on 30 November, 2017.

In the last week, the property market has been abuzz with the reports issued by Bank Negara Malaysia and the almost immediate response by the Finance Ministry. There has also been much talk about the 1Malaysia People’s Housing Programme (PR1MA) not being on track to achieve what they set out to achieve.

Bank Negara has announced Malaysia’s economic growth at a high of 6.2 percent for the third quarter of this year. This is no mean feat in the current economic climate, and the country should indeed be applauded for having achieved such an impressive growth, although this is only for one quarter of the year. The second quarter also managed to register an impressive 5.8 percent. This has been the fastest growth rate since June 2014. Much of this growth has been credited to private sector spending and strong performance in the export markets.

In the middle of all this, the Cabinet had directed Dewan Bandaraya Kuala Lumpur (DBKL) to impose a freeze on four types of high-end developments:

Shopping complexes

Offices

Service apartments

Luxury high-rise apartments priced over RM1 million.

Projects that have been approved could, however, continue.

Let us analyse if this blanket ban is positive or negative to the market in general. Firstly, before such a ban is issued, there should have been an in-depth study to identify exactly the sectors which are oversupplied. The property market cannot be looked at as a singular entity. There are many strata in the property market. And each of these strata can be further broken down to sectors. Factors that affect how these sectors are clumped together will be location, type of development, prices, etc.

If the many reports that are being published is to be believed, we will realise that the most contentious sector will be the high-rise properties priced above RM1 million. My opinion is that although there is certainly a mismatch between supply and demand in this sector, the difference is relatively small, and can easily be absorbed by the market within the short to medium term.

Not everyone can afford to invest in properties in this price range. The people who can afford to buy these properties are presumably stable in their financial standing, experienced in the art of property investment, and savvy in their business acumen. This group of people are not likely to invest in just any development, without conducting their own in-depth study. They would also most likely understand that the market is cyclical and that their investments would need some time to be able to show any gain.

They would be prepared to go the long haul and wait it out until the market improves. In the meantime, they would certainly be able to meet their financial obligations to the bank. Many of them would likely put their properties into the rental market, hoping to offset their monthly obligations to the bank with whatever rental they could collect in the meantime.

Perhaps the authorities should relook their blanket ban in this sector. Imagine if you were a developer with a parcel of land in Bangsar. There is no way that anyone would consider building something in Bangsar at a price lower than RM1 million. In all likelihood, these properties would be priced at closer to RM4 million or RM5 million. And because of the scarcity of these types of luxury properties, the developer would be able to secure enough purchasers to make the project financially viable.

With a blanket ban like this, how does he proceed?

I suggest that any ban of this nature be tempered with good economic sense, and any application be considered on a case-by-case basis, and approval be given on its individual merit. In this way, the government can exercise some form of control in sectors that are overbuilt, while at the same time, exercise discretion in cases which merit a development going forward.