Property Bubble Concerns Across Asia-Pacific

Asian countries fearing a disastrous US-style property bubble are striving to cool down their real-estate markets as the region powers out of the global financial crisis. Policymakers are worried that excessive exuberance could push property prices far above their real value, only to crash and bring down with them banks that lent money too freely and individuals who borrowed beyond their means.



"It is better to pre-empt a bubble than wait for it to get serious and have to take more drastic measures," Singapore Prime Minister Lee Hsien Loong said last month after the city-state took fresh measures against speculation. Low interest rates, strong demand and speculation have pushed property prices in many Asian cities higher, in some cases surpassing peaks reached in 2007.

"The risk of an asset bubble is quite high in certain (economies) such as China, Hong Kong and Singapore," said Chua Yang Liang, head of Southeast Asia research at property consultancy Jones Lang LaSalle.

In China, property prices in 70 major cities hit a 21-month high in January.Beijing has tightened lending, requiring buyers of second homes to put up a downpayment of at least 40 percent, and they also face higher interest rates on their mortgage loans. In Singapore, where housing prices have been heating up since last year, the government slapped additional duties on sellers who flip a residential property within a year of buying it.

Home buyers are also now limited to borrowing up to 80 percent of the property's value, instead of 90 percent.In densely packed Hong Kong, home to one of the world's most frenetic property markets, authorities are fretting about a surge of speculative money since late 2008.

Starting April, the territory will increase the stamp duty for sales of flats worth 20 million Hong Kong dollars (2.6 million US) or more from 3.75 percent to 4.25 percent. Prices of some Hong Kong luxury flats have returned to 1997 boom levels.

Australia's central bank on Tuesday lifted interest rates afresh. One factor it cited was a "solid" increase in mortgages, "and dwelling prices have risen significantly over the past year". Median house prices in Sydney rose 12.1 percent in 2009 and 18.5 percent in Melbourne, and observers said the rise was likely to continue.But Simon Vinson, head of Asian property at AMP Capital Investors, said he did not see the overall Asian market overheating.



When you ask around, most will cite bubble conditions in HK, Singapore, Australia and China. But somehow no one seems to think Malaysia is having a property bubble as well???!!! Do I think there is a bubble in Malaysian property, oh yes! Ask me that question again during the talk.

How do you know there is a bubble? When everyone cites only the positives: low interest rates, comparative valuations ... I see big bubble in HK and Singapore, driven by truckloads of buyers from China. In Singapore, they cite the inflow of PRs pushing up prices in private apartments and HDB housing. The whole thing reside on the recent financial crisis which saw truckloads of stimulus left, right and center, but Asian banks and corporates were really not that badly affected. Properties in Asia DID NOT go to the extremes like in the US subprime party or CDOs driven gains in most of Europe, in particular the UK and smaller European nations. Now with the stimulus, we have too much liquidity swishing in the system. Most Asian central banks are still keeping rates low to keep in step with US and EU rates as exports and real economy are still recovering. I see liquidity being diverted into property in Asia-Pacific.

Yes, some countries are hotter, such as Australia, HK and Singapore. China is next but Malaysia is not far behind. In Malaysia there are two markets, its the new developments that are getting the bulk of the funding and cheap financing. Seriously, look at our affordability ratios, how can families keep up with RM500,000-RM800,000 loans??? Unless I am mistaken, most middle class families don't make more than RM10,000 a month.

Have a look at just completed properties over RM1.5-2.0m, even after 6 months, more than half are empty. Those below RM1m still mainly owner occupied. Many of the higher priced ones are people's second or third investment homes or owned by foreigners. We all know what kind of yields these properties can get locally don't we.... lucky to get 3% yield. However, the party is still on because the foreigners are mainly Asians and they are riding on a good property wave in their own turf, hence no need to sell. See if there are buyers for properties above RM2m in the secondary market... very very few.

Of course no property developers would be caught dead saying its bubbling over. So, how will the whole thing unwind, we need one major market to correct and then you see the domino effect. Property markets are different to stock markets, their bull run is more sustained and the unwinding takes a lot longer. When you are in the property markets, its hypnotic and crowd driven. Every profitable sale gets whispered louder and louder, do you want to miss that. I have a friend who bought a Desa Park City link house and it has risen by RM400,000 in 6 months, how to argue that that is wrong.

Safe to say that a lot of new developments are still being built, even the super luxury condos in KL and Bangsar are mostly still under construction. It takes time to see a correction but its coming. You just cannot make a timeline prediction. Unless you can see a normal executive in their 30s being able to buy at RM1m, without any help from their parents, then you can say its affordable.

The worse defense is that Malaysia is still cheap compared to Singapore or HK .... so what???!!! When is there an average for Asian property prices??? That argument is the same as saying my salary in Malaysia will soon double because its so far from Singapore's salary - yes, quite bullshitty. So, make your money while the sun shines, and then hope that it is sufficient to cover the losses when they correct.

p/s photos: Titi Kamal

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Friday, March 10, 2006

Asian Real Estate

Or Why Malaysian Real Estate Is So Cheap

Did you know that KL real estate is one of the cheapest in Asia - another reason why 5 star hotels in Malaysia are also among the cheapest in the world. One can understand if Malaysian real estate values lag those of more developed nations such as Singapore, Hong Kong, Seoul or Tokyo... but KL even lags Indian cities, Bangkok and certain places in Jakarta. We can understand why Shanghai or Beijing would be more expensive too compared to KL - population, out-sourcing and investment.

Is this a correlation to our GDP per capita (roughly translated is how much money a citizen earns in a specific country a year). The figures were obtained from CIA files, yes the American Central Intelligence Agency for 2005: www.gov/cia/publications/factbook/rankorder/2004rank.html

1) Luxembourg US$62,700
2) Equatorial Guinea US$50,200 (where is that, I want to move there ... but a cafe latte will probably cost US$15)
3) Norway US$42,400
4) USA US$41,800
8) HK US$36,800
16) Canada US$32,800
18) Australia US$32,000
20) UK US$30,900
22) Japan US$30,400
26) Singapore US$29,700
36) Taiwan US$26,700
41) New Zealand US$24,100
42) Brunei US$23,600
51) South Korea US$20,300
82) Russia US$10,700
83) Malaysia US$10,400
86) Mexico US$10,000
88) WORLD AVERAGE US$9,300
97) Thailand US$8,300
118) China US$6,200
132) Philippines US$5,100
150) Indonesia US$3,700
155) India US$3,400
229) Somalia US$600
231) Gaza Strip US$600
232) East Timor US$400

If you look at the table above, it bears little correlation. A poor country can have high city real estate values - hence a big factor is city population. You need to cram a lot of people into a tiny space, then real estate values will soar - take New York, Tokyo, HK, Singapore, Bangkok, Shanghai, Shenzhen, Karachi, Mumbai ... many are in the region of 10-30 million city population. KL has about 5 million but it is also quite spread out. So, another factor is it has to be CRAMPED - or rather business activity CBD has to be cramped.

Another factor for high real estate values is whether you are a financial center. Is your city a crucial outpost to doing business in the region - HK, Shanghai, Singapore, Tokyo, Mumbai, New York, etc... KL is neither here nor there. What about Bangkok? Well, it has a super duper population (have you seen the weekend exodus from Bangkok every Friday). Even though it is not a financial center, it the the center for a country with a decent population size. If your capital city is the center of a country with a decent population, you can be assured of good commercial real estate values - e.g. Thailand, Taiwan, South Korea. We need Malaysia to move quickly from 26 million to at least 60 million. Then you can have some good ripple on effect on real estate values.

If you are not a financial center, you can still command high rates if high-value services businesses are aplenty. Hence Singapore's commercial real estate will have a very strong long term uptrend as it does not depend on its reputation as a financial center/port/MICE biz like HK but moves higher up the value-added curve by encouraging designers/inventors in animation, biotech, education, etc. Does KL look like a city with good high value added industries?

Good amenities and public infrastructure would not be a bad thing, look at Tokyo, HK, Singapore or even New York - but infra is not crucial in giving higher real estate values. If you look at the capital cities of the high GDP per capita countries such as Oslo, Amsterdam, Stockholm, etc.. you will find that good infra is a good thing but not necessarily stratospheric real estate prices.

Lack of good quality commercial space will also spruce up real estate values. Just look at Indian cities, cities in Vietnam or even Jakarta. We in KL, unfortunately builds okay buildings cheaply as land is cheap and plentiful. I mean, KL commercial just keeps getting drawn wider and wider. First the CBD, then the city kind of move wider to include PJ, then it moves out to Shah Alam, now Klang. Too much cheap flat land.

So, commercial real estate value in Malaysia will lag the rest of Asia, even some cities in Vietnam (my gawd), and it will not change until the fundamentals change. The only exciting part for Malaysian real estate is residential, and you know how people get crazy with houses, every now and then, good houses in good locations will have its own bull run. The rental yields never match the house prices - but hey, who the heck cares. Commercial and retail, fergedaboudit!

Got A Question For Bank Negara

Dear Madam Zeti,


There is a curious trend in bank lending which I am sure you are aware of, but is troubling to me. I am sure you are aware that all property loans (or almost all property loans) given out by Malaysian banks have a 5 year lock in period. During that 5 year period if you want to refinance your loan by the same bank or take it to be refinanced to another bank, you will be whacked with a 5% penalty on outstanding amount.

Say you bought a house in 2006 for RM500,000 with a RM400,000 loan with rate of 6%. Naturally with rates coming down over the last 12 months, you should refinance the balance, but you cannot.

Is this ruling fair to property owners? Is this rule sanctioned and encouraged by Bank Negara as it obviously benefits the banks at the expense of the borrowers. Is this to stop other banks from "stealing" loans from one another? If it is, then banks SHOULD allow for refinancing inhouse with no penalty - why should borrowers not have that choice?

As the country tries to deflect a recession, interest rates come down as a monetary tool by Bank Negara. What good is the tool, what good is the lower rates if a substantial portion of the loans are "locked in", unable to take advantage of the lower rates? This neutralises the lower interest rates policies as property loans make up a huge portion of most households' balance sheet.

Why are local banks having it so good? Why can't the public be beneficiaries of better and more open competition among the banks? A borrower will go to a bank because of the service it provides. Why does that "better service" automatically goes out the door the moment you sign off on the loan? Why can't a person switch to a lower cost option two or three years down the road? If a bank loses a loan to another bank, it means the other bank can compete more effectively - i.e. lower cost of funds.

The local banks are acting like a cartel... they all agree to do this so that all can enjoy supernormal profits, lock in profits, all to the detriment of the consumer. No need to watch The Sopranos, we have the local banks.

I can understand a window of a lock in period for the banks to recoup some marketing cost, but certainly not 5% penalty.

Bank Negara should:
a) reduce the lock in period from 5 years to 2 years
b) reduce the penalty from 5% to 2%

This is one of the many big reasons why Malaysian properties are sluggish.



p/s photos: JJ

Sectors & Stocks I Like To Follow As CI Breaches 1,000

This is a follow up to the last posting on the confirmation of the bull run. As in any bull run, it is sometimes quite silly to look for stocks to recommend. The best performing stocks in a bull run are generally the worst type of stocks, no fundamentals, speculative and dodgy management. So, how to get the best returns? I cannot tell you the kind of speculative nonsensical stocks to look for, even though they can make good money, because its baseless and manipulative. Hence for the speculative stocks, you will have to ask your taxi driver or vegetable seller, they have better information on those type of stocks.

Can a simple announcement by Najib turn things so dramatically? We need to be be able to decipher what is blah-blah, and what constitute structural changes. Say that Malaysia is like a farm, the input and output are similar year in year out. Sometimes, through no fault of our own, the yield on the farmland drops sharply, maybe we had an unexpected prolonged dry spell, or the weather patterns shifted unfavourably. You may then do your normal monetary and fiscal stimulus, you can buy some fertiliser or even tweak the tractor's engine to make it stronger, but thats that.

The recent announcement of the removal of the 30% rule is a structural change, not a cosmetic change. To the farmland, that is like getting plenty of tractors to totally remove the topsoil and replace with a much better soil. Its like rethinking on removing some of the plants that yield poorly and have low margins, and replant with ones that give better margins.

We also need to be careful that we do not do too much all at once. There will be those who will clamour for the 30% rule to be taken off FIC as well. One step at a time. While Najib is at it, there is one area that has been neglected for far too long, and too wasteful and results in a huge mis-allocation of resources - properties reserved for bumiputras discounts. I agree that the allotment should stay, but a more sensible rule to be added in that if the properties allotted for such schemes remain unsold for 6 months after the launch, then it is open to be sold as per normal. The rule causes developers to incur unnecessary financing charges, eats into margins, and raises the business model costing. Not being able to sell them after a prolonged period (say more than 1 -2 years) ties up the funds and capital for the developer to manage his business.

Stocks that will run as a group will be the Iskandar project - SP Setia, UEM Land, even the ports and logistics stocks. The second group of stocks should be those in financial services, if Najib can do the 30%, you can expect a similarly effective liberalisation in the financial services. Prefer AMMB, EONCAP.

One sector I particularly like is property, surprise, surprise. Except for the high end condos, the rest of the property market held up very well. However, if you look at property stocks in general, they got whacked by Mike Tyson in a boxing match. Looking at the structural changes, hard assets will do well, i.e. good land banks. I have also said that the world will be in for a strong reflationary period over the next 2-3 years, which again favours hard assets. I like SP Setia, UEM Land, even Talam, Sunway City, even MK Land.


p/s photos: Satomi Ishihara

The 2 Major Defining Issues For Malaysia & Singapore Property

1) The stock market effect in Malaysia - If you were to look at the financial turmoil in the past, namely, the mid-late 80s, the blip in 1994, the major monster of 97, the internet bust, the SARS effect, the tsunami effect and now the credit implosion... you can chart a very useful multiplier effect from losses in the stock markets. Prior to 2000, any kind of financial bust ups will see a lot of havoc and bad debts, ask any remisier... Following moves to limit contra and contango trades, this has removed a HUGE "leveraged disaster" from the domestic economy.

I can give you the excellent example of my 6 analysts working with me in mid 90s, their monthly salaries between RM3,000-10,000 and basically under 30 and real net worth probably zero. But each and everyone of them will have zero deposit with 2 or 3 remisiers, but personally will have a contra position of between RM100,000-300,000 in a few stocks depending on the mood of the market. This is not unique to my team of people, everybody everywhere were doing it. Naturally we always see a huge multiplier effect when the market corrects 10% over a week.

Since 2000 every major financial calamity has not seen similar catastrophic personal financial aftermaths. Now you try to buy RM50,000 worth of share with zero deposit, your remisier will ask you to fly wau. This market correction was also unique to the majority of retail stock players. Many were able to sell down most of their stocks or just stop playing stocks when the market retreated from 1,400 to 1,200... sure some will still hold a few stocks in their portfolio but many have been able to avoid the carnage. When a market falls from 1,400 to 850 its the holders of the shares that bear the brunt.

This time around retail players have been able to sidestep much of the disaster movie, its the funds that got whacked royally this time, ... local, hedge and foreign. Thus this will further help explain why most Malaysians are still relatively cash rich and under invested. Fewer job losses and fewer after effects from the stock markets = less likelihood to need to sell properties in desperation.

Hence market commentators should keep this in mind when comparing similar wealth effects prior to 2000 and after. The magnitude of the above financial effect on the broader population should not be underestimated.

2) The expatriates wave in Singapore - Singapore's population, on its own does not really grow on a net basis. However if we were to look total population from mid-2003 till mid-2008, Singapore's population grew by an incredible 17.6% to4.84m. Largely that came from a surge in expatriate staffing. That was an increase of 724,600. Official estimates had it that of the 724,600 some 546,700 were foreigners (expats) and permanent residents. If you were to assume that there were 3 per household, that would work out to an increased demand for 182,233 condo/house either for rental purposes or for purchase.

The large jump in expats and PRs were due to a sharp increase in business services segment, in particular hedge funds and more importantly private banking. The other segment of the industry which was significant was the boom related to the integrated resorts projects. When there is a major structural change in a country's infrastructure and/or the additional of a significant and viable new industry, it tends to attract a lot of investments and liquidity to partake in the euphoria. Needless to say, foreign investors piled into surrounding properties and new developments.

The wave was so strong that many developers were confident enough to lure the best architects to build the best of class condos in Singapore. The interest was so significant that pricing was at the very top end of global condo valuation standards. It even flowed into Sentosa in a big way.

To meet the increase in demand for high end housing, en-bloc sales became very popular. Developers were willing to pay a huge premium to secure good locations. They will then tear it down and build a new swanky and pricier place. En-bloc sales resulted in many Singapore owners suddenly turning into multimillionaires. That in itself, feed well into the demand for the pricier new condos as well. If your condo was worth S$1.0m in 2003, it could have been sold for S$1.8m in 2005 in an en-bloc sale. Assuming you had some mortgage left, you may still have a cash position of S$1.0m-$1.5m. That would be more than sufficient to pay down payment for the pricier new developments, maybe even flip them a few times thus tripling that capital within a short period.

The credit implosion will hit Singapore harder because of the "property and expat situation" cited above. Credit Suisse estimated that some 200,000 expats could leave Singapore in 2009, or a net drop of 160,000.

On the local front, Singaporeans themselves could see a net job loss of at least 100,000 among themselves in 2009.

p/s photos: Nia Ramadhani

Revised Outlook For Malaysian Property

Readers of this blog will know that I have been pretty bearish on Malaysian properties, but even more so for Singapore and HK properties. The latter two have seen a 10%-15% price correction across the board. The funny thing is that Malaysian property is holding up pretty well.

Over the last few days a couple of things struck me about Malaysian properties, which have eluded me, and many property analysts. We always look at the same indicators: affordability ratios, employment trends, rental vacancies, occupancy rates, ratio of income to mortgage, etc.

Somehow there are a couple more reasons which seem to dictate the underlying strength of local property prices.

a) Open economy - The more open your economy is to free trade, the more susceptible you are to global financial turmoil. Hence explaining much of the distress in HK and Singapore economies. Theoretically speaking Malaysia should be affected just as bad, but we are not. I would like to cite this as the Shenzhen effect. Malaysia has what I would coin as the "Shenzhen effect". Its when a place can be used to produce goods and services more cost effectively. We also must remember that we are in a massive globalisation mode for the past 15 years, with the pace rising over the last 5 years. There is no way you can bring back those jobs to Singapore, HK or the US unless maybe if the Sing dollar goes to 1.5 vs the ringgit or the HKD drops to 15 HK dollar to the USD.

The key point is that when global companies decide where to cut cost or restructure, they now tend to leave Malaysia alone. You cannot cut manufacturing outright, you reduce shifts and capacity. But you can cut services and managerial headcount easily and the numbers make more sense out of places such as Singapore and HK. I give you another example, in investment banking, a senior analyst may be paid a US$300,000 package in South Korea or HK, but a similar position in the same firm in Malaysia may be paying just US$120,000. Its not all equal. And when top managers strategise on where to lop off manufacturing and investments, Malaysia will almost be the last to be chop.

Why? Multi lingual work force, relatively hard working staff (I said relatively), very cheap land cost, very cheap building and facility cost, excellent ports and road networks to ship in and out, reliable and effective air travel hubs in the country, much safer and stable politically, less risk of war or internal unrest, high degree of safety from terrorism, its Islamic yet Islamic neutral for businesses which is a highly coveted position to all, strategically, its position is important for shipping services.

b) Many have over invested in India and China, hence some operations investing may be delayed or see its capacity being shrunk there. HK and Singapore are the high value add sectors and are also highly leveraged to global financial markets, they cannot hide. Hence we cannot and should not lump Malaysia together with HK and Singapore. yes we will see some jobs lost but it should not be anywhere near the cuts we are seeing in HK and Singapore.

We always just talk about speculation in markets, but we should also look at sectors or countries that have over invested (either from domestic or foreign sources). Singapore has over invested in private bankers, same with HK. Singapore has over invested in Sentosa and the outlying real estate areas where prices are totally out of whack - we are seeing Monaco prices and the weather is too damn hot! China has many areas that have seen over investment as well.

In terms of speculation, Singapore is topping the charts with the en bloc sale, which proceeds are then geared up to speculate in the many luxury condos. Enough said. Specuation is there in Malaysian properties, in particular the high end condos - we have never been able to maintain very high prices in condos because most people still prefer houses and land. The only time we see RM1,500-3,000psf is in a bubble. The correction will be most severe in those above RM1,000psf which may see a 15%-20% drop. The RM500-999 psf may see a drop half of that. Landed properties below RM1.5m are still pretty solid and may only see a 5% drop from their peaks. Those under RM3m may see a slight ease off but it should not be major. Higher than RM3m, they are in a world of their own.

c) The stock market effect - If you were to look at the financial turmoil in the past, namely, the mid-late 80s, the blip in 1994, the major monster of 97, the internet bust, the SARS effect, the tsunami effect and now the credit implosion... you can chart a very useful multiplier effect from losses in the stock markets. Prior to 2000, any kind of financial bust ups will see a lot of havoc and bad debts, ask any remisier... Following moves to limit contra and contango trades, this has removed a HUGE "leveraged disaster" from the domestic economy.

I can give you the excellent example of my 6 analysts working with me in mid 90s, their monthly salaries between RM3,000-10,000 and basically under 30 and real net worth probably zero. But each and everyone of them will have zero deposit with 2 or 3 remisiers, but personally will have a contra position of between RM100,000-300,000 in a few stocks depending on the mood of the market. This is not unique to my team of people, everybody everywhere were doing it. Naturally we always see a huge multiplier effect when the market corrects 10% over a week.

Since 2000 any major financial calamity has not seen similar catastrophic personal financial aftermaths. Now you try to buy RM50,000 worth of share with zero deposit, your remisier will ask you to fly wau. This market correction was also unique to the majority of retail stock players. Many were able to sell down most of their stocks or just stop playing stocks when the market retreated from 1,400 to 1,200... sure some will still hold a few stocks in their portfolio but many have been able to avoid the carnage. When a market falls from 1,400 to 850 its the holders of the shares that bear the brunt.

This time around retail players have been able to sidestep much of the disaster movie, its the funds that got whacked royally this time, ... local, hedge and foreign. Thus this will further help explain why most Malaysians are still relatively cash rich and under invested. Fewer job losses and fewer after effects from the stock markets = less likelihood to need to sell properties in desperation.

I am working on a big piece on the Market Prognosis for 2009, stay tuned, will be out in a couple of days.

photos: Pace Wu Pei Ci

Need Sobering Clarity On Malaysia

For the past 3 months we have heard many differing calls and views on the Malaysian economy in the face of the global financial turmoil. We have to be careful on what people are saying and their roles. Many of those who are the most vocal have vested interest, namely politicians and real estate developers. We have to regard those statements with a few bucket loads of salt.

I can understand it when property guys stay optimistic, they had to, you think they have any choice. No property guy will come out to say that they are doomed, they will first be lynched by fellow property players. There is probably an unwritten code among property players, when you have nothing good to say, shut up cause the rest are trying to reduce their inventory as fast as they can.

I would like to see a more sobering comment and leadership from the top politicians and top financial people in government institutions such as Bank Negara, MIER and even RAM and the like. I am not asking for them to give pessimistic views, I am asking them for clarity and realistic views. Do not try and instill a false sense of confidence in the people. I know that the rule book would call for a need to keep an optimistic view so that domestic consumption stays strong, but I also believe that a realistic view would help restore confidence that the people would know the government is handling the issue properly, and more importantly has a good handle on the issues we are facing. Time for sobering leadership.

Things are crumbling in the US and much of Europe. Many nations are already in a recession statistically, even some Asian countries. Malaysia is not in that boat (yet), but we also need to know why we are not there (yet). Is that inevitable? Can we dodge the bullet? Or are we deluding ourselves?

This is not 1997, it is not a financial crisis in our own backyard, hence we should not and will not feel the effects firsthand. For my life I cannot understand how those people out there can say Malaysia will not be affected or will be only marginally affected by this crisis. We will be affected because:

a) We do not have a big enough or strong enough domestic economy. If we had a population of maybe 80m-100m and domestic consumption makes up 65%-75% of our economy, maybe we can ride it out, but we are not.

b) If the turmoil is a short one, e.g. if the US and Europe will come out of this with positive growth by 2Q or 3Q 2009, then we can safely say we might only be marginally affected, but that is not the case here.

c) Our major trading partners are the US, China and Singapore. Of that, maybe China can still chug along and save us, but we are not supplying the right products in their enlarged fiscal stimulus (rail and infrastructure). We are rerouting a lot of exports normally to the US to China as partially finished products to be assembled or finished in China for exports. Well, some 60%-70% of China exports are really MNCs funded manufacturing / outsourcing concerns operating out of China - I don't think they will be unaffected.

Oil and CPO prices have crashed, and both help to boost our coffers. CPO prices affects CPO companies rather than the bulk of the population, hence we do not see great wealth effects when CPO is at RM3,000 and we will also not feel it that much if it goes to RM1,200. Oil would affect government coffers and the ability to fund our budget deficit. Some would scream that we are at a highish 4.8% deficit, but I am actually comfortable with that.

RM7bn stimulus is OK but will not be sufficient. I hope the government will add to it with another RM5bn at least, this time do it with a 2 percentage points cut in income tax. I know that will hurt government receipts but its a time to go further into deficit spending as the alternative is not nice. The other recommended measure is for the government to totally pay up on all bills and claims for work done within 2 weeks of invoice receipt. Governments (including state governments should lead the way to pay all bills, we all know that many bills are left unpaid or delayed for the longest time, bickering over amounts and maybe something else to happen... the trickle down effect will be substantive.

One big factor causing people to think things are hunky-dory in Malaysia is the stubborn property prices. I still think things will hit hard in the coming months when property prices start to come down. Property prices are already down substantially (about 15%-20%) in Singapore and Australia - granted thats also because the leverage and speculation there have been more rampant. The good thing is that speculation has been not as rampant in local property but that does not mean we are immune.

The biggest job losses will be in Penang with the high number manufacturing firms there, and watch the trickle down contraction. Oil and CPO price collapse does not hit jobs that much as the number of employees needed to run an oil company are not critical, or rather the revenue/employee is very high. Plus even at US$50, its still profitable and many suppliers and contractors are on long term contracts anyway. As for CPO, well, we know their cost is still around RM650-750 and you still need people to tend to plantations.

For impact, just take a minute to reflect on your job, how much does your company rely on strong foreign demand, how much does your company rely on domestic demand, now look at the demand outlook from both sides 3 months out and then 6 months out. Now take two of your close friends in different jobs, do the same exercise ... maybe you will have a better idea now.

Malaysia relies a lot on foreign investment and that will dry up over the next few quarters. Thankfully, Bank Negara has maintained good discipline and our reserves are at an enviable level, thus allowing the country many options to deal with this crisis better than many countries. For those who does not like a weak ringgit above 3.60 vs the USD, grow up, in times of global turmoil I'd rather have a weakened currency to maintain better competitiveness. A strong ringgit would have seen more industries collapsing outright. Plus we are in a deflationary environment, hence a weaker ringgit won't be importing inflation.

Lastly, while the stockmarket has lost substantial ground over the past 12 months, this time around the bulk of retail players have been able to sidestep the fall and is in fact quite cashed up. Nonetheless Malaysia has one of the highest percentage of GDP that is listed and stock prices have a large correlation to domestic consumption, we have yet to see the wealth effect coming through.

Do not be blinkered in that we have not yet seen the effects, by virtue of the makeup of this crisis, it will only hit us with a 3-6 month delayed effect.

p/s photo: JJ

How Bad

Datuk has left a new comment on your post "Morgan Stanley Asia Not So Bearish":

I think KLSE has dropped more than 45% today compared if peak point. Do you think 45% of down turn in index is not enough for us to consider collapse ? In fact, KLSE is in line with other bourses in the region ...virtually in collapsing situation! The only difference is the dropped in the KLSE index is less severe compared its peers.

Obviously, there were several factors for that:

i)In the most recent bull cycle, the performance of KLSE has been well below its peers in Asia region. Hence, it's within our circle of expectation that the down turn in KLSE will be less severe compared other region.

ii)KLSE is supported by two of our natural endowments, petrol and palm oil. The prospect for these commodities only changed negatively and drastically in August-September period. Thus, the negative impact for big cap in KLSE is less clear to most of the investors and research houses.

iii) The petrol hike in June this year and its hyper inflationary impact across all sectors had destroyed the market demands among the middle class and damanged the consumer sentiment. The sudden changes in the macro and micro economy climate caused, small investors and local institutional buyers will shy away from the equity market. Thus, foreign funds are not be able to liquidate their investment timely. Otherwise, it would incur hugh losses. That's the explanation of foreign stake in bursa is lingering in the range of 19-20%. (I think foreign funds have liquidated Malaysian stocks way earlier than other Asian markets such as Singapore, HK, Thailand, Japan and Indonesia. The only other one which fell earlier like Malaysia was South Korea - in hindsight, Malaysia was sold down on heightened political uncertainty, which now looked like a blessing in disguise. Korea had other fundamental issues which brought the market there down earlier. The current foreign shareholding level in KLSE is pretty low, only long term funds are in. To say that foreign funds did not have a chance to sell is flawed. If they want to sell, they will sell regardless what the price is. Sell IOI at 6, np... how about 5, still ok, 4... hmmm just do it... errr 3... I SAID SELL...)

Having said that.....in my opinion, KLSE will be in down south direction in the next 2 years when corporate earnings are heading in the similar direction.

Thus, when the dropping momentum in index is slow, the recovery momemtum in index is expecte to be slow.

Hence,it's not easy for the small investors to timing for good entry point as the future direction is not clear and the tendency to compare prices by using the previous peak point which is no longer relevent as the earning equation is less visible.

Stay out from the market is more pragmatic as i don't believe anybody can spot the recovery at this juncture. Worse is yet to come. (Agreed, there is absolutely no hurry to buy stocks. Many still are oblivious to the coming down trend. Ask any real estate agent... give the seller a 15% lower price as a bid, the seller will say they can still make payments, and will hold out for the price when things are better in 3 months... if that is not ignorance, I don't know what is. The slowdown may not cripple Malaysia, will see its usual cascading effects. Stock markets have lost 40% from its high.

The usual yardstick is property will see a 6 month delayed effect. Its usually the last thing to go. Finances are structured this way:
1) New loans shrinked considerably (happening already).
2) Reduced wealth effects from stock market.
3) Spending curtailed. Nice to have items first to go such as overseas holidays (happening already), and new car purchase.
4) Our biggest sector is electronics, not oil and gas or palm oil, guess the impact on jobs there.
5) Credit card defaults rise, go ask your banker friend of the trend there.
6) Next to go will be car payments, look for repossessed cars, ask your repossesor friend of the trend there.
7) Jobs stagnant or being cut, we must also remember that every day there are new graduates entering the workforce.

I am not saying that we will see a 30% price correction in properties, but at least 15%-20% in most areas and some sub sectors will see 30%. The worst hit is likely to be the high end condos and unoccupied high end bungalows. Yes, they are rich people but a lot of these have been bought by HKers, S'poreans and Indonesians... and not one or two lots, but a few lots. The leasehold types over RM2m will go down first. Things are going to go down 20% at least in Singapore and HK, Malaysia will feel those effects. Beng able to afford repayments is only one part of the equation. People will hold or maintain their leverage when the assets are steady or going to go up. If things are not going up, they will go down. Even if those people can afford these properties, they will be sold just like stocks. Many of these are ready for occupancy now. Try and rent out the RM2m condos at RM5,000... good luck, and thats just a gross yield of 3%... Buyers of any property above RM1.5m will at least have 2 or 4 more somewhere else. You do the math. Properties below RM1 may see a more subdued loss of 10%-15% and may be able to ride them out better.

Just imagine even when you want to sell, how much harder is it now for people to commit to a RM500,000 or RM1m housing loan... and don't you think the banks will make lending that sum a lot harder now).

p/s photos: Haruna Yabuki

Report Card On The RM7 Billion

You can get a good idea of the "thinking and strategy" behind the plans being announced, and make an assessment of whether they "know" the problems ahead, have a good appreciation of the problems ahead, and whether they are tackling them with the right medicine. I would rank them from A to E, A being excellent, C being neutral and E being flawed.

The government yesterday cut its economic growth forecast for 2009 to 3.5% from 5.4% and announced several measures to keep the economy ticking, including putting more money in the hands of the people, creating more jobs and boosting the construction and real estate sectors. (A+, The statement show a very sobering and realistic acceptance of the cascading effects from the global financial tsunami. In fact many other countries have only downgraded growth for next year minimally. The 200 basis points downgrade shows a willingness to err on the side of caution, which is good).

Deputy Prime Minister and Finance Minister Datuk Seri Najib Razak, in winding up the debate in parliament on Budget 2009, also gave a commitment that "a big number" of government procurements will, from now, be done via either an open or limited tender process to ensure it gets "value for money". Contracts targeted at bumiputera companies will also be put to competitive bidding among bumiputera firms. Direct negotiations will, however, continue on a discretionary basis. (A, Hard not to be cynical, the words sounded right, will give him benefit of the doubt for 6 months and see if reality mirrors the message. Even a 75% figure for open tender will be a blast).

While the country's fundamentals remained strong, Najib said Malaysia would still be impacted by the current global financial turmoil and economic downturn. This left the government with no choice but to follow other countries and pursue an expansionary fiscal policy to ensure continued economic expansion, albeit at a slower pace. As a result, the government's budget deficit for 2009, originally projected at 3.6%, has been revised to 4.8%, which is the rate anticipated for this year. Inflation, currently running at around 8%, will dip to between 3% and 4% next year, if crude oil price remains at the current level, he said. (A, a responsible statement, and yet aggressive view for a higher budget deficit in 2009. Its fair, committed, responsible tactic without iviting major problems in the future for the country's balance sheet. Whoever is advising najib is doing really well so far).

Najib unveiled an additional RM7.0 billion fiscal stimulus that will be funded by the savings obtained from the recent cut in petrol subsidies. The money will be spent, among others, on:

• RM1.5 billion to set up an Investment Fund to attract more private investments (C, too vague).
• Building RM1.2 billion worth of low- and medium-cost houses (C, good but not good enough. There are plenty of property projects which people have paid deposits but may be in grave danger of being abandoned, look into them as well).
• RM500 million to upgrade police stations, army camps and quarters (C+, smaller construction projects to boost activity, ok la, at least they stayed on the right course by having no mega projects).
• RM600 million to build roads, bridges and community halls in kampungs (B, this is in addition to the latest budget, still better than nothing).
• RM500 million to upgrade schools and hospitals (B, same as above, keep it smallish and spread around the country).

To boost consumer spending, he said employees can opt to cut their contribution to the Employees Provident Fund to 8% from 11% in 2009 and 2010. If all EPF contributors do that, it will free RM4.8 billion a year for them to use (E, reprehensible and irresponsible. Why do you have to boost spending by consumers via their OWN SAVINGS. Already we have a retirement scheme which is really insufficient to care for the MAJORITY of Malaysians. You still want the public to chip in to keep domestic activity going. Its forsaking the future for the present, when the future is already not good enough. The government MUST always regard EPF savings as something sacred and immovable, and must be a very last ditch effort. Once you reduce, it will be very hard to put it back up again. People have to learn to live with a certain mandatory savings rate. If anything, the savings rate should go higher (not at the present time) as the employer and employee contributions should equal 25% sometime within the next 5 years onwards in order for EPF to remain meaningful for Malaysians to retire on).

Najib also said government employees would now enjoy bigger car loans, ranging from RM55,000 to RM70,000 compared with the current RM45,000 to RM60,000. And those with existing housing loans can extend the repayment period to 30 years from 25 years. (C+, while that is good, the government should also think of how these loans would tie down public servants. If the government is intent on improving efficiency and reduce manpower over the next 5 years, such "tie downs" will make it very hard to streamline staffing issues. How to cut 5% of workforce when all of them have these loans dangling everywhere. There are a few firms already extending generous personal loans for government servants only, using direct debit of their salary as paying installments. This instills a mentality that a civil service job is forever. How to improve efficiency properly? These personal loans in addition to their other loans do make their disposable income very tight indeed. You can forecast the compounding ill-effects from this scenario).

Najib also announced steps to boost the construction and property development industry by:
• Removing the import duty for cement and long iron and steel products and exempting the companies from applying for Approved Permits (APs) (B+, I would have given it an A if this WAS MADE PERMANENT. We cannot and should not do things on an adhoc basis, take away now, put back later. It allows for many subsidised industries to always run to the government crying for help whenever the situation does not suit them. All industries, worth having, should learn to compete regionally and globally, or else they don't deserve to exist, we can very well just import from Thailand or Indonesia... just like Singapore. There is really no need to have a steel or cement or auto industry... we are really too small a nation).
• Allowing a foreign individual or entity to buy commercial properties priced above RM500,000 without requiring FIC approval if it is for own use (B+, again, make it permanent, no more flip-flops).

To create jobs, the government through GLCs like Khazanah and PNB will launch a Graduate Employability Management Scheme (GEMS) that will train 12,000 graduates over the next two years (B, has the ability to be really useful, only because Khazanah is involved. Learn to have good spreadsheet skills, pass a basic understanding of accounting, do simple financial modelling, learn how to do power points, improve business English, conducting yourself professionally, learn about priorities and tasks completion scheduling, improve thinking like an entrepreneur and innovator, take up courses to improve your marketability ...).

Stating that the "export-led" strategy used during the 1997/98 crisis cannot be used now because other countries are also slipping into recession, he said the government has to focus on boosting domestic activities. (A, good understanding and good strategy. It would have been too easy and too simplistic to revert to a 4.0 to the USD strategy to export our way out. It would have set our economy back 5-10 years as sunset industries will find more reasons to live, and value add industries will find things hard).

One step to raise revenue and spur domestic economic activity is for the government to maximise returns on its assets, including land that has not been developed, especially those in strategic locations. He cited the Rubber Board land in Sungai Buloh as well as government land in Jalan Cochrane and Ampang Hilir in Kuala Lumpur as examples. Tenders will be opened to private companies and GLCs to develop the parcels of land based on guidelines set by the government. (A, about time, but again everytime you announce such a plan, there will be 2,500 vultures at your door... which would make these plans a D- ... keep it transparent, relevant and open).

If I was on the 4th floor, and they still listens to 4th floor boys ... I would push for:
a) reviving abandoned property projects with capital injections, it will free up capital and improve liquidity in many thousands of property buyers left in the lurch
b) going around and making sure property developers currently selling or building are properly capitalised to avoid any projects being abandoned
c) fast track the removal of import and excise duties on cars to 0% by end of the year, now that will put a lot more cash into people's hands ... AP holders get their money back and current dealers with stock will go through a mediation process to get back a minimal portion of the losses, or get an export subsidy to send the used cars to other less developed countries
d) implement a gradual removal of oil and gas subsidy for commercial firms, listed and unlisted companies: 50% reduction in subsidy effective Jan 2010, and complete removal on Jan 2012. Everybody knows how to spend, but we also need to know where to save so that we can spend wisely. Subsidy for commercial firms have to go. The savings will be used more diligently to invest in other value add areas. Need to move up the value chain if everybody is to have higher wages.

p/s photo: Elanne Kong

Asian Real Estate

Or Why Malaysian Real Estate Is So Cheap

Did you know that KL real estate is one of the cheapest in Asia - another reason why 5 star hotels in Malaysia are also among the cheapest in the world. One can understand if Malaysian real estate values lag those of more developed nations such as Singapore, Hong Kong, Seoul or Tokyo... but KL even lags Indian cities, Bangkok and certain places in Jakarta. We can understand why Shanghai or Beijing would be more expensive too compared to KL - population, out-sourcing and investment.

Is this a correlation to our GDP per capita (roughly translated is how much money a citizen earns in a specific country a year). The figures were obtained from CIA files, yes the American Central Intelligence Agency for 2005: www.gov/cia/publications/factbook/rankorder/2004rank.html

1) Luxembourg US$62,700
2) Equatorial Guinea US$50,200 (where is that, I want to move there ... but a cafe latte will probably cost US$15)
3) Norway US$42,400
4) USA US$41,800
8) HK US$36,800
16) Canada US$32,800
18) Australia US$32,000
20) UK US$30,900
22) Japan US$30,400
26) Singapore US$29,700
36) Taiwan US$26,700
41) New Zealand US$24,100
42) Brunei US$23,600
51) South Korea US$20,300
82) Russia US$10,700
83) Malaysia US$10,400
86) Mexico US$10,000
88) WORLD AVERAGE US$9,300
97) Thailand US$8,300
118) China US$6,200
132) Philippines US$5,100
150) Indonesia US$3,700
155) India US$3,400
229) Somalia US$600
231) Gaza Strip US$600
232) East Timor US$400

If you look at the table above, it bears little correlation. A poor country can have high city real estate values - hence a big factor is city population. You need to cram a lot of people into a tiny space, then real estate values will soar - take New York, Tokyo, HK, Singapore, Bangkok, Shanghai, Shenzhen, Karachi, Mumbai ... many are in the region of 10-30 million city population. KL has about 5 million but it is also quite spread out. So, another factor is it has to be CRAMPED - or rather business activity CBD has to be cramped.

Another factor for high real estate values is whether you are a financial center. Is your city a crucial outpost to doing business in the region - HK, Shanghai, Singapore, Tokyo, Mumbai, New York, etc... KL is neither here nor there. What about Bangkok? Well, it has a super duper population (have you seen the weekend exodus from Bangkok every Friday). Even though it is not a financial center, it the the center for a country with a decent population size. If your capital city is the center of a country with a decent population, you can be assured of good commercial real estate values - e.g. Thailand, Taiwan, South Korea. We need Malaysia to move quickly from 26 million to at least 60 million. Then you can have some good ripple on effect on real estate values.

If you are not a financial center, you can still command high rates if high-value services businesses are aplenty. Hence Singapore's commercial real estate will have a very strong long term uptrend as it does not depend on its reputation as a financial center/port/MICE biz like HK but moves higher up the value-added curve by encouraging designers/inventors in animation, biotech, education, etc. Does KL look like a city with good high value added industries?

Good amenities and public infrastructure would not be a bad thing, look at Tokyo, HK, Singapore or even New York - but infra is not crucial in giving higher real estate values. If you look at the capital cities of the high GDP per capita countries such as Oslo, Amsterdam, Stockholm, etc.. you will find that good infra is a good thing but not necessarily stratospheric real estate prices.

Lack of good quality commercial space will also spruce up real estate values. Just look at Indian cities, cities in Vietnam or even Jakarta. We in KL, unfortunately builds okay buildings cheaply as land is cheap and plentiful. I mean, KL commercial just keeps getting drawn wider and wider. First the CBD, then the city kind of move wider to include PJ, then it moves out to Shah Alam, now Klang. Too much cheap flat land.

So, commercial real estate value in Malaysia will lag the rest of Asia, even some cities in Vietnam (my gawd), and it will not change until the fundamentals change. The only exciting part for Malaysian real estate is residential, and you know how people get crazy with houses, every now and then, good houses in good locations will have its own bull run. The rental yields never match the house prices - but hey, who the heck cares. Commercial and retail, fergedaboudit!