An Anatomy of a Property Bubble: Case Studies On Malaysia, Singapore, the UK and US

As I laze around in my castle on a Sunday afternoon, my mind wandered into the phenomena I am seeing in Johor Bahru, Kuala Lumpur, Singapore, London, and a dozen US cities. In Asia, property prices are shooting through the roof, governments are struggling to contain the spiraling prices in order to placate the angry masses who have been priced out of the markets, and to rein in inflation which threatens real GDP growth. In the west, property prices are still sluggish, with some cities just turning around from the decades low prices. The rich in Asia are flocking to western gateway cities, buying newbuilds, which gives rise to interesting opportunities.

I attempt to analyse various markets, hoping to make sense of the patterns that lay in front of us.

Johor Bahru

Luxury New builds

This is obviously a two tier market. Singaporeans are flocking to buy newbuilds along Nusajaya, Danga Bay etc. I would say that 70-80% of the capital gains are over. 2H 2012 is the tipping point. Singapore started to announce increasing number of investments in Iskandar. With the completion of Legoland in dec 2012, Singaporeans' worries all but disappeared.

However, I dare say that I will NOT pay over RM650 psf for condos in Iskandar. JB's average income is 1/3 of Singapore's. If a Woodlands condo that is freehold is selling for S$1k psf, I will pay no more than S$333 psf for a condo in Iskandar. Don't forget that Woodlands already has an MRT whereas Iskandar is just TALKING about building an MRT in the distant future. There is no way that an undeveloped place like Iskandar can sell at 1/2 the psf of Singapore.

My guess is that 3/4 of the newbuilds that Singaporeans bought are over priced, or priced at 2017 levels. This is a bubble to me. It means that the majority of these condos will not see much capital appreciation until 2016/27, and thereafter underperform the Malaysian average.

The buld of these landed and condos will be completed in 2015 - 2017. Many of them will find it difficult to find tenants who are willing to pay the 180 bps spread above borrowing cost when TOP. For example, by 2015, if borrowing costs rise to 5.2% from 4.2%, will owners be able to get a gross yield of 7%? A condo in Ujana is asking for RM800k for a 1k sf. The asking rent is around RM3 k. It's works out to only 4.5% gross yield. This is a completed project so I can gauge the "real value" of a property this way.

My guess is the resale market for the majority of newbuilds sold to foreigners above RM650 psf will lose money. The resale market will dry up. By 2016, if borrowing costs rise above 6%, a small number of foreign owners will dump their properties at a loss. The majority will hold and either shift to iskander to live in them or suck up their losses.

Now for the best case scenarios for these luxury newbuilds? For Iskandar to become a hot investment ground, it has to become a "Singapore", or "Monaco". This requires a lobotomy of the Malaysian government and its people's mindset. There must be greater transparency, better enforcement of laws, honoring of contracts, less corruption, and a total revamp of the bumiputra laws. Affirmative action must be replaced by meritocracy and social safety net that is not race or religion based. Can I see this happening? Not in this decade. That's why this is an optimistic scenario. Under this scenario, the rich and famous the world over will invest, start business and live in Iskandar. The spanking luxury apartments will be well maintained. Resale price data will be transparent for investors to see. Only then will cap rates fall even further for luxury apartments.

If you take a drive around Iskandar, you will notice that there is indeed a lot of land. There is so ,uch land that I cannot see the need to buy condos unless it is for security sake. Developers can keep selling newbuilds to cater to the insatiable appetites of Singaporeans , Japanese and other foreigners. It will definitely be a very tough buy-to-let market in future.

Town planning also leaves a lot to be desired. Medini, Puteri Harbour , Danga Bay, Core central JB. where exactly will the centre of Iskandar be ? Malaysia is filled with small towns, like Bukit Indah, with no industry other than for workers to live, and shopping malls after malls. If you place your bets wrong, you could end up in the middle of nowhere, with a mall that is empty. The developers love to hit and run. They build many malls, sell the strata shops and offices, sell the condos and run. The maintenance is in shambles. If an MRT line eventually fails to stop near your condo, how will your prices fare? For is reason, I'd prefer to go for the mature towns where everything is built up.


Better opportunities in resale market and other asset classes

Now the rush of newbuilds sales will not benefit the general population. Ony the agents, and the developers will benefit. The shopkeepers, food sellers will benefit only if more foreigners actually live in iskandar. Right now the population growth in Iskandar is below 2% per annum, or less than 34k of people per year. This translates into only 8.5k of nett new dwellings per year.

The wealth effect or trickle down will be slow. It could be hastened by land being used to build luxury apartments that will be unoccupied instead of being used to build housing for mass market or for affordable homes.

A lack of supply for mass market homes may result, which means those homes priced from RM200-650 psf may start to rise. I especially like resale market because of the following reasons:

1) you see the actual quality of the condo after it's been built.
2) there is no risk of the developer defaulting
3) what the heck, all newbuilds become old over time

The gross yield should be at least above 6% to make it worthwhile. I believe many core JB town condos and landed provide this type of yields. The problem is foreigners cannot buy houses below RM500k. Perhaps landed homes are a better bet, if you can take the security risks because many of these landed homes are non gated.

Kuala Lumpur 

My take on KL properties is similar to JB. I don't think there's much value in buying newbuilds. In fact, and I know developers will hate me for saying this, the same problem of overpricing occurs in most countries. It's like buying a new car versus buying a one year old car. The difference between a new car and a one year old caris almost 30%!!

I believe the oversupply situation in KL is as acute in Iskandar. The high speed rail will encourage more people to commute to work instead of renting or buying in Singapore. It is like what Shenzhen does to Hong Kong. But if you look at hong kong's property price now, the gap with Shenzhen is widening again.

There is even less upside for KL properties because I believe most of the FDIs are heading to Iskandar.