Growth with a caveat in Sarawak

Focus MALAYSIA WEEKLY ISSUE 054

THE WEEK OF DECEMBER 14 – DECEMBER 20, 2013

Affordability, labour shortage and uncertain global economy could dampen the otherwise bright prospects for commercial property in a fast-developing state

Sarawak’s commercial property market is seeing encouraging growth as the state’s economy picks up over the next few years.  However, the prospects do come with a caveat as affordability, labour shortage and the uncertain global economic outlook loom on the horizon.

Overall, the prospects are good as the business community is growing every year with the state developing at a faster pace, expected to be further boosted by the implementation of projects for the Sarawak Corridor of Renewable Energy (Score).

Concentrated in the central region of Sarawak, these Score opportunities and the increase in domestic demand due to natural increase in population and increasing wealth would be the major growth drivers.

Property consultant group CH Williams, Talhar, Wong & Yeo Sdn Bhd WTWY observes that the moderating trend against a backdrop of positive outlook is especially true of the commercial segment.

“The market is still trying to absorb the last two years’ new launches which are completed or nearing completion this year.  Until these are taken up and occupied, there will be a time lag before the commercial sector picks up again.

“In addition, stringent financing guidelines and inflationary pressures have not helped,” says WTWY director Yip Phooi Leng.

Sarawak Housing and Real Estate Developers’ Association (Sheda) notes that the industry at large has been fortunate in the last few years as raw materials are pegged at world prices.

“The US, Europe, India and Chian have cooled down and (prices of) building materials have stabilised in the last two years,” notes Sheda secretary-general Sim Kiang Chiok.

“We foresee that next year should be alright but maybe after that if the US picks up, then India and China will pick up as well and building material prices will go up again.

“With all the quantitative easing (QE) that is happening now such as bond buybacks and such, it might cause inflation and might affect us.  We do not know yet but there could be a downside.”

Focusing on the local market, Sim notes that market forces rule in a free economy, leaving the dynamics of how much rental a property can fetch, how much yield and the foreseeable appreciation of the property to justify today’s prices of commercial properties.

Giving an example, he said the price of RM1.2 mil for a shophouse raises the questions of how much rental an investor can get and how much one can sell it for in 5 to 10 years.

A commercial property worth RM1.2 mil fetching a rental of RM6,000 per month (or RM72,000 per annum), gives a yield of 6% which is higher than the fixed deposit rate.

The income from the rental as well as gain from the increasing appraisal value of the property should serve as strong motivators to leave the money in the shophouse rather than in the bank.

Yip adds that affordability is definitely a growing concern among buyers due to the high rate of property price increase especially in the last five years.

“Calculated against the current household income, it would seem that the average medium-cost house in urban and suburban areas is beyond reach.  Household income has not kept up with inflation,” says Yip.

“Stringent financing guidelines from Bank Negara (BNM), increasing land costs, higher conversion premium, almost non-existent ready buyers (due to limited market), competition in terms of locality and price are added challenges.

Yip notes that the government has come up with housing schemes and programmes such as PR1MA to assist the people, especially the younger population, to own homes.

“However, it remains to be seen whether these programmes will reach their intended target groups and whether supply will match demand.  There has been a lot of mismatch in the past,” she points out.

FocusM’s checks with real estate agents show that the scenario on the ground is fairly challenging in a “tough market” as land zoned for commercial properties is notably more expensive than residential land, no thanks to administrative costs and appraisals.

In addition, tougher lending guidelines have led to a diminished rate of approvals of loans from lending institutions as the financed amounts are many times that for residential properties.

Given the mean household income growth of 6% for 2012 in Sarawak (compared to the national average of 7.2%), the average individual buyer is seeing increasing pressure in terms of property affordability when measured against high net worth individuals and companies.

The 7th Mile Gateway commercial centre by
Travilion Group

Yip further notes that the increase in fuel price with effect from Spet 30 will surely have inflationary effects on goods and services which will affect the demand from end-users.

Likewise, it will affect construction costs which will further push up property prices and hence impact sales.

However, the extent of the impact of this fuel price hike on property will be fully realised only in the coming year as it is still too soon to tell, she says.

  

Demand for shoplots in prime areas

Sim does not see affordability issues with traditional shoplots as there is still healthy demand in prime areas.

There are not many shophouses being built in secondary locations that cannot find takers and there are no abandoned shophouses in Sarawak with the exception of one case, to his knowledge.

New shopping complexes in Kuching such as The Spring, Boulevard and Merdeka Plaza are still doing very well while older malls like Sarawak Plaza would have to re-invent themselves by either doing a makeover or become specialised centres.

Photo of old ones

Citing an example of a traditional complex, Sim says Wisma Hopoh on Jalan P Ramlee which opened in 1984 is doing well with high rental rates and none of the tenants are willing to move out.

Commercial units at the relatively new Summer Mall in Kota Samarahan are also doing very well because the mall is the only one in the area and enjoys far less competition as there are no recreational facilities in the vicinity.

New shopping complexes in Kuching such as
Plaza Merdeka are doing very well

In terms of growth, the central region of Sarawak (Bintulu  and Mukah in particular) will certainly see high growth due to the implementation of mega projects, with the former having record increases in property prices and rentals.

“Samalaju, the designated industrial area for heavy industries under the regional development plan of the 10^th Malaysia Plan, is geared for much anticipated growth,” says Yip.

“Development in these areas will have a positive impact on property projects in these areas, Samarahan, the district adjacent to Kuching, has also recorded unprecedented growth in the last few years.

“Due to its close proximity to Kuching, the population increase and property demand has spilled into Samarahan which now enjoys a high rate of property construction,” Yip adds.

Inside Investor says apart from being boosted by large-scale property developments, the property market in Sarawak is also likely to grow on certain trends, such as rising demand for green buildings.

Green components include the use of solar-powered lights and heating as well as recycled water, all of which are more viable in Sarawak owing to its abundant solar energy and water resources.

A green building can allow its owners to save 10-20% on energy consumption which is a good hedge against rising energy costs while also being in keeping with the global trend of pursuing sustainable energy practices.

Unlike the rest of Malaysia which will see a hike in electricity tariffs effective Jan 1, Sarawak has been exempted and as such, property investors and tenants alike will not see higher operational costs from electricity usage for now. FocusM

Score’s double-edged sword

SARAWAK’s property developers and construction players are seeing a labour shortage that resulted from a surge in demand for construction activities for projects under the Sarawak Corridor of Renewable Energy (Score).

Sarawak Housing and Real Estate Developers’ Association (Sheda) secretary-general Sim Kiang Chiok tells FocusM that the “pull factor” from Bintulu is being felt in Sibu and Kuching.

Bintulu has a huge demand (for labour) with better pay and better benefits.  Sheda is for the government opening up the channel for more foreign workers to help alleviate the shortage during this period.

“This is especially when there is a lot of construction work going on in Bintulu and Samalaju Industrial Park (SIP) that will create a shortage in the construction sector and affect all member developers,” he points out.

Sim notes that the Sarawak state government has taken steps to open up markets for workers from Indonesia and the Philippines and they are coming in to Bintulu for the construction industry.

Some 20 factories are in various stages of operation in SIP, and this is creating secondary industries in Bintulu.  With a growing workforce in the area, Shim expects to see an impact on the price of houses.

He opines that an individual with a certificate or diploma can be employed as a supervisor with a starting salary of RM1,200 per month, “so we cannot blame Malaysians for not wanting to do manual labour”.

“Somebody has to do the manual work so we have to allow foreign workers to come in.  eventually, their countries (economies) are going to be as good as Malaysia’s, so who is going to do the manual work?” he asks.

That said, he observes that the spillover effect of Score will also be felt in Kuching and Sibu, although they are far away from Score in central Sarawak.

As Kuching is the state capital and houses government departments and agencies, Score factories would probably have a regional branch or coordination office in Kuching for administrative purposes.

Some of the high-ranking administration staff from the (mostly international) investor companies in Score may want to be based in Kuching to enrol their children in international schools there, Sim explains.