Demystifying the property market overhang

AN account­ant, who is tasked with pre­par­ing the books of a cor­por­ate, will always be guided by account­ing prin­ciples when it comes to how the fin­an­cial state­ments of the com­pany are presen­ted on an annual basis to ensure they are accur­ate and reflect­ive of the com­pany’s busi­ness affairs.

An aud­itor, look­ing at the same pre­pared accounts, will run through the num­bers and audit the key mater­ial items to ensure they are reas­on­able, reflect­ive of the com­pany’s fin­ances, and free from mater­ial mis­state­ments, includ­ing due to fraud or error, or applic­a­tion of wrong account­ing treat­ment.

In fin­an­cial state­ments, two of the most crit­ical items are receiv­ables and invent­or­ies.

In order to have proper account­ing treat­ment, account­ants and aud­it­ors used account­ing the­or­ies to describe what is deemed to be cur­rent, and those that have a longer-dated age­ing pro­file are either impaired or writ­ten off.

The reason for this is to ensure that the fin­an­cial state­ments reflect the status of a cor­por­a­tion’s cur­rent assets and are in no way doubt­ful.

There is also an applic­a­tion of gen­eral pro­vi­sion or spe­cific pro­vi­sion when it comes to how these bal­ances ought to be treated in the fin­an­cial state­ments.

Often, we see cases of over-inflated bal­ances and when it came to the crunch of the mat­ter, the man­age­ment would have no choice but to write them off.

The ‘real’ over­hang

At the recently con­cluded 15th Malay­sian Prop­erty Sum­mit 2023, the Dir­ector of the National Prop­erty Inform­a­tion Centre (Napic) presen­ted a paper on the status of the Malay­sian prop­erty mar­ket up to the third quarter of last year (3Q22), with some data points related to the per­form­ance of the mar­ket up to Novem­ber 2022.

The full mar­ket report is only expec­ted to be released in the middle of next month, where Napic will not only provide the usual annual update of the mar­ket’s per­form­ance but also provide more insight into some of the key data points that have been much dis­cussed among all stake­hold­ers, of which, one of them is the status of over­hang in the mar­ket.

As we are aware, the res­id­en­tial over­hang at the end of 3Q22 stood at 29,535 units worth some Rm19.95bil.

Napic’s web­site also provided the details of where these over­hang prop­er­ties are loc­ated and the three key states – Johor, Selangor, and Pen­ang – are the main hot­spots, account­ing for some 14,956 units or just over half of the coun­try’s total over­hang.

In terms of the type of prop­er­ties, the 3Q22 data showed that high-rises com­prise 18,962 units or 64.2% of the total over­hang.

In terms of price points, 23.8% of the total over­hang was priced at RM300,000 and below, 29.5% was priced between RM300,001 and RM500,000, 31.6% was priced between RM500,001 and Rm1mil and the bal­ance was priced above Rm1mil.

In terms of the total value, the res­id­en­tial over­hang is skewed towards the high-end seg­ment with prop­er­ties worth more than Rm1mil account­ing for 43.4% of the total over­hang value, while those priced between RM500,001 and Rm1mil accoun­ted for 31.9% of the total over­hang.

Prop­er­ties priced between RM301,000 and RM500,000 have a total over­hang value of just Rm3.5bil, while prop­er­ties priced below RM300,000 are worth some Rm1.39bil. These two rep­res­ent some 24.8% of the total over­hang value.

For the ser­vice apart­ments, the total over­hang in units stood at 23,688 worth some Rm20.21bil as at end of 3Q22, with Johor alone account­ing for 62.4% of the total.

Most of these over­hangs in the seg­ment are prop­er­ties priced between RM500,001 and Rm1mil, which accoun­ted for two-thirds of the total unit num­bers and 58.9% in value of the total over­hang.

For the longest time, Napic had not shared with the stake­hold­ers the key under­ly­ing age­ing pro­file of this over­hang, and that has led to a mis­lead­ing status of the mar­ket’s over­hang status. It was indeed an eye-opener to see what the real over­hang has been.

For example, as seen in Table 1, the key over­hang is prop­er­ties (both res­id­en­tial and ser­vice apart­ments across the four key states) that have been part of the stat­ist­ics for the last five years and they account for between 51% and 93% of the total over­hang units.

For example, as seen in Table 1, the key over­hang is prop­er­ties (both res­id­en­tial and ser­vice apart­ments across the four key states) that have been part of the stat­ist­ics for the last five years and they account for between 51% and 93% of the total over­hang units.

In total, these prop­er­ties accoun­ted for a whop­ping 75.7% of the mar­ket’s over­hang status while prop­er­ties that have been in the mar­ket for the last three years are just over 5% from the key states.

Spe­cific men­tion must also be made on ser­vice apart­ments loc­ated in Johor, and those that are in the five to 10 years bucket, as they account for 26% of the total mar­ket over­hang.

In terms of prices, most of the over­hang is seen in the same five to 10 years bucket across the board and they alone account for 71% of the total over­hang prop­er­ties in the mar­ket.

As seen in Table 2, prop­er­ties below three years account for less than 5% of the total mar­ket over­hang. Spe­cific men­tion must also be made on ser­vice apart­ments that are in the RM500,001 to Rm1mil bracket and are in the five to 10 years bucket as they account for 25% of the total mar­ket over­hang.

In the cor­por­ate world, when one is up against data that is dis­tort­ing the real pic­ture, the proper thing to do is to see whether the data is still rel­ev­ant or oth­er­wise.

Clearly, look­ing at the age­ing pro­file of the prop­erty over­hang, those above five years will likely remain unsold for a fore­see­able future, mainly due to either being wrongly loc­ated and without the proper or good infra­struc­ture to sup­port com­munity liv­ing, or untouched by prop­erty buy­ers for simply being too expens­ive, espe­cially those bey­ond the RM500,000 price threshold.

Clearly, look­ing at the age­ing pro­file of the prop­erty over­hang, those above five years will likely remain unsold for a fore­see­able future, mainly due to either being wrongly loc­ated and without the proper or good infra­struc­ture to sup­port com­munity liv­ing, or untouched by prop­erty buy­ers for simply being too expens­ive, espe­cially those bey­ond the RM500,000 price threshold.

Hav­ing iden­ti­fied the issues, reg­u­lat­ors and prop­erty developers would need to come out with strategies to address them and to attract buy­ers to these prop­er­ties via a rehab­il­it­a­tion exer­cise and with a sig­ni­fic­ant price reduc­tion.

The bot­tom line is to remove them from the over­hang data.

Let’s call a spade a spade

So what is Malay­sia’s real over­hang? Based on the data presen­ted by Napic, one can take com­fort that over­hang is not as ser­i­ous as it is made out to be mainly due to a lack of data and proper ana­lysis in terms of what is real over­hang pre­vi­ously.

While those more than three years but less than five years are part of stat­ist­ics, we should redefine them as core over­hang while those bey­ond five years can be redefined as hard­core over­hang.

As we have been able to slice and dice these num­bers, the real over­hang is only per­haps less than 5% of the mar­ket in terms of the num­ber of units and value.

Napic could also help stake­hold­ers to under­stand bet­ter the prop­erty mar­ket data bet­ter by break­ing down the data points as an over­hang that is mainly due to gov­ern­ment hous­ing schemes and those that are privately built.

In this way, we could also see whether the gov­ern­ment’s inter­ven­tion is needed to boost demand for these obscurely loc­ated prop­er­ties.

For the private developers, most of these invent­or­ies would have been impaired as the like­li­hood of the assets being real­ised in full value or even at 50% to 60% of the mar­ket value is seen as low.

Private developers too ought to think out­side of the box on how to over­come the prop­erty invent­or­ies sit­ting in their books as being part of the stat­ist­ics only res­ults in paint­ing the wrong pic­ture for the prop­erty mar­ket as a whole.

By Pankaj C. kumar is a long-time invest­ment ana­lyst. the views expressed here are the writer’s own. 

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