Post Budget Impact and Opportunities for the Property Sector

There is a window of opportunity from now until the end of the year in the secondary property market as higher Real Property Gains Tax (RPGT) rates will only take effect on 1 January 2014. The likelihood is that we are going to see an increase in sales volume in the secondary market but at lower prices, especially for those projects with Developer Interest Bearing Scheme (DIBS). 

Higher RPGT will have a negative impact but since the computation of the tax is based on the date the sale and purchase agreement (SPA) is signed, the impact might not be as severe if one is willing to wait slightly longer to dispose of a property. Typically, high rise residential projects take 36-42 months to complete. The impact will be greater on the landed residential segment as it takes about 2 years to complete but this segment is also a less speculative market.  

With the removal of DIBS, we are going to see fewer property transactions over the short term but we understand that banks have also been more cautious and gradually reduced their DIBS loan exposure over time. Hence, the impact would be less severe than initially thought. 

We think the increase in the minimum price of property that can be purchased by foreigners from RM500,000 to RM1 million could have a more significant effect as many developers have a large planned supply or units under construction to cater for both foreign and local buyers in the RM500,000 to RM1 million price range. Also, there is a higher proportion of speculative buyers in this price segment.   

The 6% Goods and Services Tax (GST) that takes effect from 1 April 2015 does not apply to residential properties but it does to commercial and industrial properties. In recent years, we have seen quite a number of mixed development projects under commercial land titles because they are more profitable. Most developers were building a large number of small units due to affordability. Residential land titles are regulated by density but commercial land titles are guided by gross floor area (GFA). Hence, there is generally no cap on the number of residential units. So residential developments under commercial land titles may not be able to claim GST paid for construction. This means that developers will face margin compression if they do not pass on the higher cost to buyers. However, the ability to pass on the higher cost will depend on demand conditions.

Next year, we can expect lower transaction volumes, lower prices due to lower demand, margin compression and lower profits for developers in a 2-3 year horizon. We think the market has priced in some of the negative news but clearly not all as few expected the severity of the measures announced. While stock prices are still resilient, we think it’s the calm before the storm. Most are still in a state of denial.   

More details on this article are published in The Edge this weekend.