Property
Lack of stimulus to tame rising construction costs
Aliff Yusri 
Ng says the government has done nothing to address the issues raised by Rehda and other stakeholders
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THE property segment saw few incentives in Budget 2018 despite its central role in national housing and multiplier effect on the economy. Developers and contractors expressed their disappointment in the measures that were announced.

“From a developer’s point of view, there’s nothing the government has done to address the issues raised by the Real Estate & Housing Developers’ Association [Rehda] and other stakeholders,” says Rehda Institute chairman Datuk Jeffrey Ng.

Common concerns raised by industry players include the rising costs of labour, materials and equipment, stringent lending guidelines by banks, high entry barriers for foreign investors and affordability issues.

“Budget 2018 was targeted at specific beneficiary groups, and I think it's fair to say that nothing was provided to relieve Malaysians of the rising construction costs,” Ng says.

 

Uphill battle

Rehda deputy president Datuk Soam Heng Choon says a weaker ringgit has seen a rise in the price of imported materials, particularly steel bars, since an import levy of up to 13.9% was imposed on the item earlier this year.

“Within a year, the price of steel bars has risen from RM1,700 per metric tonne in October last year to a peak of RM2,600 in September,” he says.

Implemented in April, the duty on steel concrete reinforcing bars is effective for three years but will be reduced to 12.27% on April 14, next year, and 11.1% on April 14, 2019. Soam notes that labour costs have gone up as well, with wages for a general worker now reaching RM50 per day and that of a bricklayer RM120 per day – up from RM100 six months ago.

Other challenges include maintaining tariffs on the heavy construction machinery required to catalyse industrialised building system (IBS) uptake. IBS is seen as critical in raising the construction sector to be on par with international standards due to the emphasis on offsite component production and reduction of manpower requirements.

“The industry needs more heavy lifting equipment to encourage IBS adoption, and the Master Builders Association Malaysia has fought for the reduction of taxes on these items.

“However, this issue was not addressed in the recent budget, despite the national drive to promote IBS uptake,” says its president Foo Chek Lee.

The industry needs more heavy lifting equipment to encourage IBS adoption, but Budget 2018 did not address this, says Foo

While duties on some categories of machinery were revised from 10% to 5% on June 11, 2015, other categories such as crane lorries and excavators are still subject to import duties of up to 30%.

On the financing front, Budget 2018 extended step-up financing guidelines introduced for the 1Malaysia People’s Housing Programme (PR1MA) to private developers (see sidebar).

However, Alliance Bank Malaysia Bhd chief economist Manokaran Mottain defends Bank Negara Malaysia’s tight grip on loan regulations as a way of curbing household debt.

“The heart of the matter is income. About 30 years ago, fresh graduates were paid RM1,000 a month. Based on inflation, that figure today should be closer to RM3,500, but how many employers pay that much?” he says.

Household debt growth this year slowed to 5.2% in Q1 – down from 5.4% in Q4 last year, says Bank Negara.

 

Changing market

Rising costs highlighted by industry stakeholders come amidst persistent calls for more affordable housing for first-time purchasers and the B40 segment, as well as dampened sentiment due to end financing issues.

The B40 demographic comprises the bottom 40% of households by monthly income. This is defined by the Department of Statistics as below a median of RM3,000 per month.

The calls have seen developers adjusting their strategies to target the lower and middle tiers of the property segment, addressing an existing market mismatch which saw a disproportionate number of launches catering to high-end luxury projects.

“Over the past two years, the private sector started rolling out more products in the affordable range despite lower margins, as developers catered for growing demand from younger purchasers to survive the downturn,” says Ng.

However, he anticipates long-term issues with the entry of more local players into the affordable segment, due to the presence of numerous national housing schemes with the same target market.

“Rehda Institute foresees potential issues when it comes to competition, as developers play in the same space as schemes like PR1MA, RumaWIP and Rumah Selangorku, which sell homes at subsidised prices.

“If the private sector tries to go to market against these prices, you can already guess who is going to win and who will lose,” says Ng.

Dubbing it an “unlevel playing field,” he notes that the trends spell tougher times for a property segment that’s already taxed by rising costs and lower margins in the affordable space.

However, he says a consolidation period where the number of small to mid-range developers decreases via mergers and acquisitions is unlikely.

Budget blues for developers

The recent Budget 2018 announcement came with several measures targeted at specific areas of the property segment, particularly affordable housing, step-up financing and the rental market.

However, the measures did little to address the rising costs highlighted by industry stakeholders, with Credit Suisse Malaysia managing director Stephen Hagger dubbing the Budget a “non-event”.

In addition, the absence of measures designed to address stringent lending guidelines and flagging demand at higher market tiers has disappointed industry stakeholders who say they are already taxed by rising costs. This dashes hopes of an upswing in the segment next year.

Budget 2018 as tabled included the allocation of RM2.2 bil for various national housing initiatives.

This included PR1MA, People’s Housing Programme (PPR) and People’s Friendly Home (PFH).

These funds will go towards constructing 210,000 homes under PR1MA, 17,300 units under PPR and 3,000 units under PFH – all priced under RM250,000.

Additionally, resident individuals will be eligible for a 50% tax exemption on rental income not exceeding RM2,000 from assessment years 2018 to 2020.

This will alleviate some concerns regarding rental prospects as high-rise oversupply issues affect hotspots such as Johor.

Other budget measures include the extension of PR1MA’s step-up financing scheme to private housing developers, allowing purchasers to withdraw from Account 2 of their Employees Provident Fund while paying instalments only on the interest portion of their loans for five years.



This article first appeared in Focus Malaysia Issue 259.