Problems on Penang? Possible oversupply with new developments

Close to US$10billion in developments have been planned for picturesque Penang island

Malaysia’s Penang island has seen a surge of planned projects over the next 10 to 15 years worth RM29.6 billion (US$9.9billion), but some have raised concerns over the ability of the market to sustain this.

Over 1,121.56 acres of land, including reclaimed land, will hold the properties, according to The Star Online.

Some of the projects include Eastern and Oriental Bhd’s second phase of the Seri Tanjung Pinang project in Tanjung Tokong, which will include two islands comprising 740 acres of reclaimed land.

It is expected to take two years from the start of reclamation before the project can be launched and a further 10 to 15 years to fully develop the land, said E & O deputy managing director Eric Chan in a report.

“Within that time, with Penang continuing on its present growth path, the demand for better residential properties and lifestyle amenities is expected to be generated,” he said.

Other projects include 35 acres by Ivory Properties Bhd; 103 acres by IJM Land Bhd; approximately 95 acres of development by Mah Sing Group Bhd; and close to 600 units on 81 acres by Sunway City Bhd.

Approximately 70 per cent of the planned developments are residential.

Yet, even at current levels of purchasing, which is the highest it’s been in years, observers said it would take 10 to 11 years to up take all of the properties.

According to Real Estate & Housing Developers’ Association (Rehda) Penang chairman Datuk Jerry Chan Fook Sing, this is a long time.

“A RM21billion (US$7billion) GDV (gross development value) is a lot for the market to absorb even if the period of uptake were to be extended to 15 years.
“The planning and the launch of the projects must be timed to suit demand, although the demand of properties would be higher in certain areas of the island.

“But of course if the economy continues to be good and there is consistent or increasing demand, there should be no problem for the new launches to be absorbed in a shorter period of time.

“If Penang can continue to re-invent itself in the economic sphere, then it can draw people from other states to Penang to work.

“This migration could serve as the source of demand for the future property launches and create a higher population as opposed to normal birth rates,” Fook Sing said.

The oversupply of new property could have a downward effect on prices on the island, according to registered and chartered valuer C.A. Lim & Co. owner Lim Chien Aun.

“As it is, the bulk of properties purchased over the past five years were for speculation purposes.

“When the holding power is gone, the speculators will have to release the properties into the market. Add that to the supply of new launches, there will be an oversupply situation.

“Developers must identify where their markets are coming from carefully and release the new launches according to demand,” Lim said.

Lim said for the past five years, the return on investment (ROI) for properties on the island had dropped by 50 per cent, while the value had increased by about 100 per cent. This is something that had gone unnoticed.
“The ROI is worsened by the fact that Penang properties generate very low rentals. If the ROI keeps decreasing, as property values increase correspondingly, then no one would buy property in Penang for investment purposes.

“The property market in Penang would then become purely speculative in nature,” Lim said.

Lim added that there was also the affordability factor.

“To purchase a high-rise property priced above RM300,000 (US$100,553) on the island, the buyer’s monthly household income would need to be between RM8,000 and RM10,000 (US$2,700 – 3,400).

“The bulk of wage earners in Penang do not fall into this income bracket. Where would the demand for future property launches come from?” he said.

Sunway City general manager Tan Hun Beng said the volume of properties planned for launch raised the question whether developers had done enough research and analysis on market demand.

Chartered valuer and property consultant Azmi & Co (Penang) Sdn Bhd managing director Chandra Mohan Krishnan said the RM21billion (US$7billion) GDV of residential properties was a lot to absorb over a 10 to 15 years period.

“If there is no demand, there may be downward pressure on property prices. However, the value of landed properties on the island should be able to hold on, as they are becoming scarce,” he said.

IJM Land (north) general manager Toh Chin Leong said it was important for developers to build a balance mix of residential and commercial properties.

“Commercial projects are important to attract the movement of labour to Penang, which will provide demand for housing. This is why a large portion of our second phase on 103 acres comprises commercial projects such as hotels, corporate offices, and retail outlets.”

Penang Master Builders and Building Material Dealers Association immediate past president Datuk Finn Choong said the reclamation works would generate demand for workers and jobs for local contractors.

“We can see positive benefits for Penang even before the launch of the new properties.

“The reclamation activities would bring in foreign labour to Penang which would generate economic spill-over effects for the state, as the workers would have to spend money on rentals and food. On paper the number of new projects seems a lot.

“However, if the Penang government can continue inspiring confidence in investors and manages well the expectation of Penangites, the state can draw migration from different income groups into the state that can support the new properties planned,” Choong said.

Henry Butcher Malaysia (Penang) director Dr Teoh Poh Huat said Malaysia’s population stood at 28.3 million with an average annual growth rate of 2 per cent.

“Being a young population, 67 per cent are between 15 and 64. Nearly everyone will be making decisions about where to live, work, shop and play, with real estate as the major key component for the next 20 years.

“It is important to know a great deal about where they reside, educational backgrounds, family composition, incomes, and whether or not they work. Consequently future real estate needs can be anticipated,” Teoh said.

On the infrastructure supporting future development, Penang Chief Minister Lim Guan Eng said international contractors from several countries have indicated that they are interested to build four major road projects in Penang.

Lim said the contractors were from China, Singapore, Hong Kong, Japan and South Korea.

He said the state government would invite those interested to bid for the projects via request for proposals (RFP) by the end of the year.

“The RFP will be out at the end of the year. It will take another six months before the contracts can be awarded to the successful bidders,” Lim said in an interview recently.

The proposed projects are the 4.2km Gurney Drive-Lebuhraya Tun Dr Lim Chong Eu bypass, the 4.6km Lebuhraya Tun Dr Lim Chong Eu-Bandar Baru Air Itam bypass, the 6.5km Penang-Butterworth Tunnel, and a 12km proposed road connecting Tanjung Bungah and Teluk Bahang.