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Are You Designing Your Investment Portfolio for a Crisis? [30-11-2017]  
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In the recent weeks, there have been many reports surfacing with regards to the severity of situation of the property market. Sometimes, I feel that Malaysia lacks the transparency needed for people to understand the developments and movements in the market.

Is it important? Bank Negara has sent a very clear signal out.

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“There is too many unsold unaffordable homes and vacant commercial space,” says the central bank.

Bank Negara has characterised Malaysia’s property market as one with an oversupply of non-affordable homes and idle commercial space.

The central bank’s recent quarterly bulletin indicated that Malaysia had an undersupply of affordable homes.

“This situation could worsen if the current supply-demand conditions persist. Within the country, Johor is poised to have the largest property market imbalances (highest number of unsold residential properties and potentially the largest excess supply of retail space),” it added.

If you have been asking how is this possible, and what has happened to create such a situation, then I would say that you have either just entered the market or been staying under a rock.

The fact remains, all indications in the past has shown that we have been in a property bull run for a while.

As early as 2013, Bank Negara has been signalling us of an overheated economy. Household debt versus GDP is a basic measurement of Malaysia’s credit situation.

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While it is healthy to have a ratio of about 65%, Malaysia started to experience usually higher debt ratios within 80% since 2012. Last year, we stood at 88.4%, making us having the highest ratio in South East Asia, till this very day.

What does this mean? It means we are in a Credit Bubble.

Since 2012, we have been taking too many loans, 57% of which were property loans. It also means that today’s oversupply was created since 2012, which accumulated until today.

According to Bank Negara, the number of unsold residential properties is currently at a decade-high, primarily due to a mismatch between new housing launches and what households can afford to pay.

The central bank’s quarterly bulletin said there were 130,690 unsold residential properties as of the first quarter of this year.This is close to double the historical average of 72,239 units per year between 2004 and 2016.

Making matters worse was the fact that median household income was increasing at a slower rate than median house prices.

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If you are hoping that other property sectors are to bring a ray of sunshine onto the topic, I guess I am going to disappoint you with more rain and thunderstorms.

Both the commercial as well as the retail sectors are signalling a substantial oversupply with vacancy rates skyrocketing.

Our commercial vacancy spaces are three times more than the regional average, holding at 18.1% as compare to the regional average of 6.6%. Please, let’s not talk about the further incoming supply of 38 million sq.ft. of office space.

The central bank is projecting a record vacancy rate of 32.8 percent by 2021 – surpassing that of the levels seen during the Asian Financial Crisis. In other words, if current supply-demand dynamics persist, 1 in 3 offices in the Klang Valley could be vacant in 2021.

There is also an oversupply of shopping complexes, with 140 new shopping complexes scheduled to be completed by 2021 across the Klang Valley, Penang and Johor.

The central bank also said that Penang has the highest retail space per capita in the country (10.5 sq ft per person), followed by the Klang Valley (8.2) and Johor (5.1) in 2016. In higher-income regional cities such as Hong Kong and Singapore, prime retail space per capita is only at 3.6 and 1.5 respectively.

Stripping down the facts and summarising the reports from Bank Negara, I would conclude that we are not doing too well. With a high volume of supply and vacancy rates across the board in all major states, I would say that we are extremely exposed and highly vulnerable towards a bust in the market, should the economy tilt towards the worst. It could also mean that our property sector could be the fault of an economic downturn.

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Let’s pause for a moment, take a deep breath to take all this in, before we exhume a big SIGH…

So, what do we do?

I would be a good investor. Start to sharpen my knives, start to batten down the hatches and get ready for the stormy seas by being a much better investor than anyone else.

While anyone can claim themselves to be the best investors in a calm sea on a bright sunny day, not all will be ready to battle 10ft. waves pounding on your ship, with dark stormy clouds and constant rain. However, this is where the best of us shine, and this is where I thrive for the moments.

 

Though I may not claim to be the best investor in today’s market, I can safely tell you that I was born an investor during the last crisis and have been yearning for times like this when the foolish drowns and the wisest of us weather the storm and get the biggest catch of our lives.

The only advice I can give to those who are seeking solace is to have prepared yourself years ago; clean out your portfolio, skill yourself up and gain the necessary experience to take on the market to come.

 

Source:BUSINESS TIMES
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