Competitveness: Low Down Limbo

Let us read Lee Wei Lian's news article on the global competitiveness survey results just out.

Sadly, we are doing the limbo rock once more, falling by another 2 spots in the World Economic Forum (WEF) competitiveness index. We came in  26th out of 132 countries, with security, productivity and higher education identified as areas for improvement. How obvious given what is on the news, day in and day out!

This is the second year in a row Malaysia has dropped in the rankings after falling from 21st to 24th spot last year.

The WEF noted in its report, however, that the country’s four-year decline in the quality of institutions that pushed Malaysia from 17th in to 43rd has finally come to a halt, with the country remaining stable at 42nd place in that category this year.

“The main drag within this pillar remains the security situation (80th, up five),” said WEF.

“In order to improve its competitiveness further, Malaysia will need to improve its higher education system, with particularly low enrolment rates at the secondary and tertiary levels.”

The report also pointed out that Malaysia would be well-served by encouraging greater technological adoption — particularly the use of ICT — for productivity enhancements.

Malaysia’s aggregate score also remained fairly stable, up slightly to 4.88 from 4.87 last year.

Switzerland continued its reign as the most competitive country in the world, followed by Sweden, Singapore, US and Germany. Among the Asian giants, Japan climbed from eighth to sixth position, while China improved from 29th to 27th. Korea, however, fell from 19th to 22nd.

RAM Ratings chief economist Dr Yeah Kim Leng said that this year’s ranking will be a baseline to see if Malaysia’s transformation efforts will boost its competitiveness globally.

“Given that we launched the Government Transformation Programme (GTP) and Economic Transformation Programme (ETP), we should see ranking improve over the coming year,” Yeah told The Malaysian Insider. “If there is no improvement next year, that means we are not even harvesting any low-hanging fruits and we need to relook at policies.”

Yeah pointed out that the index was useful as it allowed Malaysia to assess its global standing.

However, he expressed concern that Malaysia’s ranking slipped even though initiatives to improve governance like Pemudah have been launched. So, are they calling our bluff?

“It shows other countries are improving and there is greater urgency to implement transformation initiatives quickly and arrest the continuing decline.”

He said that a look at the top ten most competitive countries confirmed that they had become developed by being competitive.

“The bottom line is we need to redouble our efforts to address the critical challenges,” he said. “Malaysia’s issues are long term structural challenges that require policy consistency to address.”

WEF said that Switzerland retains its first place position thanks to an excellent capacity for innovation and a very sophisticated business culture, noting that it is ranked fourth for its business sophistication and second for its innovation capacity.

“Public institutions in Switzerland are among the most effective and transparent in the world (fifth), receiving an even better comparative assessment this year than in past years,” said WEF. “Governance structures ensure a level playing field, enhancing business confidence; these include an independent judiciary, strong rule of law, and a highly accountable public sector.”

WEF said that Singapore’s institutions continue to be assessed as the best in the world, ranked first for both the lack of corruption in the country and government efficiency.

“Singapore also has world-class infrastructure (ranked fifth), with excellent roads, ports, and air transport facilities,” said WEF. “In addition, the country’s competitiveness is buttressed by a strong focus on education, providing individuals with the skills needed for a rapidly changing global economy.”

Japan continues to enjoy a major competitive edge in the areas of business sophistication and innovation ranked first and fourth, respectively in the categories.

“Company spending on R&D remains high and the country benefits from the availability of many scientists and engineers buttressing a strong capacity for innovation,” said WEF.

China’s two-place jump is mostly due to its better performance in the financial market (up 24 places to 57th) category, historically its weak spot.

“This is the result of easier access to credit and financing through equity markets, banks, and venture capital, which has been accompanied by a slight improvement in the perceived soundness of the banking sector (60th, up six places),” said WEF.

The US fell two spots to fourth place this year due to its deteriorating of its institutions, lack of public trust in politicians and concern about the ability of the government to maintain arms length dealings with the private sector.

“There is also increasing concern related to the functioning of private institutions, with a measurable weakening of the assessment of auditing and reporting standards (down from 39th last year to 55th this year), as well as corporate ethics (down from 22nd to 30th),” said WEF.

It noted, however, that the US still enjoys an economic structure that makes it highly competitive — including companies that are highly sophisticated and innovative, supported by an excellent university system that collaborates strongly with the business sector in research and development.

Responding to the report, Minister of International Trade and Industry Datuk Seri Mustapa Mohamed said while the ministry acknowledged there were a number of areas for improvement, it was happy to see the report highlighted a number of positive elements about the Malaysian economy.

Mustapa said Malaysia was also assessed to have a well-developed financial market development with ease of financing through local equity, ranked 11th from 15th previously, and ease of access to loans position at 10th.

“Venture capital availability, soundness of banks, transparent regulations of security exchanges have also contributed to financial market development in Malaysia,” he said.

On the concerns which contributed to the country’s slide, he said, the government has already launched nationwide initiatives to tackle them.

“Among the proactive measures to enhance Malaysia’s competitiveness are the New Economic Model, which emphasises achieving high income, the Government Transformation Programme to enhance government efficiency, and the implementation of initiatives under the 10th Malaysia Plan.

“As these initiatives begin to take effect, we can expect to see improvements in Malaysia’s overall competitiveness soon,” he said.

Diffuse the property bubble before it is too late

Jagdev Singh of the on-line STAR advocates diffusion. Property developers says, "No!". The controversy will rage on until a decision is made by Bank Negara Malaysia (BNM).

The subject of property prices and financing has gathered momentum ever since news broke that BNM is assessing the situation to determine if new measures should be instituted to cool down fast escalating property prices.

Lobby groups for the industry have been busy making their case heard, saying that any move to impose higher downpayments for houses would hurt the property market.

Their concerns come at a time as a growing number of people have complained that prices of houses, especially in the hotspots in the country such as the Klang Valley and Penang, are spiralling beyond affordability.

The last thing everybody needs is such speculation spreading to other areas where for the moment, speculative activity appears to be contained for the moment in the hotspots as 94% of houses sold in the country are priced below half a million ringgit and 85% of houses launched in the past nine months cost below RM500,000.

Dealing with speculation is tough and the last thing anyone should do is to make genuine buyers suffer, especially first time buyers.

Suggestions that houses costing below RM500,000 should not be subject to the new higher downpayment requirement makes sense.

Also first-time house buyers or owner occupied houses should be given the most ease of financing to allow them to fulfil the dream of owning a home.

It’s also hard to clamp down on speculative activity as the wealth creation process is an allure that developers, banks and policy makers might find hard to turn away.

After all, the money generated from flipping houses adds to the bottomlines of companies and the money in the hands of people could well filter down to other consumption activity that would go a long way to help spur economic activity.

But the profit from speculating activity, this time driven largely by cheap and ready financing, is unsustainable and history is full of examples of the dire consequences of a property bubble gone burst.

It’s then not surprising that the authorities in other countries in the region, where a property bubble has formed, are working hard to manage and diffuse the situation. Rules introduced in China, Hong Kong and Singapore are far more drastic that what the authorities here are reported to be contemplating.

In fact the new rules that are talked about are tame compared with what has been done in the past. In 1995, reports said that Bank Negara imposed a maximum 60% loan for residential properties priced above RM150,000 to put the brakes on the then fast rising house prices.

Furthermore, a real property gains tax of 30% was imposed on foreigners selling their properties irrespective of the holding period of the property.

Those measures were met with a huge hue and cry from the lobby groups, and developers who claimed that such draconian measures would maim the market. A couple of years later Malaysia entered its worst-ever recession, and as they say the rest is history.

The point is, just as the saying goes, those that fail to learn from history are doomed to repeat it, and for Malaysia, failing to deal with any property speculative bubble would spell trouble for the banks that have grown to rely more and more on households to drive their lending activity.

In the interest of financial stability and common sense, the move to act should be made soon.

Tobacco Tax Concern

It is obviously worrying to the tobacco industry but there are many who would want to government to tax' sin industry' to curb the unhealthy smoking habit.

Now, let us hear the apprehension form the biggest industry player  here in Malaysia.

The country's largest cigarette maker, British American Tobacco (Malaysia) Bhd (BAT) , said it would be worried if the government imposed an excise duty increase of more than 5 per cent on the industry this year.

The industry faces a possible excise increase under Budget 2011 as the government looks to increase its revenue and continue its health agenda.

BAT is not opposed to higher excise but wants any increase to be gradual and moderate as, otherwise, it would further fuel illegal trade, managing director William Toh said.

As it stands, the level of illegal trade in Malaysia is at its highest ever. Smuggled and counterfeit cigarettes accounted for 37.5 per cent of total cigarette sales last year compared with 14.4 per cent in 2004, Toh said.

Illegal cigarette trade here is the highest in the world, according to a Goldman Sachs global study last year.

"Anything above 5 per cent (in excise duty) would exacerbate the situation," Toh told reporters at a briefing yesterday.

BAT, which sells brands like Dunhill and Pall Mall, commands two-thirds of the cigarette market in Malaysia.

BAT is also lobbying, through the Confederation of Malaysian Tobacco Manufacturers, against a possible new form of tax on the industry.

It was reported last month that cigarette makers would have to pay half-a-sen for every stick sold as cess to the National Kenaf and Tobacco Board, starting this month.

BAT, however, has not received any formal notification on it as yet, Toh said.

"If cess is imposed, it will lead to higher prices for cigarettes and this will further lead to higher price differentials between legal and illegal cigarettes," he remarked.

It is the increasingly high price gap between legal and illegal cigarettes over the years - it stood at RM3.40 last year compared with just 30 sen in 2004 - that has led to a thriving illegal trade, he claimed.

As cigarettes become more expensive, consumers are more likely to gravitate to cheaper illegal products and the government then loses out on potential revenue, he said.

BAT and its rivals here, JT International Bhd and Philip Morris Sdn Bhd, have seen shrinking volumes as a result. The industry sold 14.9 billion sticks last year, about 10.8 per cent less than the previous year.

This year, assuming a moderate 5 per cent excise duty is imposed, like last year, and no cess, volumes will likely fall at a slower rate of between 1.5 per cent and 2 per cent, Toh said.

Well, it all depends on the government now. Collect more from industry sources in tax and lose out to illegal trade. Enforcement must be strict if they want to reduce smuggling. Otherwise, the 'healthy' culture that the government intends to cultivate will come to nought again!

So, what else is new in Bolehland?

Steps to check household debt

Sharidan Ali's article in the online STAR is worth reading if you hold too many credit cards.

" There are plans in the pipeline to impose stricter credit-card and personal-loan limits to maintain household debts in Malaysia at a healthy level.

According to a banking source, Bank Negara is said to be looking into elements of household financing and may come out with preventive measures.

Chatter within the financial circles reveals that such measures are to ensure that total household debt is kept under control and may see new and tougher limits on the number of credit cards a person can hold as well as a lower cap on how much a person can borrow as personal loan.

“The central bank is still in discussion on the matter and has not reached any decision yet. But, if it decides to implement the measures, it is all purely prudent and pre-emptive as the general non-performing loan ratio is still at a sound level,” the banking source told StarBiz.

The steps being considered are to prevent a build-up of household debt to gross domestic product (GDP), which stood at 76% or around RM516.6bil last year against 63.9% in 2008. The figure averaged around 67% from 2005 to 2008.

Checks with banks showed that the credit-card limit was at the banks’ discretion but first-time applicants were usually given limits of between 2.5 times and three times their salaries. And the credit limit was likely to be gradually increased based on payment history and usage.

For personal loans, the average limit is about four to five times a person’s salary. Some banks offer a flat interest rate of 10.5% while others give between 8.5% and 17%, depending on the loan amount and repayment period.
On average, the maximum amount for a personal loan is between RM100,000 and RM150,000 but it could also be higher if a person’s monthly income is high.

On Monday, StarBiz reported that although household non-performing loan ratio had been on an improving trajectory since December 2008 to 2.5% as at June, the sector’s debt burden had also been increasing steadily, partly due to greater appetite for borrowed funds and also as a result of strategies used by banks.
Personal loans and credit cards on average made up 5% and 3% respectively of banks’ total loans.

Under Budget 2010, a RM50 service tax for principal credit-card holders was introduced with an aim to reduce the nation’s credit-card debt.

Kenanga Research, in a recent sector update, said the consumer segment was still the sole driver for banking system loan growth.

“In July, hire-purchase loans continued to register strong growth rate of 8.8% year-on-year (yoy), the strongest growth rate over the past 12 months,” it said. “Hire-purchase loans in June was 8.4% yoy.”
“Housing loan growth of 14% yoy in July was marginally higher than 13.7% in June,” it added.

The move to curb excessive household debt obligations comes about a week after the news of a possible 80% loan-to-value ratio for mortgages to avert the risk of a property bubble.

As at end-2009, home loans represented 25% of the banking system’s approved loans.

However, the 80% loan-to-value ratio may not be implemented across the board as some banks have suggested it should be more for high-end properties and investments.

Are House Prices Sustainable?

I copy Lee Wei Lian's article in the Malaysian Insider as it makes for a good benchmark reading on property.

Radio DJ Terry Ong has been looking out for an affordable condominium to by. Sadly, he is reeling back from shock as prices seems to be spiralling ever skywards.

To illustrate his frustration, the DJ quoted prices at the Menara Duta complex in the Segambut area which he says has gone from RM250,000 for a renovated unit at the end of last year to RM330,000 now for a standard unit — a jump of 32 per cent in less than a year.

“It’s unaffordable,” he said of current property prices.

Account manager Christopher Chew, 31, has also been hunting for a property in the past six months but has still not been able to find a suitable home to fit his RM300,000 budget.

Among developments he has looked at is the Cova Suites, a condominium development in the up-and-coming neighbourhood of Kota Damansara where a 1,300 sq ft unit is typically going for about RM450,000.

“Developers are more bold in coming up with prices,” he said.

Many middle-class home hunters like Chew and Ong are becoming frustrated by prices that are far outpacing income growth. Figures provided by National Property Information Centre (Napic) show that average values of residentail properties in Malaysia rose a whopping 16 per cent, to RM212,815 in the first half of this year from RM183,807 in same period last year.

For Kuala Lumpur, the increase has been even more dramatic, rising an eye-watering 34 per cent to RM485,435 in the first half of the year from RM362,569 last year — 9 times  the average urban household income of RM54,000. 

 

Housing and local government minister Datuk Chor Chee Heung said that the government is building some 76,000 low cost homes nationwide costing about RM42,000 each over the next three years, but it is unable to tell private developers how much to build to boost supply of middle-class housing in the market.

“Those that cannot afford it will just have to move to houses further away from the city where it is cheaper,” said Chor.

But some middle class workers find the prospect of being banished to the “fringes” unappealing.

One married Malay manager who currently rents a townhouse in Damansara Challis in Petaling Jaya but is looking to buy his own home, says moving to outlying areas meant living in more mono-racial neighbourhoods.
“Puchong and Shah Alam where it is cheaper are mainly populated by one race,” he noted. “I don’t want to move to the fringes but I want my kids to grow up in a mixed-race environment and the location makes a difference.”

The manager expressed surprise that prices for Damansara Challis — a leasehold development near high tension wires — have escalated by as much as 30 per cent above its 2007 launch price to RM850,000, given that an estimated half of the units are still vacant.

Real Estate and Housing Developers Association (Rehda) president Datuk Michael Yam said that the issue of rising property prices was partly due to an imbalance of supply and demand as more migrants move to land scarce Kuala Lumpur.

“Even if 50,000 new housing units are needed in KL that is still a huge number to build,” he said at a recent Rehda media briefing.

One developer, however, privately expressed concern that the market had become too speculative and the dramatic increase in housing prices may become unsustainable.

“I am all for sustainable price growth but the current market is too speculative,” one developer told The Malaysian Insider. “Most of the units are taken up by employees of the developer hoping to sell for a profit when the development is completed.” 

 

There are signs that the government is concerned that a real estate bubble is forming as investors pour money into property in the hope that prices will keep spiralling upwards.

The Edge business weekly had reported over the weekend that the government is exploring the possibility of increasing mortgage caps to 80 per cent of loan-to-value ratio in a bid to keep the market from overheating. This comes as Singapore introduced a series of measures yesterday to reign in investors and speculators, such as a 70 per cent mortgage cap for investors with more than one property and launching 36,000 public housing units this year and next.

Such a move, however, may only serve to hurt first-time homebuyers who will have to struggle to come up with the down payment whereas richer investors are unlikely to face such difficulties.

Edward Seah, who works as an engineer and already owns one condominium which has doubled in value in the past six years, said that a 80 per cent mortgage cap will only cause more properties to flow to rich investors.

“The rich will get richer,” he said.


Seah said that while he would like to upgrade from his present condominium, he will not buy another house given current valuations.

“Are such high prices warranted?” he questioned. “I refuse to feed into the current property frenzy.”

* Figures for average residential property prices in Malaysia and Kuala Lumpur that were earlier reported reflected all property types and have now been corrected to reflect only residential properties.

Housing Loan Cap: The First Salvos

They showed their vehemence demonstrably to Bank Negara Malaysia's proposal to cut housing loan quantum from 90% funding to 80%.

The reason for their opposition: They believe it will will only discourage Malaysians from buying houses as it will deter potential house buyers who have to bear the brunt of forking out an additional 10% of the house sales price.

The groups that are in opposition are chiefly, the National House Buyer’s Association (HBA) and Federation of Malaysian Consumers Associations (Fomca).

HBA secretary-general Chang Kim Loong said the proposal would go directly against the Government’s plans to encourage home ownership.

“Young professionals who are just starting out will be deprived of buying a home for themselves. How are they going to get the 20% upfront payment?"

"That does not include the legal fees and stamp duties house buyers have to pay,” said Chang when contacted yesterday.

He said the move would only be good if it targeted high-end buyers, as an effort to deter speculation.

On Sept 2, StarBiz reported that Bank Negara was engaging with banks on possible measures to curb excessive speculation on property prices.

One of the measures discussed was whether the central bank will be capping the loan-to-value ratio (LVR) for mortgages at 80% in order to avert the risk of a potential property bubble.

Currently, most banks provide loans of up to 90% of the value of the property.

Fomca secretary-general Muhd Sha’ani Abdullah urged the Govern­ment to ensure there was enough affordable housing available first before implementing such proposals.

“40% of the workforce earn up to RM1,500 a month. If this proposal were to be implemented across the board, how are they going to afford houses?” he asked.

Gerakan vice-president Datuk Mah Siew Keong said that if the proposal was applied across the board, the property market, construction industry, housing and real estate industry, and economic growth would slow down.

“Bank Negara must study the plan carefully, as the present limit of home loans of 90% has helped the housing and real estate industry,” said Mah, who is also the party’s economic development bureau chairman in a statement.

Housing and Local Government Minister Datuk Chor Chee Heung, however, said the measure would not dampen the housing market as in the long-term, it would actually be a healthy growth for the industry.

Banking sources said Bank Negara might consider discontinuing the 5:95 and 10:90 housing loan packages and impose higher downpayment for property purchasers.

This was due to a surge of between 10% and 30% in the price of landed properties in some parts of the Klang Valley and Penang.

OSK: Property Profile 2010-2013

OSK has prophesied that Malaysia’s property sector is set to see its biggest residential boom in a decade, led mainly by medium- to high-end landed properties, says a research firm.

It may peak in 2012/13 before going into a potential slump, it added.

OSK Research said a major mass housing boom will likely occur in the first half of this decade.

It added that the sector was already entering the early stage of a property “super cycle”.

“Although the expected peak in 2012/13 may have dire consequences, the phenomenal boom that immediately precedes it gives investors an excellent opportunity to profit from the trend for at least the next 12 months.”

“We, therefore, seize the opportunity to upgrade our property sector call to overweight from neutral,” OSK Research said in its research note.

Although location is key to identifying real estate opportunities, what is equally important but often overlooked is timing.

It noted that the current 20-year boom in the medium- to high-end residential properties since the early 1990s might peak in 2012/13, after which mass affordable housing could dominate the real estate industry around 2015/16.

Stocks with focus in the medium- to high-end segment, such as Sunrise, YNH Property, IGB Corp and Bandar Raya Developments, are some of the best bets for the next 12 months.

“Mass housing developers, especially the ‘fallen angels’ such as LBS Bina and MK Land, may come to the fore as another major investment theme after that”.

For “best of all worlds” exposure during this period, OSK Research recommends buying SP Setia.

It said the country’s current boom in higher-end residential properties is probably in its longest “bull run” ever, spanning almost two decades since the early 1990s.

“This, unfortunately, has also given rise to the illusion of the infallibility of properties. We are now entering the final phase of this secular boom, which will be characterised by a period of fast-rising property prices in the medium- to high-end residential segment, particularly landed ones.”

OSK Research observed that those born in the 1950s had become more risk-averse in their investments since 2003/04.

“As they approach retirement, they will divert a significant portion of their wealth into savings and traditionally perceived defensive asset classes such as real estate.

However, their eventual absence may bring an end to the boom if there is no credible demand force to fill the void.”

Emkay Group senior general manager Mazrita Mazlan said the wealthy do not mind paying a little bit extra as long as the properties are away from congested towns.

“As an example, MK Land (MK Land Holdings Bhd) will launch its Rafflesia high-end project, which has units starting at RM2 million apiece.

“Already the project has sold 100 units even before its launch,” Mazrita claimed.

Mercury Securities head of research Edmund Tham said the boom will only benefit certain areas and selected developers.

“When it comes to the so-called boom, it depends on who you talk to. I believe there is a property overhang project in Mont’Kiara and some buyers are facing financing problems.”

Independent property valuation surveyor Sharizal Supian said the trend right now is to go for boutique projects complete with gated communities and modern facilities and townships, such as UEM Land’s Symphony Hill which saw units snapped up within days of its launch.

“The boom, however, only benefits the rich and does not benefit the general public,” Sharizal said.

An Island & Peninsular Bhd executive said that only foreigners will benefit from Malaysia’s property boom due to the cheaper ringgit.