The bleak outlook for Iskandar

Last week, a Maybank Investment Bank Research property sector report made headlines as it warned of a drastic oversupply of homes in Iskandar Malaysia.

The views presented in the report, by Kuala Lumpur-based analyst Wong Wei Sum, carry much weight and influence because Maybank is the largest financial services group in Malaysia, providing loans not only to the developers and construction firms, but also to investors who buy the homes. It is best positioned to provide a deep insight into the market.

What got property watchers stirred up is the warning that the existing glut would be exacerbated by the huge incoming supply this year and next, with 80,900 high-rise residential units having been approved for sale, adding to those sold during Iskandar’s peak from 2012 to 2013.

The Maybank report also pointed to the 33 per cent plunge in transaction values in Johor in the fourth quarter last year from the previous quarter. It added that “aggressive land banking activities by Chinese developers in the already crowded Iskandar area is of much concern”.

The risks of these mega projects undertaken by Chinese developers are compounded by their huge debt pile.

The report adds to my concerns about Iskandar in three areas:

Chinese developers’ debt

Most research analysts look at listed companies’ gearing — usually derived from dividing net debt by equity. But I prefer to look at the total debt of the companies and total liability for interest expenses every year. Derived ratios are good for reference, but are not as tangible as total debt, interest expense, annual coupon and debt expiry date.

Two of the Chinese developers in Iskandar — Guangzhou R&F and Country Garden — have outstanding long-term debt of more than 45 billion yuan (S$9.8 billion) each. Assuming an average funding cost of about 5 per cent per year, each company needs to pay S$490 million a year in interest to their lenders, bond holders and creditors.

On Monday, Shenzhen property developer Kaisa Group defaulted on two tranches of debt, having failed to pay interest totalling around S$71 million. Rating agency Standard & Poor’s has warned that a slowing property investment market would push more Chinese developers into default on their loans because of cashflow issues.

Overambitious timelines

The Rapid Transit System (RTS) station to connect Woodlands North MRT station to Johor was scheduled to be operational in 2019. To date, while Woodlands North MRT station and the line are already under construction, there is no confirmation of the exact location of the RTS station.

Is the site selection delayed because of a giant mixed development project that is being built between Woodlands North station and the Johor coast? Will the tracks have to be rerouted around the mega-project? Will there be budget overruns? When may train services begin operations: 2021 or 2022?

Delay of high-profile projects

Several projects announced with much fanfare two to three years ago have not got off the ground because of weak market conditions or because they are still awaiting government approval. These include Rowsley’s Vantage Bay and motorsports hub projects announced in 2012, as well as Capitaland’s Danga Bay and Link THM’s One World Medini projects, both announced in 2013.

The delays may be good in terms of moderating housing supply, but the economic activities around the motorsports hub and media village in Medini are also being pushed back.

This brings me to the point about economic drivers. Of the more than RM150 billion (S$55.5 billion) of investments going into Iskandar since 2006, most of the value was in the land sales and follow-on sales of apartments and office units that sit on the land. There is little data on the value of investments into economic activities that will provide jobs in the services and manufacturing industries.

So while we know there is a potential supply of more than 200,000 residential units, we are not able to estimate the demand arising from population growth because of increased employment and economic activities.

In this aspect, my opinion differs from that in the Maybank report that the industrial segment is a better investment in Iskandar.

I do not recommend investors to buy Iskandar’s commercial and industrial properties unless we see a groundswell of Singapore SMEs or international industrialists setting up businesses there. The laws and duties are just not business friendly enough to attract our SMEs en masse for now.

While the outlook for Iskandar may seem bleak, every product has a price-value level that makes it irresistibly attractive to investors and end users.

If Iskandar’s residential property prices fall to a point that makes them competitive with HDB flats — for example, condominiums with full facilities priced at below S$250 (RM$674) per sq ft — mass-market investors from Singapore may be tempted to return in droves.

Of course, if, at the same time, HDB prices moderate further, Iskandar prices would need to ease some more to be competitive.

ABOUT THE AUTHOR: Ku Swee Yong is a licensed real estate agent and the CEO of Century 21 Singapore. He recently published his third book, Real Estate Realities — Accommodating the Investment Needs of Today’s Society.