Overbuilding of mega projects could affect sectors

From The Edge Malaysia
12th Sep 2013

KUALA LUMPUR: The overbuilding of mega projects, such as the Tun Razak Exchange, the RM5 billion Warisan Merdeka Tower and the Rubber Research Institute land development in Sungai Buloh, could negatively affect the banking, property and real estate investment trust (REIT) sectors.

CIMB Research, in a recent note, said without the solid backing of fundamental demand, the overbuilding of commercial real estate could result in painful long-term issues.

“Should the project be part-funded by government-guaranteed bonds and fail, the losses would hit the government’s balance sheet and exert further pressure on the overall public debt,” said the research house.

In addition, there will be an oversupply of office space, leading to depressed rentals and yields as well as wastage of strategic land resources. The research house is also concerned that the financial sector might see its non-performing loans ratio rise as borrowers default on their loans.

“We estimate that the loans associated with the various mega land privatisation projects come to about RM17 billion. Assuming 20% of these loans go into default in the event of a failure of the projects, this will increase the industry’s gross impaired loan by about 14.4% and lift the ratio by 30 basis points to 2.3%,” it said.

The research house said slowing down these mega commercial projects would lessen the impact on the country’s current account balance.

It said banks with the most exposure to non-residential loans are PUBLIC BANK BHD, followed by AFFIN HOLDINGS BHD.

CIMB Research said stiff competition from mega commercial projects could result in weaker sales of commercial properties by developers and put pressure on rental rates. Developers under its coverage include UOA Development Bhd, MAH SING GROUP BHD and S P Setia Bhd.

“The REIT sector could also be affected due to its exposure to commercial space. Among the REITs under our coverage, Sunway REIT has the highest exposure to office space.

“One way to mitigate the impact of the increase in the oversupply of office space is to pace the new supply from the mega commercial projects and to wait for demand to gradually catch up with supply,” it said.

Another major concern, according to the research house, is the uncertainty in the contribution of real estate investments to the long-term potential growth of the nation. “We believe there need to be a proper assessment of the supply and demand equilibrium before the country commits to such large-scale property investments.”

CIMB Research said special incentives offered to developers of the Tun Razak Exchange and its occupants will widen the disparity between KL hot spots, like KLCC, KL Sentral and other areas which are not privy to these incentives.

It said the government’s target of bringing 100 multinational companies to the Klang Valley by 2020 may be overly ambitious, as Malaysia is still facing many challenges in having the “right” policy approach to foreign investment, as well as more home-grown regional companies moving their headquarters abroad.

“It has not been statistically proven that foreign direct investment [FDI] in the real estate sector complements the FDI in the manufacturing and services sector in helping to boost the economic growth of the host economy.

“In Malaysia, there are concerns whether liberalising and developing property policies to attract higher FDI are effective.

“It remains to be seen if overinvestment in mega property developments can really help to boost FDI inflows and, more importantly, growth,” said the research house.

[Source]