Demystifying the issues behind Malaysia’s overhang, unsold residential properties

KUALA LUMPUR - As cranes increasingly dot Malaysia’s skylines and construction sites buzz with non-stop activity, a curious imbalance has taken shape.

Amid the rising apartment complexes, suburban enclaves and gated communities, a significant number of residential properties stand vacant, their doors open and awaiting the footsteps of prospective occupants.

The phenomenon of overhang and unsold residential properties in the country has cast a spotlight on the intricate tapestry of economic, social and market forces that shape the nation’s housing sector.

Its occurrence also raises a crucial question: why do these completed and available properties remain unclaimed in a nation where homeownership has long been a cherished aspiration for many?

Overhang vs Unsold: What does it mean?

Not many know that there is a difference between overhang and unsold properties, as the terms are often used interchangeably.

Malaysia’s National Property Information Centre (NAPIC) describes properties in overhang to be completed and ready for use, but remain unsold for nine months after its launch date.

Unsold properties can be defined in two ways, depending on its stage of construction.

Unsold (Not Constructed) properties have building plan approval but have yet to begin construction and remain unsold not more than nine months after being launched.

Properties that have building plan approval and begun construction will be considered as Unsold (Under Construction) if it continues to be unsold nine months after its launch.

The Current Situation

The latest comprehensive report from NAPIC in 2022 reveals that Malaysia recorded 27,746 residential units in overhang during that year, with a total value of RM18.41 billion.

Compared to previous years, 2022 marked a significant improvement in the residential overhang situation, both in terms of volume and value. There was a decrease in overhang units from 2018 to 2020 (32,313 units to 29,565 units) before a notable increase in 2021 (36,863 units).

This trend is also mirrored in the total value of overhang units. The overhang value dropped from RM19.86 billion in 2018 to RM18.92 billion in 2020, only to surge again in 2021 to RM22.79 billion.

However, it is worth noting that as of the first half (H1) of 2023, the number of residential units in overhang stands at 26,286 units, with a combined value of RM18.3 billion.

A nearly similar downward trend was observed in the number of unsold units from 2018 to H1 2023.

Residential units categorised as Unsold (Under Construction) numbered at 80,984 units in 2018, reducing to 54,844 in H1 2023. Meanwhile, those classified under the Unsold (Not Constructed) category decreased from 19,865 units in 2018 to 7,927 units in H1 2023.

It’s curious to note that despite the reduction in the overall volume of unsold residential units, the housing units priced below RM300k consistently represented the largest share of unsold units from 2018 to H1 2023.

Factors Contributing to Overhang & Unsold Housing

There are a range of factors contributing to this and Malaysia’s continued issues with overhang and unsold properties, says Dr Hassanudin Mohd Thas Thaker, an Associate Professor at the Department of Economics and Management Sciences of International Islamic University Malaysia.

"When discussing unsold residential units and their overhang, it’s essential to consider several factors.

"These include the imbalance between supply and demand, the increasing costs of construction-related raw materials and the location of these developments,” he explains.

Location & Connectivity

Location has long been a cardinal rule in real estate, often determining whether a property finds a buyer or lingers in the shadows.

Urban centres and well-connected suburbs typically witness higher demand, while properties in less desirable or remote areas may struggle to attract buyers.

An undesirable location could be a significant reason contributing to the high number of unsold residential projects, particularly those priced at RM300k and below, says Hassanudin.

"Strategic housing locations are of utmost importance when it comes to attracting buyers. Many people prefer to live near major urban centres because of the high accessibility to amenities and facilities needed for their daily lives.

"When affordable housing projects are built or are being constructed far from town and lack proper connectivity, selling these houses becomes challenging as they fail to meet the needs of buyers. This causes these housing to remain unsold for some time,” he said.

Recent research conducted in the country on the topic of housing preferences among Malaysians further underscores the crucial role played by location.

A 2018 study, involving 412 participants, focused on the housing needs and preferences of Generation Y in Malaysia. It considered 21 housing needs that influenced this group's decision-making process regarding homeownership. Among these needs, eight were related to location, with the following rank: travel distance to workplace (3), travel distance to grocery stores (4), travel distance to restaurants (5), travel distance to public transportation stations (6), travel distance to school (8), travel distance to the hospital (16), travel distance to shopping malls (18), and travel distance to sport centres/gym (19).

In the subsequent year, a study involving 312 participants examined the factors influencing customer purchase decisions of residential property in Selangor. Location was identified as the most crucial factor influencing buyers’ decisions to purchase property in that state.

Meanwhile, a 2021 study focusing on the housing preferences of Malaysian youths was conducted in Shah Alam, Selangor, with 174 participants.

The location factor ranked third among the five factors investigated, with financial factors considered the most important, followed by neighbourhood factors. The study also revealed that 72.6 percent of the respondents preferred to live in urban areas, 14.23 percent in suburban areas, and 13.17 percent in rural areas.

Supply and Demand

The equilibrium between supply and demand is a perpetually shifting force within Malaysia's property market. At the heart of this issue lies a delicate balance between what developers have available and what buyers are actively seeking.

"The issue of supply and demand in our housing market is that there is a larger supply of housing units available compared to the existing local demand,” Hassanudin said.

Taking a closer look at NAPIC’s 2022 data on residential housing reveals that states like Johor (5,258 units), Selangor (3,698 units), Penang (3,593) and Kuala Lumpur (3,429) had the highest residential overhang by the end of that year.

When asked about this situation, Hassanudin used these states as examples to illustrate how an interplay of supply and demand contributes to residential overhang.

"These states are currently experiencing significant economic growth and rapid development. In such situations, property development, including housing, often sees substantial expansion.

"The housing market in these areas becomes increasingly competitive for our local developers. They find themselves in competition with foreign developers, which may lead them to adopt aggressive development strategies, potentially resulting in an overabundance of newly constructed housing units, surpassing the actual demand in the region,” he said.

Pricier Raw Materials

The very foundation of Malaysia's property market rests on bricks, mortar, and a multitude of construction materials. Any changes in costs in this domain can send ripples throughout the real estate landscape.

When construction costs rise, developers may need to adjust pricing strategies, potentially impacting affordability and the health of the market.

In a report by Bernama earlier this year, the president of the Real Estate and Housing Developers’ Association (REHDA), Datuk N.K. Tong explained the measures developers would take in response to rising building material costs.

"About 68 percent of respondents expect building material costs to continue trending higher for at least another 12 months before it stabilises.

"To counter the price increase in building materials, developers have no choice but to increase property selling prices (double digit on average) or lower their profit margin,” said Tong after he presented the findings of REHDA’s Property Industry Survey 2H 2022 and Market Outlook for 2023.

The survey involved 136 REHDA members in Peninsular Malaysia.

As of September 2023, Malaysia’s Department of Statistics (DOSM) latest report on the ‘Building Material Cost Index’ shows that the average price per unit of steel was RM3,620.05 per metric tonne in August 2023.

This was a 0.1 percent decrease in price compared to the previous month, when it was priced RM 3,622.85 per metric tonne.

The average price of cement, meanwhile, saw a 0.2 percent increase in price between July 2023 (RM 22.84 per 50kg) and August 2023 (RM 22.89 per 50 kg).

Solutions to Explore

Owning a house is the dream of every Malaysian. However, this dream may remain elusive without necessary measures to ensure homeownership affordability.

The federal government has several incentives, such as the Housing Credit Guarantee Scheme (HCGS), Rumah Mesra Rakyat Program, and Rumah Selangorku under the Selangor state government.

In the revised Budget 2023 presented in Parliament earlier this year, Prime Minister Datuk Seri Anwar Ibrahim has also announced government efforts to enhance essential services, including housing.

Under Thrust 12 (Providing Quality Basic Amenities), Anwar stated that the government would continue to exempt stamp duty for first-time home ownership, offering a full exemption for homes valued at RM500,000 and below.

Additionally, a 75 percent exemption would be granted for homes valued more than RM500,000 to RM1 million.

In the recent unveiling of Budget 2024, Anwar reaffirmed the MADANI government’s commitment to improving the housing situation in Malaysia.

Nearly RM2.47 billion will be allocated for housing projects in 2024. This includes RM546 million to ensure the continuation of 36 Program Perumahan Rakyat (PPR), with 15 more expected to be completed by next year, and RM358 million has been set aside for 14 projects under the Rumah Mesra Rakyat programme.

The HCGS scheme also received a boost, with nearly RM10 billion allocated to benefit 40,000 borrowers.

Anwar also announced the government’s takeover of the Bandar Malaysia project, ensuring that the developments carried out align with the MADANI government’s values. Among the planned projects are affordable housing projects for veterans and the creation of parks and green spaces for Klang Valley residents.

To control property prices, the government plans to impose a flat rate of four percent stamp duty on the Memorandum of Transfer. This would affect non-Malaysian citizens and foreign-owned companies, except those with permanent residency.

Hassanudin believes that these government initiatives can help reduce overhang and unsold housing while assisting lower and middle-income groups in realising their homeownership dreams.

"Developers and stakeholders should also consider utilising local raw materials for their residential development. Additionally, they should also enhance their financial strategies with proper property risk management techniques to complete housing projects on time.

"Embracing diverse construction styles and building partnerships between the government and private companies for affordable housing projects are also welcomed,” he added.

Hassanudin also advises potential buyers and investors to exercise caution when making decisions in the face of unsold and overhang housing.

"They must carefully evaluate all aspects of a development project, including background checks on the current property industry, developer profiles, and an understanding of the economic cycles.

"This will help them make more informed decisions on whether it’s the right time to buy or invest in the housing market,” he shared.

In retrospect, Hassanudin says that Malaysia can learn from neighbouring countries that have successfully addressed these challenges through implementing improved housing policies and strategies.

Singapore’s renowned Housing & Development Board (HDB), for instance, has built more than one million flats throughout the island nation, housing 80 percent of the city-state’s resident population, with about 90 percent owning their homes.

The board was established in 1960 in response to the housing crisis that the country faced at the time. Back then, many of its citizens lived in slums and overcrowded squatter settlements, with only nine percent of Singaporeans living in government flats.

"As a lesson, there should be continuous revisions of policies and better housing projects to cater to the needs of different income earners.

"Managing salaries and the cost of living, along with special deductions from salaries for first-time homebuyers, may also help to resolve these challenges,” he said. - BERNAMA