While a residential property boom is in the cards, there are also signs that this may be followed by a property slump, some analysts suggest.

Analysts contend that Malaysia is in the early stage of a property ‘super cycle’, which has been spurred on by mid-to-high end landed properties. This so-called super cycle may reach a high in 2012 or 2013 and be followed by a potential slump.

Following the peak in 2012/13, there may be a scenario whereby there will be mass affordable housing, which will be the focus of local real estate until around 2015/16.

Looking back, property analysts noted that the first batch of the 1970s subtle baby boomers is expected to begin to enter the age of buying trade-up homes in more desirable addresses by 2009 to 2010.

If this trend occurs, we may see a marked increase in demand for mid-to-high end residential properties, which is similar to what had happened in the early 1990s. Indeed, some analysts report that this pattern has already started to occur since the fourth quarter last year, as developers’ launches are increasingly focused on this particular residential segment to fulfill the burgeoning demand.

Nonetheless, there is a significant difference in how the 1970s baby boomers came into being compared to the 1950s baby boomers. As such, this will be a milder version of the upgrading activities that occurred during the early 1990s. The ‘mini’ boom is expected to reach a high by 2012/13 as the last batch of the 1970s subtle baby boomers is expected to enter their third life stage by then.

In comparison, industry observers reveal that demand for high-end condos was poor in the first quarter of this year, as many prospective buyers anticipated a further collapse in prices and were therefore remaining on the sidelines.

At the same time, some developers began to provide discounts and rebates, which brought effective prices much closer to the pre-boom levels and innovative financing schemes that would transfer substantial amounts of risk from the buyers to the developers in the early years. As a result, many buyers snapped up such properties. This indicated that there were still many eager buyers and this segment of the market is still growing rapidly as well.

With the economic recovery well on track, it is evident that the risk premium demanded by prospective buyers will narrow significantly by late-2010, an indication that the Klang Valley high-end condos are likely to rebound soon.

On a more cautionary note, it is important to remember that such a rebound does not mean that there will be a long-term sustainable recovery in the property market. This is due to several reasons including the fact that there may be spanners in the works with the Klang Valley’s newly completed high-end condos plagued by very high vacancy rates. Furthermore, they will likely be affected by another major supply wave by late-2011, a repercussion from the aggressive launches since year 2007.

Investors are a resilient lot and they are likely to be unfazed by the prospect of low cash flow from their investments as long as there are prospects for further capital appreciation. Still, they may be more worried that the buying momentum can no longer be sustained for the long term as this would imply limited prospects for capital appreciation.

The mass housing market

The mass housing market has been stuck in a rut for six years, say analysts. “Its peak in 2004, preceded by a short but impressive up-cycle, almost instantly came close to wiping out the unprepared mass housing developers when the momentum in new household formation began to slow dramatically,” says a property analyst with a local stockbroking firm.

When these developers failed, the larger and more financially stable developers began to move in to grab the former developers’ market share as buyers flocked to the more reliable developers. After this setback some developers have been slowly gaining ground in terms of financial performance, improving their operations and staging an overall recovery.

If they can do that in time for the next major boom in mass affordable housing early next decade, these developers are likely to be able to gain increasing visibility among the investment community in the coming years.

Future property buying patterns

A potential property owner will typically be able to purchase an apartment or house as his earning power increases. Most people gather experience as they grow older and are able to command higher incomes as they progress in their career.

Higher income translates into greater purchasing power and therefore the ability to buy bigger houses in the later life stages. A recent survey in 2008 and 2009 of over 200 respondents was conducted by a research company and the results were made available to Business Today.

The report revealed that Malaysians’ income levels do change in a predictable manner as they enter different life stages and are therefore highly capable in influencing property-buying patterns. A Malaysian typically moves from renting an apartment or house to buying it and possibly getting married and perhaps having. Subsequently, it may be logical that he may move on to trade-up homes as confidence in his income and career prospects grow.

Pre-retirement, with sufficient wealth built over the years, he may become an active real estate investor. So, how does the investor weather the vagaries of the property market? He needs to find the right time and opportunity to accumulate stocks of mid-to-high end residential property developers, particularly those with a focus in developing higher-end landed properties.

These stocks are the investors’ best bets over the next 12 months, after which they should adopt a more cautious stance in anticipation of a potential peak in the real property cycle in year 2012.

In conclusion, the winners during this up-cycle between 2009/10 and 2012/13 are clearly the mid- to high-end developers, particularly those concentrating on the developments of landed properties. However, the current valuations of these developers do not appear to be reflecting this yet.

The property investment portfolio in the next 12 months should be heavily weighted in property developers with main exposure to the developments of mid-to-high end landed properties.

As we are in the final phase of the boom in mid-to-high end residential properties, another option is to look at developers that want to build niche mid-to-high end non-landed residential properties.

Finally, analysts feel that if developers of mass housing find ways to return to their heydays then perhaps we could see more success among them, especially since some analysts predict a boom in mass affordable housing in the next decade.