This article first appeared in Forum, The Edge Malaysia Weekly on June 5, 2023 - June 11, 2023

Property overhang” is a term that is taboo in the real estate industry, where some believe that it gives the impression of a sector that is in dire straits. Simply put, a property overhang occurs when the rate of building exceeds that of take-up, culminating in a property supply-demand gap.

The Malaysian property overhang data was introduced in the Valuation and Property Services Department’s (Napic) reports more than two decades ago. In the initial years, it was amusing to see that even some in the department seemed confused about the term, using it interchangeably with ­“unsold units” in the reports (read on to find out more). While the confusion within the department would have been cleared up by now, the term continues to befuddle less discerning property buyers.

Not every unsold property is classified under the overhang category. According to Napic’s current definition, overhang properties are those that have been completed and have received the Certificate of Completion and Compliance (CCC) but remain unsold for more than nine months after the project’s launch.

In short, unsold inventory must meet all three criteria before they are classified under this category.

To illustrate, unsold units in a high-rise housing project that is under construction — which typically takes three years or more to complete — are just termed unsold stock even though they have been on the market for months or years.

Unless a property has a build-then-sell concept, it is not wrong to assume that units still unsold at the time they can be handed over to buyers would be labelled overhang units.

I would be the first to concur that not all unsold units should be lumped under the overhang category. After all, buying real estate is neither an easy nor a simple decision. For many, it is the single biggest decision to be made in their lifetime, a decision that would involve many sleepless nights and endless rounds of discussion and debate with family members before they finally take the plunge.

Furthermore, the process of completing a property purchase typically takes months, given the time needed to meet the legal requirements and seek end-financing.

Malaysia’s housing overhang has been climbing over the years, driven by relentless building activity and, ironically, accelerated by the push for affordably priced homes. The result is homes sprouting in cheaper-priced but less desirable locations that lack connectivity and amenities, which are the foundation of liveability.

It is laughable how such homes could even have been thought capable of being a catalyst for a popular address. Nevertheless, it is heartening that after the Covid-19 pandemic receded, Malaysia’s housing overhang dipped below 30,000 units for the first time in two years, shrinking 24.7% to 27,746 units (valued at RM18.41 billion) in 2022 from 36,863 units (RM22.79 billion) in 2021, according to Napic.

It must be noted, however, that more than half of the latest overhang units (52.8%) were homes priced at RM500,000 and less. In fact, a breakdown shows that those costing RM300,000 to RM500,000 accounted for 29.3% while those priced below RM300,000 made up 23.5% of the country’s residential property overhang. Homes priced at a million ringgit and above con­tributed 13.6% to the overhang but in terms of value, because of their pricing, this segment accounted for 40.7% (RM7.5 billion) of the total housing overhang value.

The size of Malaysia’s property overhang rests primarily on its definition. Interestingly, the initial overhang parameters were quite different from that which are used today. For instance, in its Property Overhang Report for the second half of 2000, Napic reported that the value of the country’s overhang stood at RM6.6 billion at end-2000. Yet, in another section of the same report, these same properties (51,348 units) were referred to as “unsold” units.

In those days, overhang property was defined as those launched from the base year of Jan 1, 1997, yet remained unsold. Naturally, the number ballooned over the years before Napic decided, with the stroke of a pen, to literally reduce it simply by introducing the current criteria.

There is no right or wrong definition for property overhang as long as the parameters are clear and meaningful, as with the data collated. Most importantly, such data must be shared on a timely basis for it to be relevant. Towards this end, it is necessary to go back to the basic objective of a property overhang report. Who are the primary stakeholders? Are they the developers, planning approval authorities, bankers, potential buyers, land owners and existing homeowners? Yes to all of the above.

It is time to have a more granular analysis of the property overhang. A glimpse at the properties’ price range is far from sufficient to aid in investment decision making.

Where is the overhang property located? Grouping them under districts offers little clarity. What property type are they? How long have they been on the market? What is the neighbourhood like? Are any unwelcome developments such as highways coming up in the area? Do the units have a highly undesirable frontage and view? In short, why are these units not moving? The answers must go beyond the stereotypical ones such as wrong product, pricing and lack of connectivity.

Only an in-depth study into the property overhang will be meaningful to developers, the planning authorities and the market in general.

For instance, do not be surprised that among the overhang are very attractive homes with addresses and views that are to die for. Take this super-luxurious condo project in the heart of Kuala Lumpur City Centre as an example. More than a decade since completion, the developer is still retaining unsold units presumably to maintain the project’s exclusivity and market pricing. As such, lowering prices in order to clear the remaining stock does not seem an acceptable immediate option. This is, however, an exception rather than the rule as keeping the unsold units not only hurts the developer’s balance sheet and puts pressure on cash flow, but it also has to shoulder the payment of maintenance charges.

One can also find other successful projects with a handful of overhang units. These are normally the less attractive units in terms of location such as proximity to the lift core and those affording unpleasant views. To clear such units, developers would need to invest more by offering extras such as free fit-outs. Or, dangle hefty discounts as a carrot. Otherwise, they stand the risk of having to hold on to the units for a long time.

Developers prefer to not lower prices for fear of angering the other buyers in the project. This is more so when the developers are counting on their loyal support for future projects.

All scenarios considered, it is not realistic to believe that all overhang property can be cleared. Developers will have to think hard and deep about their next course of action.

Whatever the case, for better property development planning, we need a lot more granular details on projects that have failed or we risk repeating the mistakes over and over again. More importantly, such insightful findings and data must be shared on a timely basis with Malaysians. That is the real deal!

Au Foong Yee ([email protected]) is an editor emeritus at The Edge

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