Serviced apartment glut leaves buyers hanging by a thread

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The serviced apartment overhang in Malaysia is valued at RM20.76 billion, compared to the residential overhang of RM18.92 billion.

PETALING JAYA: In 2013, several Singaporeans were shuttled to a development project in Johor Bahru. They were given five-star treatment, a prelude to their five-star living once the project is completed.

Because prices were a fraction of what they would have to pay in Singapore, John (not his real name) bought the RM1.6 million high-rise project.

He was told the entire project would have 11 blocks of serviced apartments and 33 blocks of condominiums.

When he received his keys in 2017, his condominium had become a serviced apartment.

“The developer said all 44 blocks are now located on commercial land,” he said in a phone interview. There were various issues regarding the unit.

He had contracted to buy a unit with a covered balcony. But when he received his keys, he found that there was no covered balcony but only open sky, because the developer had removed one level of car park.

That purchase had become John’s Achilles heel, and he was embroiled in a long legal tussle.

Today, Johor has the largest stock of unsold completed residential and serviced apartment units in the country.

Known as overhang, the National Property Information Centre (Napic) said Johor has 7,030 unsold completed housing comprising both landed and condominiums, and a staggering 16,442 units of serviced apartments worth a total RM5.48 billion and RM14.97 billion, respectively.

Combined, it is RM20.45 billion, or half of the country’s total overhang value of RM40.80 billion.

Over the past decade, Malaysia has overbuilt virtually all segments of the property market, from housing to retail malls, to office space to industrial units.

Because serviced apartments are built on commercial land, they are categorised as commercial property.

What is mind boggling is the fact that serviced apartments, a relatively new type of commercial development, only entered the property scene in 2011/2012.

This was at the height of the property cycle which popped in 2014 when developers’ interest schemes (DIBs) were banned by the government in order to weed out speculation.

In a span of less than 10 years, the serviced apartment segment has a colossal overhang valued at RM20.76 billion, totalling 23,606 at the end of 2020. The residential overhang amounted to RM18.92 billion, with 29,565 units.

One may ask, why is the serviced apartment overhang larger than the residential overhang?

After all, the usual built-up area of a serviced apartment is between 400sq ft to 800sq ft, big enough for a couple and a child.

This takes us to land prices. Serviced apartments are built on commercial land, which has a higher value than residential land. The service and maintenance charges, utilities and local authority’s rates like assessment and quit rent on commercial land are also higher.

This is an important point that most buyers fail to appreciate until they get their bills, which may be between 25% and 30% higher than for a house built on residential land.

If a developer buys an acre (43,560sq ft) of commercial land, and the local authority gives him a plot ratio of 10, he can build up to 10 times that, or 435,600sq ft.

He makes allowances for drainage and sidewalks, which may take up 20% of the 435,600sq ft which leaves him with 348,480sq ft.

Developers are capitalists. They are out to make a profit. So, he decides to build serviced apartments with a built-up area of 600sq ft. Rounding up that 348,480sq ft to 350,000 q ft, he can build up to 580 units.

A condominium project, on the other hand, is built according to density, that is, how many people are housed within an acre.

In Malaysia, a household of four, parents with two children, is the assumed norm. City Hall has set the limit for housing density at up to 400 people per acre.

With a household of four, that means 100 units. Thus, one acre of residential land, a developer can build only 100 condominium units versus 580 serviced apartment units.

With a serviced apartment overhang of RM20.76 billion versus residences of RM18.92 billion, it may be imperative for local authorities to halt giving development orders for serviced apartments.

So far, the lament has been on completed unsold units.

The “under-construction”, or “work-in-progress”, has not been factored in yet, or the not-yet-constructed portion. Counting them, the numbers will swell.

As for John, the other Singaporeans and Chinese nationals who bought into that development, the travel ban as a result of the Covid-19 pandemic and the flood of serviced apartments in Johor sitting vacant in Johor may be something they never signed up for.

“Most of the units are not occupied. Most of the buyers are Singaporeans and Chinese nationals. Three blocks will not be built, so there will be 41 blocks.

“The last time, I went there about a year ago, about 20% of my block was occupied,” John said.

One of the keys to resolving this overhang, which has become the annual highlight of the property sector, lies with the local authorities who approve development approval.

The other lies with the banking and lending sector who provides the financing. Property consultants over the past couple of years have suggested feasibility and market studies to be carried out independently, and for local authorities to insist on these independent studies before giving the green light.

Last September, the Valuation and Property Services Department and the Royal Institution of Surveyors Malaysia (RISM) published a book “Investigating the Property Overhang Situation: Policy Analysis”.

From property professionals to Valuation Department, they are throwing up their arms in frustration as to what will stop the current overbuilding and the resulting overhang.