COLLAPSE OF OIL PRICE AND THE BIG MALAYSIAN PROPERTY SALE

Properties in Malaysia are virtually on a big sale for those with stronger currencies due to the falling ringgit, a direct result of plunging oil prices.

Since last June, prices of Brent crude oil have more than halved from USD110 to below USD50 per barrel for the first time since May 2009. This is a big blow to Malaysia which is arguably a net crude oil exporter. Oil and gas account for 20% of total Malaysian exports. Will the situation get any better?

seaNo, according to Organisation of the Petroleum Exporting Countries (OPEC). The oil cartel, led by top oil exporter Saudi Arabia, has indicated that they would not slow supply even if crude oil price drops to USD20 per barrel. The prevalent thinking is that the Saudis are doing it to kill the American shale oil and gas industry and they are succeeding to some extent. At this point in time, several shale oil companies in US have closed down due to the high cost of production i.e. USD50 – USD100 compared to the USD25 – USD50 to produce a barrel in the Middle East. Expect the US to be the top crude oil producing country in the world from 2015. How will this shift in energy production centre impact the economies of oil producing nations? For a start, oil producing countries such as Russia and Malaysia are experiencing sharp currency devaluation due to the falling oil and gas price. Investors have pulled out billions from the share markets of both countries. Investment inflows have literally dried up. If oil price further deteriorates later in the year as widely expected, the Malaysian currency would further depreciate.

Expect any uptick in a price downtrend to be short-lived as the surge of oil supply continues unabated. The oversupply in the market has been estimated at almost one million barrels a day. That was in March, it’s probably higher in April. Instead of less shale oil output in the US due to bankruptcies of smaller shale oil companies, there is actually more supply now, potentially causing oil storage space to run out. If that happens, where can oil go except to the markets? It’s not inconceivable that prices could even fall lower than USD20, or even below USD10, which to date no one has yet predicted. The truth that’s staring us in the face is that the bottom is not yet in sight. Clearly, if the oversupply situation continues (exacerbated by a supply boost from Iran, post-nuclear pact), OPEC will let the price drop further.

In a worst case scenario, when that happens, the capital and FDI flight will intensify, causing the ringgit to crash. That has happened to Russia which saw its rouble collapse as a result of plunging oil prices as well as sanctions. Oil and gas account for 70% of Russia’s export income.

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Add a few more negative factors such as a potential credit rating downgrade by Fitch, confusion over Goods and Services Tax (GST) implementation and you have a big sale close at hand – for foreign purchasers, that is. What this means is that now is the time for global investors to start scouting for cheap properties in Malaysia because prices are at a huge discount vis-à-vis their currency.

At the time of writing, it’s RM3.67 to the dollar, down from RM3.20 a year ago.

Region’s top value

How will this affect property prices in Malaysia? With comparatively few restrictions on foreign purchase of property in Malaysia (e.g. RM1 million minimum price for residential), any foreign investor or fund looking for below market value properties would miss out big time if they didn’t have Malaysian properties in their portfolio. Malaysian properties currently represent the best value among the entire Asian property offerings measured on quality, location and lifestyle. Even with a RM1 million floor price, it will only come up to about USD275K plus which is relatively cheap by international standards, while that price is considered a luxury item in Malaysia.

And more are coming onto the market as completions of projects started during the hey days of the Malaysian property boom (2010 – 2013) take place. Of even greater significance is the fact that auctions of high-end properties are increasing in frequency. That tells you the number of investors who have the holding power is thinning by the day.

“A bottomless pit for property price is not possible – it’s a basic necessity that suffers from scarcity everywhere.”

Concerns that the ringgit will go on a freefall and hence the Malaysian asset will correspondingly fall in value is perhaps over-exaggerated. Eventually, with government intervention, rising commodity prices including palm oil and crude oil – the ringgit value will go up again. The cycle is inevitable – there is a cap to a freefall due to various factors. A bottomless pit for property price is not possible – it’s a basic necessity that suffers from scarcity everywhere.

Further, a growing young, productive and middle-income population across the developing world will continue to drive demand for property. OPEC too may at some point decide that the oil price is too low to be sustainable (even for them) or that the North American shale oil and gas industry has had enough battering. When oil price returns to the ‘new normal’ (lower than the average of USD100 per barrel it has enjoyed for the last few years – perhaps closer to between USD65-85), prices of property will rise to boom-time levels again – or even higher due to inflation, GST and pent-up demand.

Is there any reason not to take the next plane out to Malaysia for the big sale?

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