Malaysian Economy Construction & Property

Outlook

Manokaran Mottain

Chief Economist

November 2017

2

Glance at Budget 2018

Source: Ministry of Finance

2017e 2018f

RM bn % of TR RM bn

% of TR

Total Revenue (TR) 225.3 100.0 239.9 100.0

Direct Tax 119.7 53.1 127.7 53.3

Corporate 67.8 30.1 72.5 30.2

Individual 30.1 13.4 13.4 13.4

Petroleum 10.9 4.9 11.4 4.8

Indirect Tax 60.5 26.9 63.9 26.6

GST 41.5 18.4 43.8 18.3

Excise duties 11.8 5.2 12.3 5.1

Import duty 3.0 3.0 1.3 1.3

Export duty 1.2 1.4 0.5 0.6

Non-tax Revenue 45.1 20.0 48.3 20.1

Operating expenditure 219.9 97.6 234.3 97.7

Development expenditure 46.0 20.4 46.0 19.2

3

Development expenditure by sector

Source: Ministry of Finance

2017e 2018f

RM bn % of TDE RM bn % of TDE Total Development Expenditure (TDE)

45.9 100.0 46.0 100.0

Economic 25.9 56.3 26.3 57.3 Transport 10.8 23.4 10.5 22.8 Trade & Industry 4.8 10.5 4.1 9.0 Energy and Public Utilities 2.5 5.5 2.7 6.0 Agriculture & Rural development 2.4 5.3 2.5 5.5 Environment 2.2 4.8 2.0 4.4

Social 12.1 26.4 11.7 25.5 Education & Training 5.9 12.8 5.3 11.4 Housing 0.9 1.9 1.2 2.5 Health 1.5 3.3 1.9 4.2 Security 5.3 11.5 5.2 11.3

General administration 2.7 5.8 2.7 5.9

4

Comparison of expenditure – MY and SG

Source: Ministry of Finance

Malaysia Singapore

82.7%

17.3%

Operating expenditure

Development expenditure

75.0%

25.0%

Operating expenditure

Development expenditure

Limited scope for expansionary fiscal policies, as gov’t remains committed to fiscal consolidation

Target for fiscal deficit to fall to 2.8% to GDP in 2018 (2017e: -3.0%)

In 2018, gov’t revenue is expected to increase by 6.4% to RM239.9bn (2017e: RM225.3bn)

Estimated – Corporate income tax collection (30%), GST collection (18%), oil-related revenue (16%)

Gov’t proposed to allocate RM234.3bn (2017e: RM219.9bn) in operating expenditure and maintain development expenditure of RM46bn

Looking back: FG finance

Federal government’s expenditure and revenue

Source: Ministry of Finance 5

Fiscal deficit

0

50

100

150

200

250

300

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

e

20

18

f

RM bn RevenueOperating expenditureDevelopment expenditure

-3.4 -3.2 -3.1

-4.6

-6.7

-5.3-4.7

-4.3-3.8

-3.4 -3.2 -3.1 -3.0 -2.8

-8.0

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

-50

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

20

05

20

06

20

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09

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20

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20

17

e

20

18

f

%RM bnFiscal deficit (lhs)Fiscal deficit to GDP ratio (rhs)

6

Malaysia’s economy grew 5.7% in the first half of 2017

Gov’t expects 2017 and 2018 GDP growth to expand between 5.2% - 5.7% and 5.0% - 5.5% respectively

Riding on global growth recovery

GDP growth by sector and aggregate demand (% y-o-y)

Real GDP 4.2 5.6 5.8 5.4 5.2 - 5.7 5.0 5.0 - 5.5

Agriculture -5.1 8.3 5.9 5.6 5.6 3.0 2.4

Mining 2.2 1.6 0.2 0.6 0.5 5.5 0.9

Manufacturing 4.4 5.6 6.0 5.8 5.5 8.0 5.3

Construction 7.4 6.5 8.3 7.7 7.6 5.5 7.5

Serv ices 5.6 5.8 6.3 5.8 5.9 5.3 5.8

Consumption

- Public 0.9 7.5 3.3 3.5 2.7 2.0 1.3

- Private 6.0 6.6 7.1 7.1 6.9 7.0 6.8

Investment

- Public -0.5 3.2 -5.0 2.2 3.7 1.0 -3.1

- Private 4.3 12.9 7.4 9.1 9.3 8.5 8.9

Exports 1.1 9.8 9.6 6.9 8.0 3.4 2.3

Imports 1.1 12.9 10.7 7.0 9.9 3.5 2.5

- Net exports -3.7 -14.5 1.4 5.9 7.3 3.1 2.5

Source: BNM, AllianceDBS

1Q2016

MOF2Q

2017 2017e

A llianceDBS

2018e

A llianceDBS MOF

7

Private consumption growth has recovered from its low of 4.1% in 3Q15, following GST implementation

Expanded 7.1% in 2Q17 (1Q17: 6.6%), highest since 1Q15

Despite strong private consumption growth, we remain cautious on sustainability

MIER consumer sentiments remains bearish for the 13th consecutive quarter (3Q17: 77.1 vs 2Q17: 80.7)

Unemployment rate averaged 3.4% in 1H17, higher than 2010-2015 avg of 3.1%

Subdued wage growth, annual median income has been moderating at 6.6% in 2016 (2014: +11.7%)

Household debt level at 85.6% of total GDP as at mid-2017 (end-2016: 88.4% of total GDP)

Private consumption – resilient, susceptible to downside risks

Credit card spending and retail sales growth

Source: MIER, Department of Statistics

Private consumption growth and consumer sentiments index

50

60

70

80

90

100

110

120

130

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

1Q

15

3Q

15

1Q

16

3Q

16

1Q

17

sa % q-o-q Private consumption growth (lhs)

Consumer sentiments index (rhs)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

% y-o-yRetail Sales growth

Credit card spending growth

Household debt to GDP ratio has been gradually decreasing to 85.6% as at mid-2017 (end-2016: 88.4%)

In fact, total household debt growth ratio continues to moderate, expanding by 5.1% in 2017 (2016: +5.8%)

Due to prudential measures by the gov’t and households reducing loan exposure in non-residential properties, vehicles and securities

Household debt to GDP ratio

Household debt in Malaysia

Source: BNM, Department of Statistics, AllianceDBS 8

80.5

86.286.8

89.188.4

85.6

76.0

78.0

80.0

82.0

84.0

86.0

88.0

90.0

0

100

200

300

400

500

600

700

800

900

1,000

2012 2013 2014 2015 2016 1H17

RM bn %Total household debt Household bebt to GDP

Elevated inflationary pressures YTD-Sep17 CPI expanded higher at 4.0% y-o-y (YTD-Sep16: +1.9%)

Lifted by higher pump prices in transport sector on the back of rising Brent crude oil prices

Nevertheless, the gov’t expects 2018 inflation to moderate between 2.5% - 3.0% as price pressures normalise

Source: Department of Statistics, AllianceDBS

Malaysia inflation rates Percentage point contribution to inflation (% y-o-y)

9

-2

-1

0

1

2

3

4

5

6

-2

-1

0

1

2

3

4

5

6

Jan

-12

Ma

y-1

2

Sep

-12

Jan

-13

Ma

y-1

3

Sep

-13

Jan

-14

Ma

y-1

4

Sep

-14

Jan

-15

Ma

y-1

5

Sep

-15

Jan

-16

Ma

y-1

6

Sep

-16

Jan

-17

Ma

y-1

7

Sep

-17

% y-o-y% y-o-yCPI (ex food)CPI (ex food & transport)CPI

0.0 0.5 1.0 1.5 2.0 2.5

Transport

Food and Beverages

Housing and utilities

Others

% pt cont.

Sep-17

Aug-17

10

YTD-August, unemployment rate averaged 3.4% – higher than the 2010-2015 average of 3.1%

Trend average of unemployed is around 500,000 people per month since mid-2015, up from around 420,00 per month average in 2010-2014

Manufacturing, wholesale and retail trade sector key employment sectors (cumulatively over 30% of total employment)

Unemployment rate at worrying levels

Unemployment rate Number of unemployed person

Employed labour force by sector composition (in 2016) Wholesale, retail trade; auto vehicle

repair16.8

Manufacturing16.5

Agriculture, forestry &

fishing12.5Construction

9.3

Accommodation, F&B

8.2

Others36.7

Source: Department of Statistics

0

100

200

300

400

500

600

De

c-1

1

Ap

r-1

2

Au

g-1

2

De

c-1

2

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3

Au

g-1

3

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Au

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r-1

6

Au

g-1

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6

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r-1

7

Au

g-1

7

'000

3.4

2.0

2.5

3.0

3.5

4.0

4.5

Jan

-09

May

-09

Sep

-09

Jan

-10

May

-10

Sep

-10

Jan

-11

May

-11

Sep

-11

Jan

-12

May

-12

Sep

-12

Jan

-13

May

-13

Sep

-13

Jan

-14

May

-14

Sep

-14

Jan

-15

May

-15

Sep

-15

Jan

-16

May

-16

Sep

-16

Jan

-17

May

-17

%

11

No Overnight Policy Rate hike Bank Negara maintained a neutral tone with an upside bias, regarding the economic outlook for the year

Despite elevated YTD-September inflation of 4.0%, the underlying core inflation (excluding food and transport) has remained steady at around 1.7%

Bank Negara expects private consumption growth to expand 6.9% this year, however, consumer sentiments (as measured by MIER) has been bearish since 3Q14

Nevertheless, while the Ringgit exchange rate stabilises after heightened volatility early this year, it is not conducive for Bank Negara to deliver surprise interest rate cut/hike

Real interest rate and OPR Malaysia GDP and inflation growth

Source: Bank Negara, AllianceDBS

-5

-4

-3

-2

-1

0

1

2

3

4

5

-5.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

Jan

-07

Jun

-07

No

v-0

7A

pr-

08

Sep

-08

Feb

-09

Jul-

09

De

c-0

9M

ay-1

0O

ct-1

0M

ar-1

1A

ug-

11

Jan

-12

Jun

-12

No

v-1

2A

pr-

13

Sep

-13

Feb

-14

Jul-

14

De

c-1

4M

ay-1

5O

ct-1

5M

ar-1

6A

ug-

16

Jan

-17

Jun

-17

%% Real interest rate Overnight Policy Rate

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jan

-12

Ma

y-1

2

Sep

-12

Jan

-13

May

-13

Sep

-13

Jan

-14

Ma

y-1

4

Sep

-14

Jan

-15

Ma

y-1

5

Sep

-15

Jan

-16

May

-16

Sep

-16

Jan

-17

Ma

y-1

7

Sep

-17

%y-o-y%y-o-yGDP growth CPI

CONSTRUCTION SECTOR OUTLOOK

12

Budget 2018: Construction Sector Driving logistic sector

ECRL project Port Klang – Pengkalan Kubor

MRT2 project Sungai Buluh – Serdang – Putrajaya (52km: RM32bn)

MRT3 (Circle Line)

High Speed Rail Project KL – SG (350km)

Central Spine Road project (RM230m)

Upgrade of international and local airports

Schools development and improvement

14 new sports complexes nationwide: RM112m

Construction of pre-schools, PERMATA centre, primary & secondary schools and vocational colleges as well as matriculation centres (RM654m)

Rebuild and upgrade 2,000 dilapidated schools using IBS (RM2.5bn)

Providing quality infrastructure for the Rakyat

Pan-Borneo highway (RM2bn)

Development of communication infrastructure (RM1bn)

Construction of roads in rural areas (RM934m)

13

Source: Ministry of Finance

Major Project Updates

14 Source: AllianceDBS, various news sources

Projects

Est

amount

(RM bn)

Est

commencem

ent date^

Est completion date* Potential winners

MRT Line 2 and 3 60.0

Mid-2017

(Line 2); End-

2018 (Line 3)

July 2022 (Line 2); 2025/2026 (Line 3)Gamuda, MMC, IJM,

Sunway, various

Gemas-JB double tracking 8.9 Mid-2017 End-2020 Gamuda, IJM, WCT

LRT 3 10.0 Mid-2017 2020MRCB-George Kent and

other local contractors

Pan Borneo Highway 27.0 End-2017 2022CMS, Naim, HSL other

West Malaysian players

East Coast Rail Link 55.0 2018 2022 China Communication

Construction Company

Penang Integrated Transport 27.0 TBA TBAGamuda, IJM likely to

have subcon role

High Speed Rail 60.0 TBA End-2026 Gamuda, YTL, various

Jalan Tun Razak traffic dispersal 0.9 TBA TBA Various

BRT KL to Klang 4.0 TBA TBA Various

Bandar Malaysia 64.0 2018 2037 Various

Tun Razak Exchange 16.0 Started TBA Various

MRT lines

15 Source: MRT Corp

High Speed Rail

16 Source: MyHSR

Budget 2018: Construction Sector For 2011-2015, residential projects contributed 20-38% of the total construction value

2016 saw a doubling in infrastructure-related projects to RM58bn

As the Budget 2018 focuses more on transportation-led projects, the trend should continue to show positive growth moving forward

In line with a softer property market where developers have been holding back launches, construction related activities for residential and non-residential fell 45% and 40% y-o-y respectively

17 Source: CIDB

Breakdown of projects by sector

Chinese presence in infrastructure space growing

Within ASEAN, Malaysia is one of the largest beneficiary country from the One Belt, One Road initiative by China

More participation from Chinese contractors in Malaysia - Directly or through JV with local contractors

Driven by the Chinese government via G-to-G or Private Sector initiatives. Generally, the government will appoint the contractors according to the types of projects.

Backed by Chinese government – enjoy strong support from the Chinese government via cheaper source of funding (Mainland China lenders and the Export-Import Bank of China)

Construction companies which are dependent on contract awards will be directly impacted by the influx of Chinese contractors

18

19

Foreign Contractors’ Contribution Projects undertaken by foreign contractors (RMbn)

Source: CIDB

Foreign contractors contribution to total project value (%)

20

Chinese Contractors Largest Presence

Value of projects by foreign contractors (%)

Source: CIDB

Number of foreign contractors by country

CIDB statistics show that in 2016 foreign contractors clinched 37% of the total construction project value

In terms of value, the Chinese contractors lead the way with 42% of the total value comprising 25 projects

Largest amount of foreign contractors are from China with 23

21

China’s infrastructure investments

PROPERTY SECTOR OUTLOOK

22

Budget 2018: Property Sector Allocation of RM2.2bn for affordable housing schemes

Stamp duty exemption for loan agreement and letter of consent to transfer

50% tax exemption on rental income for rent up to RM2,000

Maintenance and refurbishment of houses including 1Malaysia Maintenance Fund (RM200m)

23

Source: Ministry of Finance

Projects Additional

Units Agencies

People’s Housing Programme (PPR) 17300 JPN

Rumah Mesra Rakyat 3000 SPNB

Perumahan Rakyat 1Malaysia (PR1MA) 210,000 PR1MA

PPA1M 25000 JPN

MyBeautiful New Homes (MyBNHomes) 600 NSU

MyDeposit & MyHomes 2000 JPN

FELDA Second Generation home 5000 FELDA

Malaysia Property – Looking forward to 2H18 No respite from relatively weaker property

market, but not all doom and gloom

Second-tier cities offer opportunities

Sustaining new property sales is a challenge for developers

Affordable homes to dominate in 2017/2018

Keen competition to cap price hike growth, pressuring margins

Sub-sales may gain traction; demand supported by rising affluence

24

Sentiment is recovering

Slower growth of house price index

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

60

70

80

90

100

110

120

130

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

1Q

15

3Q

15

1Q

16

3Q

16

1Q

17

MIER consumer sentiment (LHS)

Total approved property loan growth (RHS)

-10%

-5%

0%

5%

10%

15%

20%

25%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

2000=100

All Terraced High-rise Detached Semi-D

In the latest 3Q17 MIER survey, residential property index (RPI) rose to 107.8 moving into positive territory (2Q17: 76.6)

Residential sales were steady with new bookings picking up

Within future spending plans, housing plans were the most ambitious among consumers with 18% (2Q17: 11%) in urban areas and south

Cont – Outlook in the near term

Residential property index Consumer spending plans

Source: MIER 25

0 5 10 15 20

PC

Fridge

TV

Furniture

Car

House

%

3Q17 2Q17 3Q16

Overview of Malaysia property market

Properties priced RM250k-500k gained significant market share

Buyers increasingly upgrading properties even before 2011

Affordably-priced properties with lifestyle amenities in demand

26

Market share of property transaction volume by price range

87% 85% 83% 83% 81% 78% 75% 72%

60%53%

61%57%

9% 11% 12% 12% 14% 15% 16% 18%

27%31%

25% 28%

2% 3% 3% 4% 4% 5% 6% 7% 9% 11% 11% 11%

0%

20%

40%

60%

80%

100%

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

<250k 250-500k 500k-1m

Overview of Malaysia property market

27

Government schemes and incentives

Pol ic y De ta i l s Prope rty va lue Mora torium

Fina nc ing sche me

My First Home Scheme

up to 100% financing for young adults below 40 years old

earning <RM5k/month <500k

Private Affordable Ownership

Housing Scheme (MyHome)

developers' subsidy of up to RM30k/ low-cost house for first-

time homebuyers earning RM3k-6k/month

<45k low cost,

<170k medium

cost

Stamp duty exemption 100% stamp duty exemption for first residential property <300k

Youth Housing Scheme

Full financing for first home for married youth aged between

25 and 40 years with household income <RM10k/month.

RM200 monthly assistance for first 2 years <500k

First House Deposit Financing

Scheme (MyDeposit)

RM10k deposit contribution (max RM30k) for first homebuyers

with household income <RM10k/month <500k

Hous ing sche me

1Malaysia People's Housing

Programme (PR1MA)

Malaysians above 21 years old with individual/household

income <RM10k and own no more than 1 property 100k-400k 10 years

1Malaysia Civil Servants Housing

Programme (PPA1M)

Affordable homes for civil servants with individual income

<RM10k/month 90k-300k 10 years

Rumah Selangorku

Affordable homes for Selangor first-time homebuyers with

household income <RM8k/month 42k-250k 5 years

RUMAWIP

Affordable homes for KL/Putrajaya/Labuan first-time

homebuyers with household income <RM15k/month 52k-300k 10 years

Challenging market in 2017

Property prices remain stubbornly high

Strict bank lending policies lead to high loan rejection rates

Macro-prudential measures over the years:

2010: 70% loan-to-value cap for 3rd property onwards

2013: Mortgage financing tenure reduced to a maximum of 35 years

2014: Removal of DIBS incentive, higher threshold for foreigners to buy property at RM1m from RM500k

28

Real Property Gains Tax (RPGT) rates in Malaysia

Holding

period (yr) 2014 2013 2012 2011 2010

2008-

09

1995-

2007

1 30% 15% 10% 10% 5% - 30%

2 30% 15% 10% 10% 5% - 30%

3 30% 10% 5% 5% 5% - 20%

4 20% 10% 5% 5% 5% - 15%

5 15% 10% 5% 5% 5% - 5%

>5 0% 0% 0% 0% 0% - 0%

Cautious outlook

Lowest take-up in 2016 over the past 10 years

Property buyers turn cautious; no more sold-out-upon-launch

Key-events

Property market remains strong till 2012, as macro-prudential measures introduced negatively impacted the market

Developer Interest Bearing Scheme (DIBS) was banned in 2014

GST introduced in 2015, while the Ringgit weakened against the USD in 2016

29

Property sales suffer in 2016

20%

25%

30%

35%

40%

45%

50%

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

New launch (LHS) Sales (LHS) Take up (RHS)

Too much supply?

Incoming supply is the largest in recent years

2017-2018 should see higher completions especially high-rises

Large incoming supply to cap house price growth

30

New residential supply to accelerate in 2017-2018

Comple tions

% of

s tock

Incoming

supply

% of

s tock Exis ting s tock HPI

HPI

growth

2002 156,042 5.1% 605,566 19.9% 3,050,421 104

2003 192,490 5.9% 627,028 19.1% 3,287,733 108 4.0%

2004 165,964 4.8% 641,771 18.5% 3,467,812 113 4.8%

2005 180,600 4.9% 637,208 17.3% 3,680,462 116 2.4%

2006 171,448 4.4% 619,583 16.0% 3,864,432 118 1.9%

2007 181,123 4.5% 573,716 14.1% 4,063,167 124 5.3%

2008 136,881 3.2% 557,502 13.2% 4,220,510 130 4.7%

2009 103,335 2.4% 538,894 12.4% 4,338,609 132 1.5%

2010 99,866 2.2% 533,605 12.0% 4,446,085 141 6.8%

2011 65,866 1.4% 533,844 11.7% 4,547,971 155 9.9%

2012 72,247 1.6% 628,655 13.5% 4,640,269 173 11.8%

2013 78,265 1.7% 696,557 14.8% 4,718,534 193 11.6%

2014 107,747 2.2% 769,788 15.9% 4,848,030 211 9.4%

2015 71,591 1.5% 766,582 15.8% 4,852,986 227 7.4%

2016 78,216 1.6% 829,687 16.8% 4,945,140 242 6.9%

1Q17* 20,325 0.4% 494,319 9.3% 5,300,429 n.a. n.a.

* Adjustment made for completed projects issued with CCC for incoming suply and existing stock

Game changer is needed..

Introduction of a single entity governing matters relating to affordable housing, consolidating all current affordable housing agencies – Malaysian Affordable Housing Agency

Negotiation with state governments to fully-utilise parcels of undeveloped government lands

Enforce a higher percentage of total developments by developers – reserving for affordable housing projects while offering tax reductions as incentives

Transit rental homes with rent-to-own clause – support lower income or fresh graduates while easing their burden of rising cost of living

31

THANK YOU

32