Uncertainties in Myanmar impact real-estate market

By Tan Kok Keong

/ REMS, The Edge Property |

November 9, 2015 10:00 AM SGT

The world’s obsession with Myanmar’s general election on Nov 8 has overshadowed everything else that has happened in the country this year. Besides the political uncertainty, Myanmar has suffered much economic disruption, owing to the delay of larger investments and the effects of severe floods.

The real-estate market in Yangon is no different. Construction of a number of large projects was postponed as demand faltered. The government’s decision on July 7 to revoke the planning permits for five projects near its iconic Shwedagon Pagoda has added to market uncertainty.

In the residential sector, developers found it increasingly difficult to sell units as investors stayed on the sidelines and foreigners continued to be locked out of the market. Similar weakness was also observed in the serviced-apartment sector. Based on our survey, rents for Yangon’s serviced-apartments fell 1.4% quarter- on-quarter in 3Q2015. This was because of the completion of new projects. However, the waiting time for better-quality projects, such as Marina Residence and Shangri-la, remains long (see Chart 1).

In the office sector, the office rental index has declined 40% from its peak of two years ago (see Chart 2). For example, the asking rent for Sakura Tower has dropped from US$8.5 per sq ft a month in 2Q2013 to US$6.5 per sq ft a month in 3Q2015. Despite its weakness, the value proposition of the market remains clear for longer-term investors. At its peak, the average transacted prices of strata office spaces in major commercial buildings were US$350to US$400 per sq ft. Even if market rent were to decline further to US$5 per sq ft a month and prices peak at US$400 per sq ft, those who own office assets now can still enjoy a gross yield of approximately 15%!

Chart 1

Source: REMS Research

Chart 2

Source: REMS Research

Can a property bubble burst in a cash-based economy?

Some analysts have raised the possibility of a property bubble bursting in the Yangon property market. There is no doubt there’s a possibility of short-term oversupply if all the projects that were started over the last three years were to complete between2017 and 2018. However, if you define the bursting of bubbles as a period of a sustained sharp fall in prices, it might not occur in Myanmar.

The key reason is that both end purchasers and most developers are funding their real estate via cash in Myanmar. In the event of adverse market conditions, the multiplier effect of a downward spiral in prices is unlikely to be as pronounced as that in highly leveraged markets.

Secondly, while many have propositioned Myanmar as “poor”, income inequality is very extreme in the country. Our experience suggests that the lack of capital is mainly owing to the reluctance of the local rich to reinvest their wealth at home. We suspect the major developers in Myanmar have the financial means to finance their projects when they need to.

Whether by design or default, Myanmar’s inefficiency in granting planning and building approvals, the length of time it takes to forma company, and the documentation needed to secure permits for foreign investments have helped to prevent an overly exuberant supply from forming and could continue to be a barrier to a supply spike.

Commercial and residential buildings in Yangon. Despite declines in residential and office rentals, Myanmar’s property market continues to offer a 15% gross yield.

Post-election boost for Asia’s fastest-growing economy

According to the International Monetary Fund (IMF), Myanmar’s economy registered impressive growth — an average of 8.1% per annum for the past three years — making it the fastest growing economy in Southeast Asia. Myanmar is expected to undergo a political transition following the elections. An orderly transition could lead to a massive outpouring of economic support and investments from the Western countries.

In its latest estimate in October 2015, the IMF expects Myanmar’s economic growth to accelerate to an average of 8.4% per annum over the next three years. If that is realised, Myanmar will continue to be one of the fastest growing economies. The market view is that economic reforms are largely irreversible, no matter who forms the new government. The key issue is whether the newly formed government can transit fast enough to continue the drive to modernise the country and unlock its economic potential.

Under the base-case scenario of a peaceful transition, we would expect the continued inflow of investments to upgrade the country’s physical infrastructure, financial and insurance industry, the development of business services and others facilities needed to support its growth as a manufacturing base.

Property market to enjoy flight to quality

Increasingly, corporates are looking to expand into higher-growth countries to sustain profitability and many simply cannot afford to pass up on the chance to invest in a country with 53 million people. We expect an increase in foreign investments, new company formations and an increase in the number of foreigners working in the country.

Even during the slowdown this year, an increased pace of investments could be observed in some of the longer-term infrastructure companies. Examples include Japanese companies such as Hitachi, Mitsubishi Corp, Marubeni Corp and Sumitomo Corp, UK-based BG Group and Australia’s Woodside Energy. This could increase demand for better-quality housing, hotels and offices in the coming years.

Yangon’s real estate market is severely undersupplied. The construction industry has been at a standstill for almost 20 years, with no major development completed in that time. Look at the current office market yield of 15%.

Tan Kok Keong is CEO of real estate consultancy REMS Advisors, and co-founder of Fund places, a real estate-dedicated crowdfunding platform. He can be reached at kk.tan@rems.asia.

This article appeared in The Edge Property Pullout, Issue 702 (November 9, 2015) of The Edge Singapore.

Tags: