Malaysia Builders Hit by Tax Amid Worst Slump Since 1998

UEM Sunrise Bhd., Malaysia’s biggest developer by market value, said it faces lower profit margins from a new tax and may delay some projects amid the nation’s steepest slump in property sales since the 1998 recession.

The company’s costs will rise as a 6 percent goods and services tax starting in April 2015 boosts prices of building materials that can’t be passed on for some projects, Izzaddin Idris, an executive director at the Kuala Lumpur-based firm, said in an e-mail interview on Aug. 3. UEM is “revisiting” some of its planned developments as the current slowdown might last for another year, he said.

Malaysian property companies are grappling with higher costs in an industry already reeling from central bank curbs on lending last year and the first interest-rate increase in more than three years in July. Property transactions in 2013 sank the most since the aftermath of the 1997 Asian financial crisis, while home prices in the first quarter rose at the slowest pace since 2010.

The tax impact will “be reflected in UEM’s future results,” said Izzaddin. “We can expect a slight decline in margins with rising cost pressures.”

Prime Minister Najib Razak’s government introduced the goods and services tax to broaden its revenue base after running a fiscal deficit since 1998. Fitch Ratings cut its Malaysia outlook to negative in July last year, citing concern over deteriorating public finances.

Levy Impact

UEM, which reported a 71 percent drop in first-quarter net income, has declined 13 percent in Kuala Lumpur trading this year. That compares with the benchmark FTSE Bursa Malaysia KLCI Index which is unchanged. UEM slid 1.4 percent at the close today, the most in two weeks, while the KLCI lost 0.1 percent.

The levy is also weighing on UEM’s competitors. SP Setia Bhd. said in June it made provisions for rising taxes that resulted in a drop in second-quarter earnings. Sunway Bhd. estimates a 3 percent impact to its profit margin in the worst case where it can’t pass on any of the tax to buyers, the company said by e-mail. Sunway shares slid 0.3 percent.

Profits in the Bursa Malaysia Property Index will drop 12 percent in the next 12 months, versus a 4.9 percent gain for the KLCI Index, data compiled by Bloomberg show.

“We are definitely cautious,” Thomas Yong, the chief executive officer of Fortress Capital Asset Management Sdn., which oversees 1 billion ringgit ($311 million), said by phone from Kuala Lumpur, referring to developers. “We have property stock holdings in China and Singapore. We sold out of Malaysian property equities quite a while back.”

Stocks Rebound

The industry gauge’s 22 percent advance from its February low suggests investors anticipate a rebound in demand, Mak Hoy Ken, an analyst at AmSecurities Sdn. in Kuala Lumpur, said by phone. UEM’s price-to-book ratio of 1.5 compares with 2.3 for the FTSE Bursa Malaysia KLCI Index, data compiled by Bloomberg show.

Government efforts to cool the market will help Malaysia avoid a property bubble, and favorable demographics, rising urbanization and low unemployment will help sustain demand, Edwin Siow and Chris Oh, Kuala Lumpur-based analysts at UBS AG, said in a May report.

While residential property is exempted from GST, the increase in input costs tied to the levy can’t be claimed by developers, said Izzaddin. “Most contractors or suppliers that are tendering for projects are already factoring in potential cost increases pursuant to the GST.”

Lower Demand

Property transactions might see a short-term increase as buyers rush to complete deals before the GST, though sales will probably slow again after the tax is implemented, he said.

The government started imposing stricter lending standards on banks from 2010 to cool the property market. In July last year, Malaysia’s central bank shortened the maximum length on mortgages to help curb household indebtedness that has risen by an annual average 12 percent in the past five years.

From January this year, policy makers stopped developers from absorbing some interest payments on loans and raised the capital gains tax to 30 percent on homes sold within five years.

Property transactions dropped 11 percent in 2013, according to the National Property Information Centre, the most since a 32 percent slump in 1998, when Malaysia had its first recession in 13 years. The Malaysian House Price Index rose 8 percent in the first three months of 2014, the slowest growth since the third quarter of 2010.

Developers offered 6,339 new units in the first quarter, a drop of almost 50 percent compared with the previous quarter. Only 30 percent of the units were sold.

“The property market is cyclical in nature,” Izzaddin said. “We strive to be more nimble and are developing a new consciousness among all employees” to keep costs low, he said.

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