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PROJECT TITLE INVESTIGATING THE CHARACTERISTICS OF PROBLEMATIC

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					REAL ESTATE RESEARCH AND DEVELOPMENT GRANT SCHEME (NAPREC)




PROJECT TITLE

INVESTIGATING THE CHARACTERISTICS OF PROBLEMATIC RESIDENTIAL
PROPERTIES AT PUBLIC AUCTION SALES USING MULTIPLE REGRESSION
ANALYSIS (MRA)



PROBLEM STATEMENTS

In line with the increased non-performing loans for the purchase of residential properties,
an increasing number of residential properties go on auction in the market. The properties,
which are held as collateral, are being auctioned off by financial institutions to recover the
loans given to the purchasers / borrowers. Typically, prices of properties offered for auction
by financial institutions will be reduced by about 10% after each unsuccessful auction sale.
Although the financial institutions have successfully disposed some of the properties via
public auction, the number of sales that are not successful is still significant.

According to one source, the auction reserve price of a flat unit has dropped to about
RM9,000, a reduction of up to 40% from the initial reserve price (The Star-6th September
2006). Unsuccessful auction sales of properties even after substantial price reductions are
attributed to poor demand for the properties. The question is why. Poor location, poor
neighbourhood condition and poor building condition have been cited as possible
explanations. Nonetheless, the actual causes have remained poorly understood.

In view of the increasing magnitude of the problem, it is imperative that a study be
undertaken to improve understanding of the issues. This research is therefore proposed
with that aim in mind. The Multiple Regression Analysis (MRA) will be employed to
analyse the characteristics of problematic auction properties in the market. By using MRA,
large samples of data can be analysed objectively to identify the prominent characteristics
of the problematic auction properties.


Research questions

This research paper will address the following research questions:

 Why do prospective buyers snub problematic residential properties even after prices
  have been reduced significantly in auction?

 To what extent does the procedure/process in existing auction system contribute to the
  problem?

 What are the features that characterise problematic auction residential properties - is
  there a tendency for some residential property types to be more difficult to sell at
  auctions than others?




Universiti Malaya (UM) & JS Valuers Research & Consultancy Sdn Bhd                          1
REAL ESTATE RESEARCH AND DEVELOPMENT GRANT SCHEME (NAPREC)




 Is there a “sub market” to problematic auction properties?

 What model is appropriate to use in identifying and predicting these properties?



OBJECTIVES

i)      To analyse the characteristics of problematic residential properties at public auctions

ii)     To generate an appropriate multiple regression model for predicting properties that
        will be remained unsold at public auctions for a specific times

iii)    To determine the spatial / locational behaviours of problematic auction properties



SCOPE OF RESEARCH

The following are the proposed scopes of this research:

        The geographical coverage of this research is confined to residential properties
         located within Kuala Lumpur and Selangor

        A property is considered a problematic auction property only if it has remained
         unsold after appearances of more than three (3) times at public auction

        The data used for the purpose of analysis in this research comprises properties that
         have been put up for auction in the market from September 2005 to December 2007



LITERATURE REVIEW SUMMARY

Subsequent to the economic recession in 1998, the Malaysian property market has
expanded vigorously as a result of the expansive fiscal policies adopted by the government.
Due to the increasing Non Performing Loans (NPL) of the corporate loans, most financial
institutions have diverged from corporate loans to expanding their retail mortgage portfolio.

As a result of this, more properties, particularly the residential properties have been
introduced into the market. The total existing residential properties have expanded by more
than 24.8% from 2,991,738 units as at the end of 2002 to 3,734,280 units during the second
quarter of 2006 (Napic Stock Report). This indicates an average annual increase of about
6.5%, which is significantly higher than the national average annual population growth rate
of about 2.6% (Census 2000).




Universiti Malaya (UM) & JS Valuers Research & Consultancy Sdn Bhd                                2
REAL ESTATE RESEARCH AND DEVELOPMENT GRANT SCHEME (NAPREC)




There are also 631,790 residential units currently under construction and are expected to be
completed within the next three years. Another 631,443 residential units have been
approved by the local authorities for development. As a whole, the residential stock is
expected to increase by an enormous 33.8% in the event that all the above units are
completed.


 TOTAL HOUSING LOANS AND NON PERFORMING LOANS (NPL) FOR THE
   PURCHASE OF RESIDENTIAL PROPERTIES (DEC 1996 TO DEC 2006)

   Housing loans (RMmil)                                                                                                                                                                             NPL (RMmil)
    140,000                                                                                                                                                                                                    16,000


                                                                                                                                                                                                               14,000
    120,000


                                                                                                                                                                                                               12,000
    100,000

                                                                                                                                                                                                               10,000
     80,000

                                                                                                                                                                                                               8,000

     60,000
                                                                                                                                                                                                               6,000

     40,000
                                                                                                                                                                                                               4,000


     20,000
                                                                                                                                                                                                               2,000


          0                                                                                                                                                                                                    0
              Dec-96

                       Jun-97

                                Dec-97

                                          Jun-98

                                                   Dec-98

                                                            Jun-99

                                                                     Dec-99

                                                                              Jun-00

                                                                                       Dec-00

                                                                                                Jun-01

                                                                                                         Dec-01

                                                                                                                  Jun-02

                                                                                                                           Dec-02

                                                                                                                                    Jun-03

                                                                                                                                               Dec-03

                                                                                                                                                        Jun-04

                                                                                                                                                                 Dec-04

                                                                                                                                                                          Jun-05

                                                                                                                                                                                   Dec-05

                                                                                                                                                                                            Jun-06

                                                                                                                                                                                                      Dec-06




                                         Housing loans (RMmil)                                                                               NPL-Residential (RMmil)

        Source: Bank Negara Malaysia




Although it has been widely acknowledged that property developments contributed to the
country economic growth, unchecked progression has the potential of bringing negative
effects to the country. An imminent problem is the swelling NPLs in the banking system
involving mortgage loans of residential properties. The NPL involving loans for purchase
of residential properties have increased from RM5,272 million in December 2002 to a
staggering RM14,051 million as at December 2006, which indicated more than 166%
increase during the four year period.

Despite concerted efforts by the financial institutions to dispose the properties to reduce the
NPL, many have difficulty to dispose these properties. Cheah (2005) highlighted that many
properties are being auctioned at implausibly low price. These properties have largely
remained unsold after numerous auctions and as a result of this the reserve price had to be
reduced. He also highlighted that a majority of these problematic properties are vacant and
in poor state of maintenance.


Universiti Malaya (UM) & JS Valuers Research & Consultancy Sdn Bhd                                                                                                                                                      3
REAL ESTATE RESEARCH AND DEVELOPMENT GRANT SCHEME (NAPREC)




RESEARCH BENEFITS

This research paper is expected to benefit the following parties:

a) Financial institutions

-   The findings from this research paper will assist the financial institutions in formulating
    their credit policies and to reduce the NPL involving problematic auction residential
    properties.

b) Local authorities

-   The findings from this research paper will serve as a guideline for the relevant
    authorities in assessing and approving property development projects.

-   To take pre-cautionary measures for projects that could potentially become problematic
    auction properties; e.g. appropriate measures to increase the collection of assessment
    and management of the project to prevent vandalism and misuse of the buildings.

c) Developers

-   To suspend property development projects that could potentially contribute to the
    problematic auction properties in the market



EXPECTED RESEARCH OUTCOME

The expected outcome of this study will be the MRA-based model for the predicting of
problematic residential properties that will be unsold at public auctions for a number of
times. The study will also offer recommendations on dealing with problematic auction
properties. At least one paper will be produced for refereed journal



PROJECT TEAM

This project will be based on a public-private sector collaboration that will involve the
Department of Estate Management of the University of Malaya and JS Valuers Research
and Consultancy Sdn Bhd. The collaboration will allow the two-way transfers of know how
between the public and private sectors.




Universiti Malaya (UM) & JS Valuers Research & Consultancy Sdn Bhd                           4
REAL ESTATE RESEARCH AND DEVELOPMENT GRANT SCHEME (NAPREC)




ENQUIRIES

For further enquiries, please do not hesitate to contact Mr. Chan Wai Seen of JS Valuers
Research & Consultancy Sdn Bhd at 03-21624133 / 012-2191282 or Prof Madya Md Nasir
Daud at 03-79676880 / 016-2752849.




Universiti Malaya (UM) & JS Valuers Research & Consultancy Sdn Bhd                     5