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Data Centers in Malaysia: How Property Investors Can Avoid the 'Bull Trap'

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Investors need to be aware of the long-term impact of the Johor data centre market on the locality and remain alert to possible changes in market trends.

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Malaysia’s property market started to regain strength in 2H2023. Industrial real estate has performed commendably, signalling the growing demand for manufacturing and logistics space and assets that cater to the rise of the digital economy and technological advancements. When investors continue to seek to capitalise on stable returns from industrial real estate, the spotlight on industrial assets is intensified further as Johor positions itself as the country’s leading data centre market, with significant investment in data centre developments by multinational companies.

According to the Malaysian property agency Zerin Properties, Johor is expected to pull RM17 billion in new data centre investments this year, building on RM51.1 billion in investments in 2022. Investors are generally optimistic about the prospect of a more positive real estate market as they see data centre investments as a catalytic enabler that will drive the demand for more infrastructure works and other real estate assets like residential and commercial properties in supporting the growing workforce and population. Furthermore, besides Klang Valley and Penang, Johor is considered another prime real estate market, accounting for 15.7% and 19.2% of the total volume and value of property transactions, respectively (Figure 1).   

Figure 1: Johor’s real estate market share in terms of volume & value of transactions, 2023. Source: NAPIC

While investors can view this as an indication that the country’s property market is on the mend, it should be noted that the rapid growth of the Johor data centre market is primarily driven by its proximity to land-scarce Singapore, the spillover effects of the US-China trade war, as well as its competitive land prices, operating costs, and electricity tariffs; in which its spillover effects to the country’s property market are rather regional, with a greater impact locally than nationally.  

In addition, investors need to be aware of the long-term impact of the Johor data centre market on the locality and remain alert to possible changes in market trends. This is because the emergence of high-spec data centre facilities with ESG compliance features will likely result in higher rental rates in the local market. In the medium term, this may stimulate the local/regional real estate market, but its long-term impact on other real estate asset classes should not be underestimated as it may put pressure on the affordability and survival of other asset classes due to higher land prices, especially those prime industrial lands near connectivity nodes.

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More importantly, there is still uncertainty about how long the current uptrend in the property market brought about by the industrial/data centre market will continue once the data centres are up and running. Unless the country continues to show promising growth prospects on the back of strategic investments, infrastructure improvements, and changing market dynamics – which are key enablers to the sustainable growth in the property market – investors should be wary of the current real estate market rebound, to avoid getting caught in a “bull trap.”

A “bull trap” is a situation where a trader purchases an asset believing that its price will continue to rise, but only to see it fall sharply after reaching new highs. A bull trap often occurs during periods of market uncertainty or when false information is circulated about a specific asset. Identifying bull traps can be tricky, but it can still be done with the assistance of several indicators (Table 1).

Table 1: Bull trap indicators

IndicatorDescription
Sharp price increasesA sudden, sharp price increases following a long-term downward trend can be a warning sign of a potential bull trap. One must question whether this rise is supported by fundamental factors or whether it is too sudden and disconnected from market reality.
Low trading volumeIf a price surge during a so-called bull trap occurs on low trading volume, it is a sign that the move may not have strong support from market participants. Low trading volume indicates a lack of confidence among traders, making price movements more susceptible to reversals.
Divergence from market sentimentEvaluate whether current market sentiment is consistent with a sudden increase in price. If broader market sentiment remains bearish despite apparent price gains, it casts doubt on the sustainability of the uptrend and the possibility of a bull trap.
Short-term nature of the moveBull market traps typically involve short-lived rallies that fail to sustain momentum over the long term. If prices rise quickly but lack follow-through in subsequent trading sessions, it increases the likelihood of a bull trap.
Source: https://skilling.com

By applying the Massive Divergence Concept with NAPIC’s property transaction data as of 4Q2023, the author’s article published on Property Guru for Business dated 28th August 2024 entitled – Bullish or bearish? Is there a turning point in our property market? – concluded that a positive short-term rebound in the Malaysian property market was promising, but investors should remain cautious as the record-breaking transactions marked in 2023 could be a bull trap that will soon lose its momentum of growth after a convincing rally.

This is because, despite the value of property transactions tapping a new high in 2023 (RM196.83 billion) – which is in line with indicator (i) – the sharp rise in prices is not confirmed by strong volume of transaction, where the volume in 2023 (399,008 units) failed to recapture the highest volume ever reached in 2011 (430,400 units) – which is in-line with indicator (ii) (Figure 1). Reaching a new high in the transaction value without the support of high volume is a sign of bearish divergence, which could signal a potential trend reversal to the downside. Investors might consider taking a defensive position and wait for the volume of transactions to confirm the trend.

Figure 1: Volume and value of property transaction, 1990 – 2023. Source: NAPIC

This is like what happened around 2011 – 2014: the value peaked in 2014 (RM162.97 billion) but with declining volume since 2011, indicating a waning purchasing momentum that investors must be wary of to avoid falling on the wrong side of sudden price movements. Not surprisingly, transaction value fell for the following 3 years, reaching its first bottom in 2017 (RM139.84 billion). This contrasts with the one that happened during 1990 – 2010, where the rising prices were confirmed by strong market momentum, with the volume generally moving in tandem with the value of the transaction.  

As of 1H2024, Malaysia’s property sales continue to surge to RM105 billion compared to RM85.37 billion recorded in the same period last year, which is a y-o-y increase of 23.8%. The recorded value is also the highest half-year sales ever since 2016. In terms of transaction volume, a total of 198,806 units were recorded in 1H2024, representing an 8% increase from 184,140 units in 1H2023 (Figure 2). While it is still too early to confirm if a trend reversal will happen in 2024, weaknesses in the current uptrend are obvious as the growth rate in volume cannot catch up with the growth rate in value, signifying the beginning of a bearish divergence.

Figure 2: Y-O-Y change of property volume and value of transaction, 1H2016 – 1H2024. Source: NAPIC

Furthermore, developers are generally not “too excited” about the achievement made in the first half of 2024, as they believe market softness will happen and persist for the rest of the year. According to the Property Industry Survey for 1H2024 and Market Outlook for 2H2024 and 1H2025 conducted by the Real Estate and Housing Developers’ Association (REHDA), more than half of the developers (56%) are avoiding new launches in 2H2024, due to unfavourable market conditions, business constraints, lack of suitable product or land bank locations, and lack of demand in a project location.

In addition, a significant 93% of the developers surveyed stated there is a higher increase in the price of building materials in 2024 compared to the previous years, with materials such as glass, cement, and sand recorded more than 10% increase in average price as of 30th June 2024. Despite the improving industry conditions in 1H2024, as reported by NAPIC, developers may choose to “wait and see,” which could, in turn, dampen market sentiment. This is in line with an indicator (iii) – divergence from market sentiment – where the current market sentiment is inconsistent with the price increase and hence casts doubt on the sustainability of the recent uptrend.

A rather weak market sentiment is also reflected in Malaysia’s retail sales growth. Based on the Retail Group Malaysia’s (RGM) report, retail sales growth decelerated to 0.6% in 2Q2024, falling short of market expectation recorded at 1.7% as estimated by the Malaysia Retailers Association (MRA) and Malaysia Retail Chain Association (MRCA). Despite the ringgit is among the best-performing currencies in the world against the US dollar so far this year (Figure 3), challenges such as rising costs of living, increased service tax rates, and floating diesel prices have reportedly impacted retail spending.

Figure 3: The exchange rate for US dollar to Malaysian ringgit, 2nd April – 2nd October 2024. Source: https://wise.com/gb/

Theoretically, a stronger ringgit means greater purchasing power of the people, which would help reduce imported inflation, thereby leading to a lower cost of living. However, prices are always sticky in reality. Even if the import costs fall due to a stronger ringgit, it is nearly impossible to bring down the consumer prices that have already factored in the import costs before the ringgit’s rebound. Anecdotal evidence suggests that consumers are worse off following the sharp cost increase in the last few years. Many are struggling with the rising cost of living while maintaining their living standards as incomes have yet to catch up with the price surge, particularly for lower-income households. This explains why many people feel “poorer” despite the recent strong ringgit performance.

More importantly, the recent ringgit’s appreciation is not necessarily related to the overall improvement in the country’s economic foundation but is, by large, the tailwind for the slowdown in US interest rate hikes. Of course, there is have confluence of short-term measures undertaken by the government to strengthen the ringgit, such as encouragement from the government to repatriate and convert foreign earnings into ringgit, increased foreign direct investment (FDI), improved tourist arrival numbers etc., but these are basically short-term capital inflows which could probably be withdrawn quickly if the investment environment deteriorates in future. A sudden outflow of funds may cause the ringgit to fluctuate sharply again, thereby posing a significant negative impact on the economy.

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Instead of relying on maintaining higher interest rates relative to other countries, sustainable ringgit appreciation should be based on economic fundamentals that encourage increased productivity and competitiveness in global markets. Moreover, a stronger ringgit does not always do more good than harm, especially for export-oriented economies like Malaysia. This is because a stronger ringgit also means that exported goods become more expensive in the international market, which may weaken the country’s competitiveness, leading to fewer export orders and pressure on corporate profits. Eventually, this will cause Malaysia’s manufacturing industry to suffer setbacks, thereby affecting the country’s economy.

The higher-than-estimated economic growth thus far has given the country a “feel-good” factor, which will spill over to the property market. As reported by the Bank Negara Malaysia (BNM), the Malaysian economy advanced by 5.9% in 2Q2024, which is the fastest pace in the last six quarters (Figure 4). Such growth is said to be driven by stronger domestic demand and further expansion in exports, in which household spending increased amid sustained positive labour market conditions and larger policy support, while exports improved amid higher external demand and positive spillovers from the global tech upcycle.

Figure 4: Malaysia’s gross domestic product growth, 1Q2016 – 2Q2024. Source: DOSM; BNM

However, by studying the growth of private consumption – which is increasingly becoming an important driver of growth in the Malaysian economy, as is reflected in its growing share of GDP that accounted for 59.6% in June 2024 and even reached an all-time high of 63.3% in March 2020 (Figure 5) – one can find that the current strength of the domestic economy is relatively weaker than the one recorded during the pre-pandemic. Slower growth is generally observed in the post-pandemic, where the average growth level of private consumption from 2016 to 2019 is 7.1%, compared with a growth rate of 6% reported in 2Q2024 and an average growth level of 3.8% since 2020 (Figure 6).    

Although the recent private consumption growth has seen increasing, it is still uncertain about the momentum of this uptrend and, as well as how long the “pro-growth” policies undertaken by the government and other “feel-good” external factors can sustain. This is because the air of caution around spending is generally observed by studying both the Consumer Sentiment Index (CSI) and the Business Condition Index (BSI) published by the Malaysian Institute of Economic Research (MIER).

Figure 5: Private consumption as a percentage (%) of nominal GDP, 1992 – 2024. Source: CEIC Data
Figure 6: Growth of private consumption (y-o-y), 1Q2016 – 2Q2024. Source: DOSM

The BCI underwent significant fluctuations throughout the years, recording an enduring positive sentiment at 94.3 in 1Q2024 before plunging to 86.2 in 2Q2024, underscoring deteriorating business sentiments (Figure 7). While the official CSI in 2Q2024 is yet to be published the moment this article is written, it is expected that a CSI score below 100 points will be recorded and is likely to be on a declining trend compared to the previous quarter, given that the correlation between BCI and CSI is discernible. Should prices rise but market sentiment remains subdued, the current upward trend is likely to be realised only in the short term, which raises the question of whether our housing market rebound is sustainable. This is consistent with indicator (iv): the short-term nature of the move.

Figure 7: BCI and CSI, 1Q2016 – 2Q2024. Source: MIER

The real estate market always seems to elicit strong and conflicting opinions. While the market is underpinned by the strength of a country’s economy, population boom, low interest rates, high employment levels, affordability, etc. – which can all be monitored and even predicted through a range of economic indicators, and there is nothing wrong with that – there is one key factor which is difficult to assess: investor psychology and consumer sentiment involving emotional dynamics.

At the juncture when market sentiment performs inconsistently with economic growth indicators, the best way to be adopted by investors is to be patient and cautious. By doing so, investors may miss out on some gains by waiting, but once a reversal is confirmed, they can still enter a position and profit from most of the upward price movement while significantly reducing the risk of falling into a bull trap.

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Disclaimer: The information is provided for general information only. iProperty.com Malaysia Sdn Bhd makes no representations or warranties in relation to the information, including but not limited to any representation or warranty as to the fitness for any particular purpose of the information to the fullest extent permitted by law. While every effort has been made to ensure that the information provided in this article is accurate, reliable, and complete as of the time of writing, the information provided in this article should not be relied upon to make any financial, investment, real estate or legal decisions. Additionally, the information should not substitute advice from a trained professional who can take into account your personal facts and circumstances, and we accept no liability if you use the information to form decisions.

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