The 'irresistible' Real Estate Bet Gripping Investors

Economic

Summary:

There’s a niche corner of dealmaking that’s quietly making inroads in the battered market for commercial real estate.

It involves buying buildings with big carbon footprints and investing in green refurbishments. Asset managers Bloomberg interviewed spoke of doubling their clients’ money in just a few years by renovating older buildings, adding 20% to rents and then cashing in on gains when they sell.

As a model for real estate investing, it’s simply “irresistible,” says Paul White, who runs a specialized fund for Hines, a Houston-based developer with more than US$90 billion of assets.

Many investors Bloomberg interviewed said they plan to rely heavily on debt markets to amplify their financial clout, raising the stakes of such wagers. And analysts monitoring the market warn of rising capital expenditure, as well as a lack of skilled labour that could fan wage growth and significantly drive up renovation costs.

Yet speculation on green refurbishments represents a sliver of optimism in a market that not long ago was pummeled by a post-pandemic spike in interest rates and volatile occupancy levels. MSCI Inc said its indexes show that commercial property prices fell about 14% in Europe between March 2020 and June 2024.

Now, a new wave of environmental regulations and tenant preferences has a growing number of CRE fund managers looking to monetize the moment.

Europe’s revised Energy Performance of Buildings Directive went into force this year, and landlords have until the end of this decade to slash greenhouse gas emissions by at least 60% from 2015 levels. Owners of older buildings risk significant writedowns, with lawyers who advise the industry warning of “huge” refurbishment costs ahead.

Landlords that wait too long face a bigger bill further down the road, according to Sven Bienert, project lead at Carbon Risk Real Estate Monitor, which helps the real estate sector tackle emissions. He also says a lot of banks still haven’t grasped just how fast the collateral value of their CRE loans might be shrinking. It’s a “significant risk” on banks’ balance sheets, Bienert said.

There’s evidence that some landlords would rather keep their heads in the sand than realize losses at the point of sale. They’re “disinclined to sell and crystallize the loss,” according to White, who says that’s why Hines hasn’t managed to buy as many properties as it would like. In the end, though, landlords will “have to accept the reality of new regulations,” he said.

For now, flipping brown buildings to make them greener remains a niche undertaking mostly limited to investment managers willing to speculate on the risks. Asset managers creating funds that target the greening of commercial property include billionaire Tom Steyer’s Galvanize Climate Solutions, Fidelity International, Schroders Plc and Ardian SAS.

The stakes are high, with huge swathes of property in the crosshairs. In Europe, as much as 80% of the office market was built more than a decade ago, leaving it outdated and in need of green refurbishment, according to an analysis by Jones Lang LaSalle Inc.

A study published by Deepki, a sustainability-data provider for real estate owners and investors, found that over half of European CRE managers are now sitting on stranded assets equivalent to at least 30% of their portfolios because they don’t meet new green standards.

At the same time, there’s evidence that a growing number are keen to invest in flipping brown buildings into green real estate. Of CRE managers surveyed, 87% “plan to increase the purchase of poor energy-performing buildings with a view to retrofitting them,” Deepki said in the study.

Schroders manages a £460 million (US$600 million) investment trust that’s focused on improving the sustainability of about 40 UK commercial properties. The asset manager recently turned a Manchester warehouse into an operationally net-zero-carbon building, allowing it to charge up to 40% more in rents than older properties on the same estate. Schroder Real Estate Investment Trust says it’s now eyeing rental premiums as high as 30% across the portfolio.

Coima, an Italian asset manager, plans to raise €500 million (US$540 million) for a fund it says will buy, renovate, rent and sell office and residential buildings in Rome and Milan. Fidelity International has a pair of funds targeting office and logistic buildings. Its investment committee initially balked at the high cost of buying and renovating a London office building, but gave the go-ahead when Fidelity negotiated a good price.

Institutional investors are taking note. White says Hines has attracted 35 pension funds and other investors for its €1.6 billion fund dedicated to flipping brown properties into green assets. By the time Hines closes the fund in 2030, the firm expects to have turned that €1.6 billion into at least €4 billion, he said.

“We usually sell pretty quick,” White said. “We can flip a building in three to four years.”

Banks, meanwhile, may not be reflecting the risks of brown real-estate loans on their books.

Priscilla Le Priellec, head of real estate, structured and development lending at La Banque Postale, says her team has rejected loans on environmental grounds only to see the business get absorbed by competitors.

“It’s quite questionable,” she said in an interview.

But ignoring climate risk is likely to come with a sting, especially as insurers retreat from properties found to be unprepared, she said. “You have to make sure that your assets can be insured.”

BNP Paribas SA, the European Union’s largest bank by assets, sold a building in Madrid three years ago for €59 million, a 40% discount at the time relative to comparable grade-A assets in the area. The property is now the subject of a brown-to-green refurbishment project by French private equity firm Ardian.

Edmund Eggins, managing director for real estate at Ardian, says that as an asset, the building was on track to “become stranded by 2030.”

A spokesperson for BNP Paribas declined to comment.

Flipping the property, known locally as Faro, entails rebuilding the entire single-glazed facade, as well as replacing all the air-conditioning and ventilation. New plumbing will cut water use, while solar panels will generate clean electricity and heat. Eventually, a cluster of 900 hidden sensors will constantly monitor and adjust building performance to ensure emissions stay low.

The expected cost is €30 million, or roughly half the purchase price, Eggins says. Ardian, which has so far completed 70% of the work, plans to finish the project by the end of this year, after which it’s aiming for rents between 10% and 20% above the average in the building’s local area.

The goal is to make Faro “the first zero-carbon building in Spain,” Eggins said.

Spencer Corkin, head of value-add strategy at real estate manager AEW in Europe, says that “inefficient or non-compliant assets are at risk of becoming functionally obsolete and illiquid.”

The flipside, according to White at Hines, is that those who invest now stand to ride a sustained wave of growth.

“It is inevitable that the demand for sustainable real estate space will prevail,” he said.

Source: The edge markets

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JPMorgan

Economic

Housing inventories remain near record lows, yet builders are not increasing construction volumes enough to sufficiently meet demand. Why aren't builders ramping up activity? Several factors are keeping housing supply limited:

Chronic underbuilding post-2008:

Following the housing crisis of 2008, the U.S. experienced a period of chronic home underbuilding. The number of residential construction firms fell from 98,067 in 2007 to 48,557 in 2012, representing a 50% decline. It took a while for the industry to recover, with single-family housing starts finally returning to pre-GFC levels in 2020.

Elevated mortgage rates:

The housing market cratered in late 2022 due to the Fed's rate hikes, resulting in a 16% y/y drop in existing home sales. Although sales are now slightly below long-term average levels, elevated mortgage rates and home prices continue to dampen sentiment. In October, the housing market index increased by 2pts to 43, yet it remains below the neutral mark of 50. The Fed's rate cutting cycle should help lower mortgage rates over time, but it is more impactful for short rates. Long rates, which inform 30-year fixed mortgage rates, typically move according to growth and inflation levels, so these may take longer to decline.

High costs for builders and homeowners:

Since the pandemic, a tornado of factors has pushed up costs for homebuilders and homeowners. These include higher material costs, zoning laws and labor shortages, which have led to higher home prices as well as maintenance and insurance costs for buyers. Inputs for residential construction, as measured by the PPI, rose 14.6% y/y in 2021 and 15.0% in 2022. Although prices grew more moderately in 2023, the rapid increase after the pandemic has made building homes less affordable. The construction industry also faces persistent labor shortages. Total job openings have fallen by 14% over the past year, but construction job openings have declined by only 4%. Due to these factors, home prices are up 30% and are 20% more expensive to insure since 2020. At the national level, builders are still hesitant to invest in new units due to concerns there aren’t enough buyers that can afford them.

Despite these challenges, there is potential for improvement. In fact, building activity has already increased significantly in some cities, particularly along the Sunbelt. For other areas, lower rates should spur more housing demand, which could boost builder confidence to increase construction volumes. Additionally, zoning reform efforts are taking place in more than 100 municipalities across the U.S., which could help reduce costs for builders1. While it will take time for supply to meet demand, the recent improvement in homebuilding activity is expected to continue. Why is Housing Supply Still so Low?_1

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Goldman Sachs

Bond

Economic

Corporations have issued more than $1.4 trillion of investment-grade US bonds and have broken four monthly issuance records in 2024, putting them on track for the second-busiest year ever. Company bond sales are also expected to surge in 2025, according to Goldman Sachs Global Banking & Markets.

Companies May Issue $1.5 Trillion of US Bonds in 2025_1

There are several reasons corporate debt offerings have been so plentiful. Many corporate treasurers and CFOs took care of their financing early this year to avoid the risk of a spike in volatility around the time of the US election, says John Sales, head of Investment Grade Syndicate in the Americas in Global Banking & Markets. At the same time, “funding conditions for the vast majority of this year have been about as good as you could ask for,” he says.

Companies May Issue $1.5 Trillion of US Bonds in 2025_2

There are signs that the momentum in bond offerings will continue. Between the annual need to refinance more than a trillion dollars of maturing debt and an increase in financing amid solid economic growth, Sales says it’s reasonable to expect borrowers to issue $1.5 trillion or more of corporate bonds in 2025 and potentially in coming years. “If the economy is growing, if companies are growing, if balance sheets are growing, you will see debt to finance that growth,” he says.

Valuations and yields have boosted corporate bond issuance

For corporate borrowers, the extra yield (or spread) they pay relative to Treasury bonds has seldom been lower. For much of 2024, investment-grade corporate bond spreads have been less than 100 basis points, according to the Bloomberg US Aggregate Corporate Index. That index hit 79 basis points the week of October 18, marking the tightest level since March 2005.

Companies May Issue $1.5 Trillion of US Bonds in 2025_3

“These are the best spread levels our issuers have seen in the last 20 years,” Sales says. The only comparable spreads came in the summer of 2021, when market volatility had evaporated and the Federal Reserve’s policy rate was near zero. “That's a big reason why folks are jumping to lock in the current rates,” he adds.

Bond yields may be converging toward the long-term interest rate targeted by policymakers, known as the Fed’s terminal rate. Sales says his team expects the terminal rate to be around 3.5%. Ten-year US Treasury yields have already fallen to 4% or even lower. Taken together, with bond yields not far from the expected terminal rate, and spreads hovering around 20-year lows, “conditions are about as good as they’ve ever been, Sales says.

M&A activity has propelled bond issuance

Mergers and acquisitions in a range of industries have also propelled the supply of bonds.

US investment-grade bond sales linked to corporate acquisitions are on track for their highest volume since 2019. Those transactions have been boosted by deals in the energy, healthcare, and consumer sectors, Sales says. “We've seen a lot of investment-grade supply to fund M&A,” he says. “That's a theme that we expect will continue into 2025 as M&A remains a top capital allocation priority for most of our large cap clients.”

Companies May Issue $1.5 Trillion of US Bonds in 2025_4

Issuance from utility companies has also surged amid capital expenditures to support power demand from data centers and electrification. Offerings from that sector have risen 18% this year compared with the same period in 2023 (as of October 10). “There's no question that we’ve seen a huge uptick in capex from the utility sector, and a big way in which the utility sector will fund that capex is through debt issuance, Sales says.”

Money may flow from short-term debt to longer-term bonds

As the Fed lowers interest rates, reducing the yields on shorter-maturity debt, money is poised to flow increasingly into longer maturity investment-grade bonds, Sales says. Many investors have been able to buy short-term Treasury bills yielding more than 5%, but that yield is falling.

“I would expect that money will migrate away from high yielding T-Bills and into the investment-grade asset class,” Sales says. “That's something we are in the early stages of now, and that's a theme we expect will continue over the next handful of months and quarters as the Fed continues the cutting cycle.”

When it comes to the economy, investors’ focus has moved from inflation, which is cooling, to the outlook for growth. Economists in Goldman Sachs Research recently lowered their probability forecast for a US recession in the next 12 months to 15%.

US GDP growth is supporting corporate bonds

And as rates fall, investors are snapping up debt with higher yields, or coupons. “If the Fed is going to be cutting, if we've hit a ceiling in terms of interest rates, investors want to lock in coupons for as long as they can,” Sales says. “Demand in the long end of our investment-grade market has been as strong as we've seen at any point over the last handful of years.”

Put another way, growth is a primary reason the $1.4 trillion of corporate bonds sales outpaced expectations this year. “What you are seeing, plain and simple, is growth,” he says. “You're seeing growth in the economy. You're seeing growth in corporate America. You're seeing growth of the balance sheet. And as companies grow, they issue debt to finance that growth.”

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Alex

Economic

The Biden administration finalised rules for a 25% tax credit for semiconductor manufacturing projects, expanding eligibility for what is likely to be the largest incentive programme from the 2022 Chips and Science Act.

The new regulations, which come more than a year after the initial proposed rules, mean that a wider swath of companies will be able to get the tax breaks. That includes businesses that produce the wafers that are ultimately turned into semiconductors, as well as manufacturers of chips and chipmaking equipment.

The credits also will apply to solar wafers — an unexpected shift that could help spur domestic production of panel components. So far, the US has struggled to foster manufacturing of those parts, despite a surge of investment in US panel-making factories.

But the benefits don’t extend all the way up the supply chain. Still excluded are facilities that produce underlying materials like polysilicon, which is used to make wafers. That approach is consistent with how the original law was written, a Treasury official said.

The tax refunds are one of three main subsidy streams available from the Chips Act, which aims to revitalise the American semiconductor industry after decades of production shifting abroad. The law also set aside US$39 billion (RM168.6 billion) in grant funding — more than 90% of which has been allocated, though not yet spent — and US$75 billion in loans and loan guarantees, of which officials are likely to use less than half.

The latter two incentive categories have garnered the most attention — President Joe Biden has even visited factories to herald the announcements — but it’s the tax credits that could be most meaningful for companies. Proposed grants typically cover 10% to 15% of project costs, compared with 25% for tax credits. The idea is to make it just as cost-effective to build a factory in the US as in Asia.

“Our goal is to give you the minimum amount of money necessary to get you to expand on our shores in a way that advances our economic and national security objectives,” Mike Schmidt, director of the Commerce Department’s chips office, said in an August interview when asked about tax credits. “That means looking at all sources of funding and then figuring out how our funds get you over that hump.”

Some companies argued in negotiations that the tax credits shouldn’t “count against” their other funding, Schmidt said — a line of reasoning that didn’t sway government officials.

Chip companies have announced more than US$400 billion in planned US investment over the past several years, including massive factories from leading-edge manufacturers like Taiwan Semiconductor Manufacturing Co and Intel Corp. There also are efforts underway to make older-generation processors and other supplies.

The surge in activity likely means that the Chips Act will be more expensive than anticipated.

The Congressional Budget Office originally estimated that the tax credits would cost US$24 billion in forgone revenue. But the true number could be more than US$85 billion, according to a June report by the Peterson Institute for International Economics that used “very conservative assumptions based on the current investment trends.”

That would exceed the original projected cost of the entire Chips Act, the report said, “resulting in a total cost overrun of nearly 80%.”

Asked whether the Treasury Department has its own cost estimate for the tax credit, an official didn’t provide a specific number. But any overrun could be seen as a win by the Biden administration since it represents additional investments in American manufacturing.

In almost every case, tax credits will account for the greatest share of Chips Act incentives going to any one company. Micron Technology Inc, for example, expects to get around US$11.3 billion in tax credits for two chip factories in New York. That’s compared with US$6.1 billion in grants and US$7.5 billion in loans to support those two facilities plus another plant in Idaho.

Texas Instruments Inc anticipates US$6 billion to US$8 billion in tax credits — as much as five times the size of its Chips Act grant.

Tax credits could also go to the many companies that didn’t win grant money — like Applied Materials Inc — but are still building factories for chips, equipment or wafers. Businesses can get refunds for construction that starts by the end of 2026 and is continuous after that point.

Michigan politicians lobbied hard to extend the tax credit to polysilicon makers as well — in particular, locally based Hemlock Semiconductor LLC. But the Chips Act limited the tax credit to property “integral” to semiconductor production, and Treasury determined that wafers — but not materials — fit that definition.

Hemlock is getting a grant, however. On Monday, the company struck a preliminary agreement for a US$325 million award, which covers a higher share of its project costs than most other Chips Act outlays.

Source: The edge markets

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Pepperstone

Economic

To frame the Budget, it’s key to note the two ‘fiscal rules’ against which the OBR will score the Budget, and within which the Government must stick. These are:

To ensure that the debt/GDP ratio is falling in the fifth year of the forecast horizon;

To ensure that borrowing is below 3% of GDP by the fifth year of the OBR’s forecast.

In addition to those two formal rules in the fiscal framework, Chancellor Reeves is likely to make some changes to provide a greater degree of fiscal flexibility:

Mandating that there is no government borrowing to fund “day-to-day spending”Exempting flows from the Bank of England’s Asset Purchase Facility from the net debt calculationExempting borrowing made purely for capital investment purchases from the overall net debt measure

Though likely, the aforementioned changes are not guaranteed. However, they are highly likely to be delivered as the Treasury work to deliver a Budget within very tight fiscal constraints.

Firstly, there is the limited headroom that already exists compared to the fiscal framework. At the March Budget, headroom – defined as the amount by which fiscal policy can be loosened before fiscal rules are breached – was seen at just under £9bln by the OBR, meagre in the grand scheme of things. While the rolling forward of the forecast horizon has likely raised headroom to nearer £16bln, this is still cutting things far ‘too close for comfort’ for HM Treasury, and very low by historical standards.

Furthermore, there is the not-insignificant matter of the supposed fiscal “black hole”, first brought to public attention in late-July, shortly after the Labour government took office. While estimates of the size of the “black hole” have varied, most believe that this amounts to £22bln – split roughly evenly between in-year overspend compared to previously outlined budgets by government departments; and discretionary spending on public sector pay increases, overseas aid, and such like, made by the new administration since the summer.

A combination of the desire to plug the aforementioned “black hole”, increase the degree of fiscal headroom, and ensure certain ‘protected’ departments (e.g. Health and Defence) receive real-terms spending increases, sees the Chancellor likely seeking to raise up to an additional £40-£45bln in the Budget. This amount is likely to come via a combination of tax hikes, and spending cuts, albeit with a heavy lean towards the former.

On the matter of tax, it is important to recall that the UK’s overall tax burden is already at its highest level in over seven decades, with the OBR – in March – projecting a further increase to a level north of 37% by the end of the prior forecast horizon, which would be the highest in 80 years.

Nevertheless, tax hikes are on the way.

Here, though, the Chancellor is presented with another issue, given the following two pledges made in the recent Labour manifesto:

Not to increase National Insurance; the “basic, higher, or additional rates” of income tax, or VAT;

To “ensure taxes on working people are kept as low as possible”.

Taking into account that the three taxes above sum to approximately 65% of the overall tax take, this again leaves very little room to manoeuvre.

According to pre-Budget media reports, the most significant revenue raiser is likely to be an increase in the National Insurance contributions (NICs) paid by employers, with the Chancellor said to be mulling a 2% increase to employer NICs, as well as the possible axing of an exemption which currently ensures that NICs are not levied on employer pension contributions. A combination of these two measures is likely to raise £10-15bln.

Though the above sounds very technical, the crux of the matter is that such measures would increase the cost of employing, and hiring, workers in the UK. The net result would likely be that businesses either hire fewer workers due to the additional expense, or that pay grows at a slower pace. In other words, this measure would be a huge tax on both businesses, and employees.

Other tax measures are reportedly also under consideration, including:

Raising the rates of capital gains tax (CGT), possibly to as high as £39bln;

Tweaking inheritance tax (IHT), extending the tax-free giving period from the current 7 years to as much as a decade;

Lowering the stamp duty thresholds for property purchases, to £125k for most buyers, and £300k for first-time buyers (from the current £250k and £425k respectively);

A potential increase in the tax levied on firms operating in the gambling sector;

An increase in fuel duty, by as much as 5p in every litre sold;

Potential changes to pensions rules, including a lower limit on the amount of tax-free cash that can be withdrawn;

Potential changes to ISA rules, placing a lifetime cap on the amount that can be saved or invested into such accounts.

While that is quite a ‘laundry list’ of measures, it is by no means exhaustive. Furthermore, there is a significant risk that many of these measures – particularly on CGT – do not raise the intended revenues, thus leaving the economy liable to further substantial tax hikes later in this Parliament.

In combination with the aforementioned tax hikes, governmental spending is likely to be curtailed. Outside of ‘protected’ departments such as Defence and Health, budgets are likely to see significant real-terms cuts over the forecast horizon. That said, the results of a multi-year Spending Review will not be known until the spring.

That combination – higher taxes, and lower spending – has a name with which we are all sadly very familiar; austerity.

Nevertheless, despite a likely return to those dark days, HM Treasury also seem set to embark on a plan to “borrow to invest”, given the likely fiscal rule change alluded to earlier on. Such a programme of capex is likely to start relatively slowly, but could run to a level as high as £20bln per year by the end of the forecast horizon. Importantly, while said investment might well be exempt from the fiscal rules, it will nonetheless still have a significant impact on market sentiment, and the perception of how the Budget is received.

Speaking of financial markets, the most important consideration for Gilt participants will be the degree of net issuance that results from the Budget announcements.

For this year, net issuance is likely to be relatively little changed, perhaps being boosted by around £10bln to approx. £285bln. Beyond this year, though, net issuance is likely to increase significantly compared to the DMO’s most recent round of forecasts, perhaps by as much as £30bln in each remaining year of the forecast horizon. For context, though, this is around half the additional one-year borrowing amount initially required by the Truss Administration after the ill-fated ‘mini-Budget’ 2 years ago.

Still, such a degree of borrowing is a substantial amount of additional supply for markets to absorb, helping to explain the continued widening of the 10-year Gilt-Treasury spread seen in the run up to the Budget. Further downside risks for Gilts remain, given the likelihood that announced fiscal tightening measures prove greater than those already trailed in advance of Budget day.

In the FX space, the pound faces a rather grim mix. Measures announced in the Budget are likely to represent a significant tightening of the overall fiscal stance, significantly raising the risks the economic growth will be choked off, slamming the brakes on the current solid momentum seen so far this year.

Couple this with the BoE’s increasingly dovish stance, with recent soft inflation figures having raised the chances of back-to-back cuts in both November and December, and the headwinds facing the GBP become even stiffer. The path of least resistance seems to lead to the downside for the pound for now, pending – of course – the US election result on 5th November.

For UK equities, the Budget is likely to do little to see the FTSE 100 break out of the range in which the market has traded since the second quarter. That said, there may well be some sector-specific stories to focus on, with gambling stocks potentially suffering were levies to be raised, and homebuilders likely to suffer as a result off stamp duty tweaks.

Overall, while the Budget is unlikely to bring much by way of positivity on its own, there is also likely to be relatively little by way of good fiscal news in the medium-term.

Next spring’s Spending Review will see the fiscal backdrop remain in the headlines for the time being, though that ignores the ‘elephant in the room’. Said elephant is the possibility that the measures announced in Reeves’ first Budget don’t raise the expected revenue, leaving further swingeing spending cuts, and additional tax hikes – possibly including a manifesto breach – on the cards during the remainder of this Parliament.

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Justin

Economic

Malaysia’s economy is experiencing a robust recovery, marked by significant growth in key sectors and improvements in labour market indicators. The first half of 2024 has seen substantial economic expansion, with GDP growth rates of 4.2% in the first quarter and 5.9% in the second quarter. The World Bank projects that Malaysia will reach high-income status by 2027-2028, supported by strong GDP growth, a resilient manufacturing sector and a thriving services sector.

Domestic demand is picking up and unemployment has reached its lowest level since the Covid-19 pandemic, at 3.3%. The manufacturing sector, in particular, is witnessing renewed momentum as global disruptions, such as the pandemic and the Russia-Ukraine war, begin to subside. Furthermore, Malaysia’s downstream manufacturing activities are benefiting from the global semiconductor boom, with a surge in demand for AI technologies further bolstering growth prospects.

However, economic growth alone does not necessarily translate into equitable improvements for the workforce, particularly in terms of wage growth. As Malaysia’s economy strengthens, it is crucial to assess whether the labour market is sharing in these gains, particularly through higher wages that reflect the economic progress. Understanding how wages have evolved in response to recent economic developments can provide critical insights into the inclusivity and sustainability of Malaysia’s growth trajectory.

Against this backdrop, this article aims to assess whether labour market wages are keeping pace with these developments. To do this, we examine wage growth from 2019 to March 2024. Furthermore, we break down this period into two segments: 2019 to December 2023, and December 2023 to March 2024, to evaluate the latest trends. This approach allows us to observe medium-term structural changes as well as short-term wage growth.

The chart illustrates the growth and decline in wages across different sectors in Malaysia between 2019 and March 2024, highlighting both medium-term and short-term changes. It is important to note that the data presented in the chart reflects after-tax and inflation-adjusted wages, providing a clearer picture of the real purchasing power of workers across different sectors. Several key trends emerge from the analysis, revealing the uneven nature of wage growth across various industries.

Slow wage growth persists in Malaysia’s manufacturing sector

The manufacturing sector, which consists of one-fifth of the economy, has been a key driver of economic growth. While it registered a strong 8.2% year-on-year growth rate from 2019 to December 2023, the sector experienced a notable decline in wages in the short term, with a 17.5% drop from December 2023 to March 2024. This decline is concerning, especially given the ongoing efforts of Malaysia to move up the value chain into high-value semiconductor industries, such as integrated circuit (IC) chip design and research and development (R&D). While these are commendable goals, it raises the question of whether they will translate into higher wages for existing workers.

Transitioning to higher-value industries also means that current workers may lack the skillsets to support these new sectors. Therefore, substantial upskilling initiatives need to be introduced to existing workers, along with efforts to bring in more workers who are well-equipped for these industries. The problem is that many of Malaysia’s graduates are not ready for high-skilled manufacturing. Total tertiary graduates’ enrolment in 2023 numbered 1.25 million, with 40% being business administration, humanities and law students, while only 16% are engineering and construction students. Although there is a high number of tertiary graduates, the proportion with a science, technology, engineering and mathematics (STEM) background is limited. Major upskilling initiatives are needed for those without strong STEM fundamentals to be employed in higher-value chain manufacturing.

There are many grand plans to move Malaysia into higher-value chain activities. The National Semiconductor Strategy aims to train 60,000 engineers, but progress has been muted, with challenges in implementation and a lack of clear milestones. The TVET Madani programme offers a wide array of training initiatives, but the lack of a cohesive structure and limited wide-scale private sector collaboration has made it difficult to assess its overall effectiveness. Without significant improvements in coordination, these initiatives may fall short of equipping the workforce with the necessary skills for Malaysia’s economic transformation.

The next frontier: Opportunities in the overlooked services sector

The services sector, which consists of half of Malaysia’s GDP and was a major driver of economic growth in the first half of 2024, has shown relatively modest wage growth compared with other sectors. According to the chart, the services sector experienced a slight decline in after-tax real wages of 0.7% (y-o-y) from 2019 to December 2023 and a further decline of 0.3% from December 2023 to March 2024.

This slow wage growth is particularly concerning, given that the services sector contributes half of Malaysia’s GDP and employs two-thirds of the workforce. Despite being a major driver of economic growth, many jobs within the services sector are low skilled and low wage, such as those in retail, hospitality, and food and beverage (F&B).

Improving national wages requires a comprehensive approach that extends beyond the manufacturing sector. It is essential to focus on upskilling workers, enabling them to transition into higher-value roles. For example, a retail worker could be retrained to enter the healthcare services sector, such as nursing or eldercare, where there are opportunities for higher pay and career advancement.

To transform the services sector into a higher-skilled part of the economy, Malaysia must target opportunities in sectors like global business services (GBS), financial services, IT development and support, and high-value tourism. Expanding the GBS sector, for instance, could create a demand for skilled workers capable of providing advanced business solutions to global clients, complementing Malaysia’s strength in manufacturing. Similarly, growing Malaysia’s role as a regional financial hub can drive demand for skilled financial professionals, while investing in IT development could align well with the digital transformation initiatives in manufacturing, enabling better integration of tech services with industrial growth.

High-value tourism and medical tourism also represent significant opportunities for upskilling service workers. By investing in specialised training for hospitality professionals and healthcare workers, Malaysia can create a premium tourism experience that attracts international visitors, thereby boosting income levels. The services sector has the potential to complement the manufacturing sector by providing essential support in logistics, technology and business services, ultimately creating a more diverse and resilient economy.

A need to create a more inclusive growth mode

Because the services sector accounts for a significant share of employment, average overall wage growth declined 2.6% in the short term (December 2023 to March 2024). From 2019 to December 2023, long-term real wage growth stagnated at an average annual rate of 1.7%, which suggests that while Malaysia’s economy is growing, the benefits are not being trickled down into the labour market, raising concerns about the inclusivity of this recovery.

While Malaysia’s economic recovery shows strong growth in key sectors like manufacturing and services, wage improvements have been inconsistent. Short-term declines in both sectors, as well as long-term subdued wage growth, highlight the need for structural reforms to ensure inclusive growth. The government must address wage disparities and labour market challenges in high-stakes industries through targeted upskilling initiatives.

Source: The edge markets

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India’s crude oil demand is about to add 4% during the final quarter of the year amid a festival season that also coincides with increased agricultural activity after the monsoon season.

The forecast comes from S&P Global Commodity Insights, which said that it expected India’s fuel demand to rise by between 50,000 and 55,000 barrels daily of gasoline and diesel in the period between November and December.

The pickup in demand follows depressed fuel consumption during the monsoon, as the rains affected transport and construction activity, the Economic Times noted in a report on the oil demand outlook for the country.

The depression in consumption, however, was only discernible in diesel fuel, the report also noted, with that shedding less than 2% during the June-September quarter. Gasoline demand, on the other hand, expanded by 3% during the monsoon.

India is one of the largest consumers of crude oil and due to limited domestic supply, it is also one of the biggest importers. As much as 85% of the subcontinent’s consumption is covered by imported oil.

That consumption is moving higher and growing in lockstep with the economy and refinery expansion plans.

Over the past two years, India has become a key buyer of Russia’s oil, which is selling at a discount because of the sanctions and embargoes on Russian crude exports to Western countries.

The attractiveness of cheaper crude supply has made Russia the single biggest supplier of oil to India, especially as New Delhi plans a significant expansion in domestic refining capacity.

By 2028, plans are to boost refining capacity by 20% to a total 6.19 million barrels daily in order to meet rising fuel demand in the medium term. According to OPEC, India will remain the world’s biggest driver of oil demand growth well into the 2040s as well, with demand rising by 6.6 million bpd over the period until 2045.