Unsold, vacant properties affect bank asset quality

Moody’s says the increasing number of unsold properties is credit negative for Malaysian banks


Malaysia’s unsold and vacant properties are raising the risk of a material decline in property prices that would diminish bank asset quality, said Moody’s Investors Service Inc.

The rating firm in its credit outlook yesterday said the increasing number of unsold properties, which it said will continue to rise, is credit negative for Malaysian banks.

It said in the event of a protracted period of supply overhang, a material decline in property prices is expected as market valuation is adjusted to reflect the lack of demand.

“In such a scenario, the quality of housing loans with high loan-to-value (LTV) ratios are most at risk,” Moody’s senior analyst VP Simon Chen said.

“In our view, the increasing oversupply and the prospects of a material property price correction will continue to build as new supply enters the market and poses a risk to Malaysian banks’ asset quality,” Chen said.

“We understand from our rated banks in Malaysia that 20% to 30% of mortgages booked each year have LTV ratios of 90%, or higher, at the time of origination. Furthermore, we believe that suspending new property development will not correct the oversupply situation over the next five years, when property projects now in development enter the market,” he said.

According to Moody’s, the banking system’s total loan exposures to property segments with acute oversupply comprise commercial property, high-end and high-rise residential segments, which account for 8% of total bank lending, and the impaired loan ratios for the segments are low at 1.1% to 1.2%.

It also said that the government’s freeze will not correct the oversupply situation over the next five years, as property projects are at present in the development stages upon market entry.

Last week, Second Finance Minister Datuk Seri Johari Abdul Ghani announced the move to impose a moratorium for luxury developments starting Nov 1, as a result of the central bank’s report that suggests the oversupply in Malaysia’s property market is worsening.

Moody’s said most of the new property supply is within key states, whereby, supply and demand imbalances in various segments of the property market, including residential housing, commercial office and retail shopping complex, have occurred since 2015.

Johor has the largest share of unsold residential units (27%), followed by Selangor (21%), Kuala Lumpur (14%) and Penang (8%).

Apart from the government’s freeze, the firm said additional measures to address this issue remain unclear.

In the commercial office segment, Moody’s also said vacancy rates have risen steadily since 2015. Based on the central bank’s estimation, office vacancy rates could rise to 32% by 2021, from 24% in the first quarter of 2017, considering large development projects, such as the Tun Razak Exchange and Bukit Bintang City Centre in Kuala Lumpur are underway.