Prolonged weakness in commercial property segment risky to financial system

By FARA AISYAH / Graphic By ANIS SHAMSUL

THE broader spillovers to the economy from a prolonged weakness in the commercial property market could transmit higher risks to the financial system, said Bank Negara Malaysia (BNM).

As such, the central bank noted in its Financial Stability Review for the first half of 2019 (1H19) that sound lending practices by banks continue to mitigate risks from potential adverse developments in the property market.

It stated that while risks remain elevated in the non-residential property segment, banks have similarly strengthened credit risk management standards which include, among others, more robust assessments on the viability of property development projects and the financial strength of property developers.

“Based on the bank’s sensitivity analysis, banks continue to maintain sufficient capital buffers to absorb 1.5 times the potential losses under severe stress scenarios which also incorporate potential spillovers to other economic sectors that are highly dependent on the performance of the property sector,” BNM said in its statement on Wednesday.

It added the overall loan impairment ratio for the purchase of residential and non-residential properties remained low during the period.

BNM said 83% of the residential property loans are extended to owner occupiers who have a stronger incentive to maintain loan repayments compared to investors, which further reduces financial stability risks in the unlikely event of a generalised downward correction in house prices.

Furthermore, it said 69% of outstanding housing loans have a loan-to-value ratio of less than 80%, thus providing a buffer against potential losses from defaults in the event of an adverse price correction.

In addition, BNM said risk of a downward adjustment to prices of retail and office space remains elevated — despite observations of higher transacted prices in the first quarter of 2019 — as the vacancy rates for office space and shopping complexes (OSSC) and retail space per capita in major cities in Malaysia already much higher than regional peers.

The central bank said the incoming supply of office space in the Klang Valley remained sizeable at 36.3 million sq ft.

On average, 4.4 million sq ft per annum is expected to be added to the market between 2019 and 2021, which is significantly higher than the average annual demand of 2.3 million sq ft per annum over the past three years.

The number of incoming shopping complexes in key states stood at 140 units, amounting to 67.8 million sq ft of new retail space.

Banks exposures to the OSSC segment account for only 3.4% of total outstanding loans and 4.6% of holdings of corporate bonds and sukuk that continue to be largely performing. “Banks, however, have continued to remain cautious in lending to the OSSC segment as reflected in declining loan approval rates,” BNM said.

It added that financial institutions’ total exposures to property expanded at a slower rate of 5.7% as at 1H19, against 6.6% in 2018, in line with softer conditions in the property market.

The central bank stated demand for home financing continued to support overall credit growth, with significantly stronger growth recorded in financing applications for residential properties priced below RM1 million (1H19: 12.7%; 2018: 1.3%).

It said a total of RM78.5 billion of new housing loans were approved to more than 180,000 borrowers in 1H19. Of this, 44% were to first-time home buyers.

BNM added that growth of bank financing in the non-residential property segment increased by 2.7% as at end-June 2019 (2018: 2.3%), driven largely by end-financing for the purchase of shops and shopping complexes.