‘Negative’ call remains for Malaysia property sector amid multiple headwinds

We think the property sector outlook will be challenging moving forward, with political uncertainties from the GE15 and multiple macro environments 


IT HAS been a challenging year for global equities, roiled by recession fears and escalating geopolitical tensions. Nevertheless, Malaysia’s property sector (as represented by the Bursa Property Index) closed in the first half of 2022 (1H22) with positive earnings, thanks to the government’s housing initiatives in line with the national recovery plan such as iMiliki and reduction of Real Property Gain Tax (RPGT) and Home Ownership Campaign (HOC). 

The positive impacts kicked in 1H22 with relatively more robust earnings growth, reflective of post-Covid normalising economic activity and government incentives. The property market recorded a 34.5% growth in 1H22 with 188,022 transactions worth RM84.4 billion compared to 2H21. On the demand side, 1H22 loan applications for both residential and non-residential properties delivered a significant growth of 4.2% YoY and 11.8% YoY respectively. 

Notwithstanding the 1H22 outperformance, we think the property sector outlook will be challenging moving forward, with political uncertainties from the 15th General Election (GE15) and multiple macro environments, namely labour shortage, weakening ringgit, tightening monetary policy and supply-demand imbalance that will continue to dampen investors’ sentiment. 

Besides, the labour-intensive property sector will no doubt be hit by acute labour shortage issues in Malaysia. Since the Covid-19 era, we have observed a decline in terms of foreign labour arrival due to the border restriction. However, after the border reopened, we do not see a higher number of foreign labour inflow, mainly due to higher migration costs, tighter competition among other Gulf states and the weakening ringgit. Historically, the highest number before the Covid-19 pandemic was just 1.8 million foreign workers, compared to the current demand of 2.1 million, denoting the severity of the labour shortage in Malaysia. 

The weakening ringgit not only reduced the attractiveness of Malaysia to foreign workers but also burdened the property developer with higher raw material costs that were sourced abroad. Although commodity prices have been softening in the past few months, they remain elevated above the historical average level. The spike in commodity prices such as steel bar, copper and iron will etch into higher building costs, which will be translated into higher selling prices (or lower developers’ margin) to end consumers eventually. Thus, we foresee it will be a challenging period for developers to solve the current property overhang issue given the expected slower demand soon. 

The Malaysian government announced the pre-election Budget 2023 with many candies earlier in October. Although the government is showing nurturing incentives by providing stamp duty exemption from 50% to 75% for purchases of houses worth RM500,000 to RM1 million until the end of 2023, we reckon the measures would not inject a substantial positive impact on the property sector. The slightly larger stamp duty reduction without continuation of HOC is insufficient to persuade marginal property buyers to decide to acquire durable products, especially when interest rates are rising. 

In conjunction with Bank Negara Malaysia (BNM) rate hikes, we expect the sales momentum in 1H22 will start to ease gradually in 2H22 as the first Overnight Policy Rate (OPR) hike occurred in May 2022. BNM has hiked four times in 2022, and iFAST Research Team is of the view that the OPR rate will hit 3.25% by 1H23, indicating there is still ample room left for upcoming rate hikes. Generally, every 25-bps hike in OPR will lead to a monthly mortgage financing increase of 3%-3.5%, which might weigh down consumer sentiment in making a significant purchase like property. 

At the same time, market liquidity is evaporating coinciding with the interest-rate hikes, as reflected in the decline in M2 supply growth since April 2022, hampering the high-beta Malaysia property index in tandem with FTSE Bursa Malaysia KLCI. (See Figure 1: Forecasted OPR). 

This will also limit property developers’ pricing power and prevent them from completely passing on the increased costs of building materials because of the prolonged overhang problem in the real estate market. Despite the fact that most of the developers lack of interest in launching new projects in 2H22 according to the Real Estate and Housing Developers’ Association, the residential property oversupply issue still persists, as shown by the elevated overhang and ongoing projects. (See Figure 2: Residential Market Status since 1H20). 

Albeit any potential easing in raw material costs and higher worker availability, ongoing supply gluts, lack of supportive measures and deteriorating affordability due to the global synchronised tightening monetary environment will form headwinds for property developers in the short term. As such, although the upcoming fourth quarter of 2022 result may be improving due to the low base effect from last year, we are cautiously viewing the property sector and hold a ‘Negative’ stance moving ahead given the lingering structural issues. 

Even so, we recommend that investors who wish to take advantage of the current depressed valuation may consider companies that have strong balance sheets to withstand near-term uncertainties. Among property players, we favour township developers and huge asset (landbank) owners with a low gearing ratio to underpin their future long-term growth. 

The views expressed are of the research team and do not necessarily reflect the stand of TMR.

  • This article first appeared in The Malaysian Reserve weekly print edition