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Cautiously Optimistic

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Weak buyers’ sentiment and property cooling measures introduced since 2013 will affect the demand for residential property in Malaysia in 2015, said ratings agency Moody’s.

Demand for residential property in Malaysia is set to slow further in 2015, Moody’s has forecast in its recent report. “We expect the anticipation of higher mortgage rates in 2015 and the implementation of a 6 per cent goods and service tax in April to dampen sales in 2015 as buyers take a wait-and-see approach,” Moody’s Investor Service assistant vice-president and analyst Jacintha Poh said.

“But the magnitude of the sales impact will depend on Malaysian property developers’ target segment of project launches and pricing,” she added.

Moody’s analysis is contained in its latest edition of Inside ASEAN, a quarterly publication looking at major credit trends prevalent in the Southeast Asian region.

Moody’s expects developers focusing on residential projects located in popular cities, such as Johor, Kuala Lumpur, Selangor and Penang, to face the greatest challenge in achieving their sales targets.

“Properties in these cities are typically priced above RM1 million and are aimed at high-income households or foreign investors. Nonetheless, Moody’s expects demand for owner-occupied homes priced in the middle-income range to remain resilient,” added Poh.

Malaysia’s average home prices from 2001 to 2013 increased at a compounded annual growth rate of 7.3%, which is faster than the 6.3% for the gross national income per labour.


Additionally, Moody’s singled out five largest listed property developers in Malaysia – based on their total revenues – to remain resilient in 2015 despite a slowdown in their sales volumes which include: Sunway Group Berhad, SP Setia Berhad, UEM Sunrise Berhad, IJM Land Berhad and Mah Sing Group Berhad.

The agency reported that Malaysia’s property sector risks remain manageable for banks and developers, and both groups of stakeholders are still resilient to possible shifts in sentiment and falling property prices.

“After several years of rapid gains in residential property prices, macroeconomic conditions in Malaysia are turning less positive for the property market. Nevertheless, we anticipate a soft landing for property prices, supported by robust, albeit decelerating GDP growth, and stable housing demand from middle-income households. In such a scenario, Malaysian developers and banks should be resilient to downward property price pressures,” said Moody’s senior vice president Stephen Schwartz.

According to the agency, Malaysia (A3 positive) has seen a rapid rise in residential property prices, of more than 40% in real terms since early 2009, against a backdrop of increased urbanization, rising living standards and a long period of low interest rates. Such a price increase has generally outpaced that of Malaysia’s neighbours.

Commodity price weakness and China’s ongoing economic slowdown are creating economic headwinds, said Moody’s, and the agency expects Malaysia’s GDP growth to decelerate to a still-solid 4.5%-5.0% in 2015, from 5.8% in 2014. However, previously implemented cooling measures, a forthcoming new goods and services tax, and tighter lending conditions, will all add to downward pressure on housing prices.

“While delinquencies on mortgages and construction-related loans will likely increase from their current multi-year lows, Malaysian banks have robust capital buffers and healthy pre-provision profitability. Also, the credit quality of property-related loans is generally good, supported by prudent loan-to-value ratios and low unemployment rates. As such, Malaysian banks are well positioned to weather a soft landing in property prices. However, mortgages with high loan-to-value ratios and loans to overleveraged households and developers are at greater risk of payment slippage,” added Moody’s vice president Senior Credit Officer Eugene Tarzimanov, co-author of the report.

Middle-income households will also be key to Malaysia’s largest listed property developers’ resilience as property price growth slows. While sales volumes will moderate, they will remain supported by developers’ product offerings that are targeted at middle-income households. Overseas projects will also buffer developers from the domestic deceleration in price growth, said Moody’s.


Global property consultancy Knight Frank Malaysia also recently unveiled its report that looked into the market performance across the various property mix – Residential, Office, Retail and Industry – and highlighted the trends and outlook in the four key markets in Malaysia, including Kuala Lumpur, Klang Valley, Penang, Johor Bahru and Kota Kinabalu.

The “Knight Frank Malaysia Real Estate Highlights 2H2014” pointed out to several market drivers impacting the real estate sector. The recent plunge in crude oil prices and lower trade surplus could undermine Malaysia’s economy and its property market especially if they are prolonged, the report said.

Knight Frank Malaysia executive director for Research and Consultancy Judy Ong said, “Amid the gloomy economic outlook and plummeting crude oil prices, the slowdown in the Malaysian property market continues. Buyers’ and investors’ sentiments have turned cautious with many adopting the ‘wait-and-see’ approach while more developers are turning their focus on the affordable housing segment.”

She added, “Selected property sub-sectors (and locations) may undergo a period of consolidation in terms of slower market activities, pricing and rentals.”

Among the highlights in 2H2014, Knight Frank Malaysia noted that the series of macro-prudential measures have succeeded in cooling the residential property market and there is a marked slowdown in residential property market with noticeably fewer launches across the board.


In Kuala Lumpur high end condominium market, for instance, Knight Frank Malaysia reported that with most launches in 2H2014 unveiled post Budget 2015, “the response in terms of bookings translating into sales remained to be seen due to the high rejection rates for loan applications. In the secondary market, there were also noticeably less activities and enquiries as potential buyers hold back on their purchases amid softening in the property market. Prices, however, continued to hold steady.”

It added, “Going forward, with a high supply pipeline of existing and incoming projects, the rental market will continue to face further pressure in selected locations where there are weak occupational demand and high project completions. Yields will continue to be compressed in line with the lagging rental market.”


In the office market, despite mismatch in supply and demand, the Kuala Lumpur office market remains resilient with both rental and occupancy rates holding firm, the report said. In retail, prime and established shopping centres in Klang Valley and Penang continue to enjoy high occupancy in excess of 90%, and more than 80% occupancy in Johor Bahru and Kota Kinabalu.

Malaysia continues to be on the radar of overseas retailers, and sees more new entrants especially in the F&B segment as well as rapid store expansion of existing brands and outlets, both local and international, the report noted. Especially in Kota Kinabalu, a very exciting time is expected for the retail sector with the impending completion of several retail properties in 1H2015, the firm said. “The pool of well-heeled local buyers and the untapped foreign investor market will be critical to the successes of new launches [in Kota Kinabalu] in 2015.”

Knight Frank Malaysia’s 2015 market outlook reported that with the Government having revised its deficit target and GDP growth following the recent sharp decline in oil prices and pro-active measures to sustain development and economic growth include free visa for tourists from China amongst others and increased frequency and duration of mega sales nationwide, the company projected more developers launching their projects ahead of the GST, slated for implementation in April 2015, while widening their target catchment by marketing overseas.

Continuous efforts by government authorities / agencies such as MIDA and InvestKL are expected to produce positive results and cushion the impact of a slowing economy and property market, Knight Frank Malaysia said.


Malaysian Institute of Economic Research (MIER) meanwhile concurred with general sentiments of experts that the year 2015 will be a very challenging year for the Malaysian economy.

“Real GDP growth is projected to moderate, depending on the magnitude of fluctuations in crude oil prices and also movements of the ringgit exchange rate against currencies of Malaysia major trading partners. Commodity terms of trade (CTOT) shock, ringgit depreciation and anticipated higher interest rates environment are expected to adversely affect Malaysia’s domestic macroeconomic fundamentals, particularly in the short-term,” it said.

However, “Looking from macro perspective, there are clearly less risks, but in fact more opportunities, especially with lower energy prices, which is quite a rare phenomenon, moving forward,” MIER added.

According to MIER’s recent report, inflationary pressures remained strong for the twelve months of 2014, averaging 3.2% (2013: 2.1%). Inflation rate moderated in September 2014 (2.6%), but edged up slightly to 2.7% in December 2014, after registering moderately high rate of 3.0% in November 2014 (October: 2.8%), on account of pass-through effect of a cut in fuel subsidy on 2 October 2014.

“The scheduled implementation of GST in April 2015, together with mandated review of the minimum wage policy and rising demand for higher wages and benefits will provide sparks for a new round of higher inflation expectations,” MIER said.

“Fortunately, falling crude oil prices and lower energy costs will help to offset domestic cost-push factors, especially for transport charges, but that depend on degree of pass-through effects and price stickiness. Additionally, low inflation environment in key advanced economies and less than full pass-through effects from ringgit depreciation will also see that inflation remains under control (Inflation 2015: 3.5%, 2016: 3.0%),” it added.

The ringgit continued its depreciating trend in January 2015, which started in September 2014, as US dollar gained strength on the back of an improving US economy and expectation of US monetary policy normalization. However, depreciating ringgit exchange rates which are almost across-the-board will likely cause higher import bills and add sparks to domestic cost-push factors, especially with the oncoming GST implementation in April 2015, MIER reported.

“Fortunately, growth is estimated to be exceptionally strong at 5.9% in 2014 (2013: 4.7%), which is very much close to the required growth of 6.0% per annum for Malaysia to escape the prevailing ‘middle-income trap’,” it said.

Additionally, MIER observed, there was a strong contribution from external sector in 2014, although moderating aggregate domestic demand continued to be the key engine of economic growth. Of greater significance, overall unemployment rate remained below the threshold of 4%, suggesting full employment situation in the country, while consumer inflation rate increased moderately by 3.2% last year.

“As such, moving forward, initial economic conditions are strong, as domestic economic fundamentals remain generally good and most importantly, confident and belief function about good management of macro economy still intact, especially among domestic households and firms and other economic agents as well as society at large,” the institute said.

“Looking at medium-term economic and social development, the Eleventh Malaysia Plan (2016- 2020) is scheduled to be unveiled in the Parliament in May 2015. While Malaysia aspires to join the four Asian tigers, its country classification remains as one of the emerging market economies (EMEs) in Southeast Asia with an upper middle-income status.”

Economic shocks come in a variety of forms, such as productivity slowdown, terms of trade and interest rate shocks and mark-up in prices and wages, according to MIER. “As such, we need to be vigilant and most importantly, must be able to withstand and adjust successfully to these negative shocks with all available toolkits,” it added.

“Most importantly, we must work together, stay calm and maintain our much-needed patience, as we are not in an economic crisis yet, just a temporary setbacks,” MIER concluded.

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