PETALING JAYA: RAM Ratings has maintained its “negative” outlook on the Malaysian residential and commercial property sectors within the Klang Valley, as consumer sentiment is expected to be reined in by weaker economic prospects.
In a report, RAM said consumer and business sentiment is expected to remain muted amid a slowing economy, while lending conditions are likely to stay tight, thus presenting another challenging year for the property sector.
“Home financing is not likely to be any easier to come by given banks’ cautious lending practices, the prevailing concerns about elevated household debt levels and dampened growth.
“We have therefore maintained our negative outlook on the residential property sector for the third year, premised on the possibility of another mild contraction in transactions volumes in 2016.”
Nonetheless, RAM said it did not envisage any widespread decline in property prices, pointing out that there may be price corrections in less mature areas and within the high-rise sub-segment.
“More recently, developers have been rolling out innovative incentives and rebates to entice home buyers. These initiatives take the form of various deferred-payment arrangements and minimal downpayments – reminiscent of the attractive financing packages and payment plans offered in 2009/2010 to spur property sales.
“Although they had been successful in the past, we believe that consumer sentiment will stay weak on the whole; a material lift in sales is thus unlikely. On the other hand, these initiatives are likely to crimp developers’ margins. As such, we expect developers to remain cautious on their launches this year.”
RAM says it expected supply concerns to weigh down prospects of the commercial property sector.
“We have also retained our negative outlook on the office and retail property sectors of KL and Selangor given the imbalance within these segments.”
It said that as at end-2015, the incoming supply of office and retail space for both states remained sizeable at a respective 11 million and 16 million sq ft.
“Along with the existing vacant space, it may take more than eight years to fill them up based on the historical absorption rate.”
Apart from supply concerns, RAM said the more lethargic economy as well as subdued consumer and business sentiment was expected to cast a shadow on demand for commercial space.
“This is compounded by the caution weighing on the finance and oil and gas (O&G) sectors – traditionally key take-out sources for office space in the Klang Valley. With the finance and O&G sectors affected by the decelerating economy and the plunge in crude oil prices, both sectors have been trimming their workforces and, consequently, their office space requirements.
“Overall, we expect the occupancy rates of the office and retail property sectors to fall another two and five percentage points, respectively, this year.”
RAM said that the residential property sector remained subdued last year, weighed down by cautious post-goods and services tax (GST) consumer sentiment, a cloudy macroeconomic outlook, the weak ringgit and tight financing.
“Against this backdrop, residential property transactions nationwide contracted 5% year-on-year as envisaged while transaction value retreated 10% – the first drop since 2005.
“The primary market – which accounts for a fifth of transactions and where developers operate within – experienced a steeper year-on-year decline of 21%.”
RAM says the residential property markets of the four key states (KL, Selangor, Penang and Johor) that drive half of the Malaysian property sector also ebbed, albeit at different rates.
“Transactions volumes in KL and Selangor have been trending downwards since 2012, dipping a respective 8% and 5% year-on-year” last year. Meanwhile, the declines in Johor and Penang were more severe, at a respective 20% and 17%.
“Although Johor recorded the largest contraction last year, this is viewed as a natural adjustment following the state’s still-strong transaction volume growth in both 2013 and 2014, when other markets were already starting to slow down.”