KENANGA Investment Bank Bhd (Kenanga Research) continues to maintain its underweight stance on the Malaysian property sector, reflecting ongoing challenges such as oversupply, high household debt and weak consumer sentiment.
Despite a more optimistic outlook on some mid-to-small cap developers in the third quarter of 2024 (3Q24), larger companies, particularly those listed on the FTSE Bursa Malaysia KLCI (FBM KLCI), continue to face significant headwinds, leading to the research house’s cautious approach.
According to the Kenanga Research, the property market’s structural issues, particularly in the residential segment, remain the key barrier to a robust recovery.
Oversupply in the property market has been a persistent problem.
According to National Property Information Centre (NAPIC) data, overhang units increased by 3% in 2Q24, totalling 127,180 units, up from 125,362 in 1Q24.
These overhang properties are concentrated in key urbanised areas like Johor, Kuala Lumpur and Selangor.
The report pointed out that this is particularly problematic in cities where land prices are high and the demand-supply mismatch is more pronounced.
“Affordability remains a major issue, with the median house price at RM335,000 and average monthly salary around RM3000 to RM3500,” Kenanga Research added. This affordability gap is making it increasingly difficult for many Malaysians, especially first-time homebuyers, to enter the housing market.
The issue of affordability is compounded by rising costs of living and stagnant wages, creating an environment where even the most affordable properties remain out of reach for a significant portion of the population.
The report said that 63% of new properties are priced below RM500,000, yet a large percentage of overhang units are priced below RM300,000, reflecting that even properties at the lower end of the spectrum are struggling to find buyers.
“Many Malaysians, particularly younger buyers, still face challenges in purchasing homes due to insufficient income levels, difficulty in securing home loans and rising cost-of-living expenses,” it added.
While the residential property segment grapples with over-supply and affordability issues, Kenanga Research notes that the industrial property market is gaining significant traction.
The government’s initiatives to attract foreign direct investment (FDI) are also adding momentum to the industrial property sector.
Developers like Mah Sing Group Bhd and Sime Darby Property are shifting their focus towards industrial properties as a more stable source of revenue.
This shift allows developers to mitigate the risks in the residential sector, which continues to face increasing uncertainty.
“Developers are increasingly focusing on land sales to capitalise on landbank appreciation,” the research house said, adding that industrial properties are emerging as a sustainable revenue stream amid weaker residential demand.
Kenanga Resaerch’s outlook on household debt also remains cautious. As of the second half of 2023, household debt stood at 84.2% of GDP, still below pre-pandemic levels of around 88%, suggesting that there is some room for recovery in borrowing capacity.
Loan approval rates have also improved slightly, with approval rates hitting 47.2% in July 2024, compared to an average of 43.4% in 2023.
However, the report warns that inflationary pressures and any relaxation in loan approval standards could lead to an increase in delinquencies, particularly among lower-income households.
“We are mindful that inflationary pressures could invite delinquencies should loan approvals become more lenient, particularly on the lower-income groups,” it added.
One major risk highlighted by Kenanga Research is the potential rationalisation of the RON95 fuel subsidy. If the government proceeds with subsidy reforms, higher fuel prices could significantly erode consumer spending power, which may dampen demand for property.
“Inflationary pressures persist, particularly with the potential rationalisation of the RON95 fuel subsidy. If implemented, higher fuel costs could dampen consumer spending power, potentially slowing property demand,” Kenanga explains. This scenario could introduce further challenges for developers focusing on the residential segment.
However, not all is bleak.
Transit-oriented developments (TODs) are expected to gain traction, particularly in urban areas like the Klang Valley.
These projects are seen as a strategic response to rising living costs and household debt pressures. As more Malaysians switch to public transport following potential fuel subsidy rationalistion, properties near transit hubs may become more attractive.
Kenanga Research believes that such developments will continue to drive demand in these regions.
“TODS developments in key regions like the Klang Valley are expected to gain traction, providing a strategic response to the rising cost of living and household debt pressures,” the report states.
Kenanga has identified Mah Sing Group and MKH as its top picks in the sector.
These developers are well-positioned to benefit from the rising demand for affordable homes. Both companies have a strong focus on homes priced below RM500,000, which continue to see healthy demand from first-time homebuyers.
Additionally, Mah Sing’s involvement in TOD development projects is expected to benefit from shifts towards public transport, especially in light of the government’s fuel subsidy policies. “Our top sector pick is MKH and Mah Sing given their focus on affordable homes priced below RM500,000 with strong demand from first-time house buyers,” Kenanga Research noted.
In light of these factors, the research house has downgraded its recommendation for Malaysian Resources Corp Bhd from outperform to market perform due to the company’s recent share price run-up, which has brought its valuations in line with its prospects. — TMR
This article first appeared in The Malaysian Reserve weekly print edition
Source: The Malaysia Reserve
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