Property sector – no full-fledged recovery expected next year

PETALING JAYA: AmResearch does not expect a full-fledged recovery of the sector within the next 12 months due to various key challenges coupled with subdued consumer sentiment and a potential interest rate increase next year.

In a note yesterday, the research house said the key challenges include elevated home prices; low loan-to-value or financing margin offered by banks; and house buyers’ inability to qualify for a home mortgage due to their already high debt service ratios.

In addition, AmResearch noted that the still-subdued consumer sentiment against a backdrop of rising cost of living, weak job security and elevated household debts is holding consumers back from committing themselves to the purchase of big-ticket items, including a house.

“Not helping either, is the potential hikes in the overnight policy rate in 2018, given the recent shift in Bank Negara Malaysia’s policy stance towards a slightly more hawkish than before.”

AmResearch believes these issues could be partially addressed with the offering of affordable housing and more flexible financing plans to the low-income group.

However, it is mindful that affordable housing typically commands low margins and the margins could be crimped further given rising competition as the segment gets more crowded.

“We believe the investment case for an affordable housing developer only holds water if the developer is able to sell affordable houses in large quantities, has access to highly cost-effective and speedy construction methods, and most importantly, has the ability to secure strategic landbank with a high plot ratio at cheap prices.

“Otherwise, we are more inclined to see selling affordable housing as a means for developers in general to tide themselves over while waiting for the property market to turn around.”

The research house said the local property sector has been weak over the last four to five years, since hitting a peak in mid2013.

“We believe the most encouraging signs we have seen in 2017 are: developers adjusting to the reality that mass-market affordable housing is where the demand is; and the willingness of certain developers to cut prices (to the tune of 10-15% or more) in order to clear unsold stocks. We expect these trends to prevail in 2018, bringing some life back to the sector.”

AmResearch, which is retaining its “neutral” stance on the property sector for 2018, said it sees a bright spot in developers with overseas projects.

“We have already seen green shoots of recovery in property markets in the UK, Australia, Singapore and Vietnam since 2017. These markets are ahead of Malaysia in terms of their recent boom-bust cycles. They have been through the consolidation phase and are now on a recovery path,” it added.