Economic headwinds taking a toll on Malaysia’s property sector outlook

PROPERTY sales are expected to be flat in 2022 prompted by uncertainties brought about by inflationary pressure, swing in the ringgit and the risk of recession in western countries which could hit demand recovery.

This is despite property sales having rebounded strongly in 2H 2021 spurred by the Home Ownership Campaign (HOC) and potentially benefitting from the re-opening of Malaysia’s economy, according to RHB Research.

“Expect 3-5 percentage point (ppt) margin erosion due to rising costs. Although the spike in building material and labour costs were much higher, the overall impact to developers would be rather gradual as some contracts have been locked in earlier,” projected analyst Loong Kok Wen in a property sector update.

“New projects will likely see a thinner margin due to the inability to fully pass on the incremental construction costs to house buyers. Indeed, developers already saw declining margin over the past four to five years due to discounts and rebates offered to unwind unsold inventory and this (margin) trend is expected to continue.”

While it is hard to predict the price direction of many commodities, RHB Research expects current cost pressure to last at least until end 2022 based on the prevailing inflationary impact on the broader economy.

“In addition, we do not think the labour shortage issue can be resolved over the near term as various sectors are also competing for the supply of labour once it is available,” the research house pointed out.

As for rising interest rate, the research house expects the impact on property demand to be gradual as current mortgage rate is still relatively moderate compared to the rate five years ago.

“On the other hand, the higher interest rate may affect developers with high gearing as the additional borrowing costs may further dampen development margin, and hence, earnings,” suggested RHB Research.

In this regard, the research house expects township developers and asset owners to fare better given the current market environment. Developers with ongoing township developments (eg. Matrix Concepts Holdings Bhd and Tambun Indah land Bhd) should see more resilient sales, smoother construction progress, and lesser impact on margin.

“On the other hand, income stream for asset owners (eg. IOI Properties Group Bhd and UOA Development Bhd should strengthen more significantly this year as the economy and international borders re-open,” added RHB Research. – June 29, 2022

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