WHILE the year started off on a positive note with the property sector poised for a long overdue rebound in tandem with post-pandemic economic recovery, sentiment has nevertheless weakened in recent times.
Moving into 2H 2022, Hong Leong Investment Bank (HLIB) Research expects Bank Negara Malaysia’s (BNM) interest rate upcycle as well as the rising inflationary pressure to negatively impact buyers’ purchasing power.
Moreover, property developers are also facing their own sets of challenges that range from elevated building material pricing to labour shortage and rising financing costs, prompting the research house to reiterate its “neutral” outlook on the sector.
“The sector outlook continues to be challenging as there is a lack of visibility on when the challenges faced by the developers will start to ease, while demand outlook had also weakened with the current interest rate upcycle and inflationary pressure,” opined analyst Tan Kai Shuen in a property sector update.
“Nonetheless, we believe that much of these negatives were already priced in by the market as the sector P/B (price-to-book value) is trading at close to -1SD (standard deviation) below its five-year mean where the only time P/B traded below this level was during the COVID-19 downturn in March 2020.”
Citing the National Property Information Centre’s (NAPIC) data, HLIB Research noted that the number of residential property transaction was down -10% quarter-on-quarter (qoq) due to a higher base from the previous quarter as buyers rush to take advantage of the Home Ownership Campaign (HOC) prior to its expiry in end-2021.
Nevertheless, this was still a +10.5% year-on-year (yoy) improvement from better sales following economic re-opening.
Likewise, unsold units eased slightly at -3.4% qoq but increased +21.5% yoy and remained at an elevated level. As such, the property overhang issue will likely continue to exert pressure on housing price as witnessed by the Malaysia House Price Index (HPI) which came down -2% qoq.
Elaborating on operating environment, HLIB Research expects property developers to likely be more cautious in their project launches under a rising and volatile cost environment as any cost increase is likely to compress their margin.
“Due to the persistent overhang issue in the property market, this will also put a lid to the pricing power of some developers and as such, they will not be able to fully pass on the rising building material costs,” justified the research house.
“Labour shortage on the other hand would delay (i) project execution timeline; (ii) revenue recognition; and (iii) cash flows to the developers. In addition, the interest rate hike would also increase the financing cost for developers.”
As observed by HLIB research, the KL Property (KLPRP) Index’s 1H 2022 performance was in line with its narrative as the index started off the year with gains of +2% in 4M 2022, indicating a sense of optimism.
“Nonetheless, following a hawkish Fed and subsequently the rate increase from BNM in May, the index declined sharply in the last two months of 1H 2022 by -11.3%,” noted HLIB Research. “On a YTD (year-to-date) basis, the index declined by -9.5% in 1H 2022, underperforming the FBM KLCI index which fell by -7.9%.” – July 14, 2022
