In an analysis today, Simon Chen VP of Moody’s Senior Analyst, Financial Institutions Group, Moody’s Investors Service Singapore wrote that Malaysia has halted new property development amid rising oversupply.
The oversupply Chen said is a threat to bank asset quality, adding that these developments – the oversupply of a certain type of property – are credit negative for Malaysian banks.
He also said in the event of a protracted period of supply overhang, the analyst firm expects a material decline in property prices as market valuation adjusts to reflect the lack of demand.
“In such a scenario, the quality of housing loans with high loan-to-value (LTV) ratios are most at risk.
“We understand from our rated banks in Malaysia that 20%-30% of mortgages booked each year have LTV ratios of 90% or higher at the time of origination.
“Furthermore, we believe that suspending new property development will not correct the oversupply situation over the next five years, when property projects now in development enter the market.” said Chen.
Other than the recent government measure targeted to limit new property developments, it remains unclear what additional measures the Malaysian authorities would take to ensure the existing excess supply in various property segments and new supply entering the market can be effectively deployed and utilized.
Moody’s said in their view, the increasing oversupply and the prospects of a material property price correction will continue to build as new supply enters the market and poses a risk to Malaysian banks’ asset quality.
On 20 November, the day after Malaysia’s Second Finance Minister Johari Abdul Ghani said the government has since 1 November frozen approvals of luxury property developments indefinitely and temporarily halted the development of shopping malls, commercial complexes and condominiums priced above MYR1 million to address oversupply in the property market.
On the same day, Works Minister Datuk Fadillah Yusof said the freeze would be applied on a case-by-case basis.
The freeze followed Bank Negara Malaysia’s report earlier this month that suggests the oversupply in Malaysia’s property market is worsening.
The volume of Malaysia’s unsold and vacant properties has risen substantially over the past three years and is likely to increase, raising the risk of a material decline in property prices that would diminish bank asset quality.
According to Bank Negara Malaysia, the banking system’s total loan exposures to property segments with acute oversupply (i.e., commercial property and high-end high-rise residential) account for 8% of total bank lending, and the impaired loan ratios for the segments are low at 1.1%-1.2%.
Moody’s also said much of the new supply is in Malaysia’s key states, where supply-demand imbalances in various segments of the property market, including residential housing, commercial office and retail shopping complex, have occurred since 2015. These states include Kuala Lumpur, Penang and Johor, which the central bank has warned will likely have the largest property market imbalances in the country.
Johor has the largest share of unsold residential units in Malaysia (27%), followed by Selangor (21%), Kuala Lumpur (14%) and Penang (8%). According to Bank Negara Malaysia, the large volume of unsold properties reflects that the majority of newly completed properties were priced above MYR250,000 (the barometer for affordable housing in Malaysia) and do not cater to households’ demand for affordable new housing.
In the commercial office segment, vacancy rates have risen steadily since 2015. Bank Negara Malaysia estimates that office vacancy rates could rise to 32% by 2021, from 24% in first-quarter 2017, considering the large development projects such as Tun Razak Exchange and Bukit Bintang City Centre in Kuala Lumpur that are underway.
In the retail shopping complex segment, total retail space per capita has increased sharply in key Malaysian states over the years, and now surpasses regional markets such as Hong Kong and Shanghai. The large incoming supply of retail space will exacerbate the oversupply situation and raise the vacancy rates across Kuala Lumpur, Penang and Johor from current levels of 13%-30%.Follow us on Social Media
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