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Commercial properties under pressure, but no major risk to financial stability, says Bank Negara Malaysia

Published: Friday, 01 October 2021
The downward pressure on occupancy and rental rates for shopping complexes and office space is not expected to significantly increase risks to financial stability given the limited direct bank lending exposures, said Bank Negara Malaysia

Occupancy and rental rates of shopping complexes and office space continued to face downward pressure in the first half (H1) of this year.

However, Bank Negara Malaysia (BNM) said this is not expected to significantly increase risks to financial stability given the limited direct bank lending exposures to office and retail commercial properties, as well as conservative lending practices.

The central bank said despite lower incoming supply following some cancellations and deferments of projects, vacancy rates in the commercial real estate sector increased across all key states with the completion of several commercial property developments amid persistent weak demand.

"Average rental rates for office and retail space in the Klang Valley have now declined for four consecutive quarters since the third quarter of 2020. Despite various extensions of rental relief, up to half of mall operators reported significant difficulties collecting rent from their tenants," BNM said in its Financial Stability Report for First Half of 2021 released today.

It said this will continue to adversely impact the cashflows of mall owners, particularly for malls in non-prime locations with relatively higher vacancy rates.

"Looking ahead, vacancy rates could continue to rise and place further pressure on rents as a result of structural changes brought about by the pandemic, including flexible working arrangements and a shift in consumer spending patterns towards e-commerce," BNM said.

The expiry of protections under the COVID-19 Act 2020 that prohibit non-paying commercial property tenants from being evicted from occupied premises could further weigh on occupancy rates.

"Although this is not expected to significantly increase risks to financial stability given the limited direct bank lending exposures to office and retail commercial properties (3.1 per cent of banking system loans) and conservative bank lending practices, broader spillovers to the economy could heighten risks for banks," it said.

Repayment assistance programmes, and support measures by the government and BNM, have thus far contained any notable increase in defaults, with the overall business loan impairment ratio remaining broadly stable at 2.7 per cent.

Banks are nevertheless preparing for higher defaults and have continued to build up provisions against the materialisation of potential credit losses when support measures are eventually unwound, BNM said.

Additionally, under a simulated scenario of an extended drag on the economy and the absence of policy interventions, banks are expected to remain resilient even if business impairments were to reach up to three times the current level by end-2022, it said in the report.

Demand, approvals for residential financing recover to pre-pandemic levels

BNM said despite the moderation in activity due to movement restrictions in H1 2021, average transaction values in the residential property market grew at a stronger pace.

This was supported by transactions for properties priced below RM500,000 which accounted for more than 80 per cent of housing transactions, it said.

Housing transactions during the period also continued to be lifted by home purchases ahead of an earlier anticipated expiry of the Home Ownership Campaign in end-May 2021. Demand for financing has recovered to above pre-pandemic levels, with housing loan applications increasing across most price segments compared to the second half of 2020.

Approval rates have also broadly recovered closer to levels recorded before the pandemic (overall approval rate in the first half of 2021: 73.2 per cent; 2020: 71.5 per cent; 2013-2019 average: 75.5 per cent), except for properties priced above RM1 million where approval rates have continued to reflect the more cautious risk appetite of banks, said the report.

In line with the slower market activity, the number of unsold houses rose to 181,460 units as at the second quarter of 2021 (Q4 2020: 167,104 units), largely driven by houses priced above RM300,000 and serviced apartments that are under construction.

Several new housing launches in previous quarters, which would have experienced slower sales during this period, also contributed to the increase in unsold units.

BNM said market observers are expecting activity to pick up with the gradual easing of movement restrictions and recovery in economic activities, as observed in the second half of 2020.

It said incoming supply of newly-launched residential properties would likely shift towards the mass market price segments, as seen in the higher share of properties priced at RM500,000 and below (H1 2021: 71.6 per cent; 2015-2019 average: 65.9 per cent share).

"Such adjustments will continue to reduce demand-supply mismatches and improve overall housing affordability. Along with sustained demand among first-time house buyers, this is expected to mitigate risks of a significant house price correction," the central bank said.

Based on the latest release of the National Property Information Centre (NAPIC) report for H1 2021, house price growth is likely to have remained broadly flat in the first six months of 2021 (preliminary estimates of Malaysian House Price Index growth: -0.3 per cent), with market expectations of a recovery heading into 2022.

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