Tough times for property sector in H2 2022, say analysts

Property demand is likely to take a hit for the rest of the year.

PETALING JAYA: The property sector is likely to face hard times for the remainder of this year due to waning demand, high cost of materials and an expected increase in interest rates.

Rahim and Co International Property Consultants CEO Siva Shanker told FMT Business the sector’s performance for the first half of this year has been unremarkable.

Siva foresees only a modest improvement of between 2% and 4% for the property sector by the end of 2022.

“Although close to a flatline, it is still an improvement and one that is sustainable over the longer term,” he said.

He said properties outside prime locations may encounter a lack of demand. On the commercial side, Siva expects demand for office space and retail outlets in small suburban malls to decline as preference shifts to smaller units and online operations. He said the rising supply of office units will only exacerbate the situation.

On the flip side, he said industrial properties are expected to see strong growth as the economy gets back into full swing.

Although the volume of property transaction in the first quarter of 2022 (Q1 2022) had rebounded 17% year-on-year, AmBank Research analyst Khoo Zing Sheng remains cautiously optimistic about the pace of growth amid concerns about future property sales.

Khoo noted that the sector slid 5% on a quarter-on-quarter basis primarily due to the expiry of the government’s Home Ownership Campaign on Dec 31 last year.

Nonetheless, he said, the country’s transition to the endemic phase and the reopening of Malaysia’s international borders on April 1 would be good for the property market.

“However, new launches could be scaled back due to higher raw material and labour costs while weakening consumer sentiment caused by inflationary pressures are expected to dampen consumer spending on discretionary goods,” he said.

“The cost of construction typically forms 50% to 55% of a developer’s total gross development value and this year, we anticipate a 19% increase in construction costs. If developers pass on the entire increase to buyers, selling prices will rise by 9% to 11%.

“We believe that in light of the softening market, developers, particularly those with lower pricing power, will absorb some of the cost increase and pass on only a portion of it to buyers to mitigate margin compression.”

Khoo said that an industry-wide labour shortage may cause delays in planned deliveries by between one and three months, which will see developers’ margins reduced by 1%.

He attributed this to higher interest costs incurred on existing borrowings as a result of delays in receiving progress payments from banks.

He said the current uptrend in interest rates is also expected to have a negative impact on demand for properties.

“Our in-house economists anticipate another increase of 75 basis points (bps) in the overnight policy rate (OPR) in H2 2022 (to 2.75%),” he said.

“Based on our sensitivity analysis, there will be an increase of RM131 in monthly instalments for a property purchased at RM500,000 with 90% loan financing.”

He said this could have a negative impact on consumer sentiment and purchasing power and may dampen demand.

The monetary policy committee (MPC) of Bank Negara Malaysia is currently in session and economists expect a 25bps rise in the OPR this time. If it pans out, this will be the second consecutive rise in interest rates. The OPR rose 25bps at the last meeting in March.

For those who invest in property stocks, Khoo recommends Sunway Bhd, Legenda Properties Bhd and Mah Sing Group Bhd for their landmark developments, focus on providing under-served communities with landed property and for affordable housing developments at strategic locations respectively.

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