High-end property freeze not enough to resolve overhang: Moody's

PETALING JAYA: Moody’s Investor Service in a report issued today opined that the freeze on approvals for properties above RM1 million would not be enough to correct the oversupply over the next five years, when property projects now in development enter the market.
“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 utilised.
“In our 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,” Moody’s said.
It said 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.
“These developments are credit negative for Malaysian banks,” it said.
It expects a material decline in Malaysia’s property prices in the event of a prolonged period of supply overhang as market valuation adjusts to reflect the lack of demand.
In its credit outlook note, the rating agency said that 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,” it said.
According to Bank Negara Malaysia (BNM), the banking system’s total loan exposures to property segments with acute oversupply (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% to 1.2%.
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 areas 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 (27%), followed by Selangor (21%), Kuala Lumpur (14%) and Penang (8%).
BNM said the large volume of unsold properties reflects the majority of newly completed properties were priced above RM250,000 and do not cater to demand for affordable new housing.
In the commercial office segment, vacancy rates have risen steadily since 2015. BNM estimates that office vacancy rates could rise to 32% by 2021, from 24% in first quarter of 2017, considering the large development projects such as Tun Razak Exchange and Bukit Bintang City Centre in Kuala Lumpur that are already under way.
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% to 30%.