A silver lining to come, although difficult

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Based on a statement by Director General of Health Tan Sri Dr Noor Hisham Abdullah on 1 April 2022, Malaysia has now entered the “transition to endemic” phase; a temporary stage before the country becomes fully endemic.

A key element that distinguishes this phase from the pandemic phase is the shift from government-imposed restrictions to individual responsibility and community solidarity to curb the spread of the virus. As of 23 May 2022, the vaccination rate in Malaysia – number of populations having received two full doses – stood at 82.7%.

Transaction volume trend (2016-2021) (Source: National Center for Land Information)

As countries around the world embrace the new normal, we have also seen a gradual increase in consumer confidence in the Malaysian residential property sector. This is largely attributed to improved finances and job prospects.
Overall, the Malaysian residential real estate sector is moving in a positive direction, alongside further easing of restrictions and reopening of international borders.
In 2021, transaction volume increased by 1.5% year-on-year (year-on-year) to 300,497, but remains 6% below pre-pandemic levels. In terms of value, there was a notable increase of 21.7% year-on-year to RM144.9 million recorded in 2021.
Despite the restoration of business confidence in the housing sector, however, a disproportionate increase in value relative to volume indicates that the market is tilted more towards mid- to high-priced properties. A more in-depth discussion of the market breakdown analysis is detailed in the next section.

Transaction value trend (2016-2021)

Supply and demand
Overhang accumulated in 2021
The total resident surplus jumped 24.7% year-on-year to 36,863 units in 2021, surpassing the pre-pandemic average of 29,238 units (2016-2019) by around 26.1%.
The increase in residential overhang over the year was in line with our expectations as developers delayed new project launches as well as retail gallery closures during intermittent lockdown periods in 2020.
Breaking down the total overhang units by price groups, the proportion of the price category below RM300,000 tops the list at 31.5%. The ranking is followed by a range of 500,000 to 1 million RM (30.2%), a range of 300,000 to 500,000 RM (25.7%) and a range above 1 million RM (12.6%). %).
As mentioned above, we note that market sentiment is stronger, although biased towards the upper middle range (ie above RM300,000). This is reflected in double-digit year-on-year growth in trading volume for the above RM300,000 market. Only demand for a price category below RM300,000 was in the red, falling 7.3% year-on-year in 2021 from the previous corresponding year.
Despite the reduced demand in the RM300k price group, the sales performance for this category is the strongest compared to other price groups, amounting to 93.4% of the total number of units launched. As with the other award categories, business performance is considered healthy, reflected by strong double-digit business performance during the year.

Percentage of residential overhang by price bracket in 2021

Based on the statistics, we believe this performance will carry over into 2022, thanks to a favorable economic environment. According to official statistics, the national unemployment rate stood at 4.3% in 4Q21 – the lowest level since Covid-19 hit. A firmer labor market should therefore further boost consumer confidence in this industry.
The Housing Price Index (HPI) has been on an upward trend, but at a declining pace since 2012.
On May 11, 2022, the central bank, Bank Negara Malaysia’s Monetary Policy Committee, raised the rate by 25 basis points to 2% – from its record rate of 1.75% in effect on July 7, 2020 – in anticipation of an improvement in economic activity in a context of cost pressures.
In light of an environment of higher financing costs, combined with inventory accumulation and looming inflationary pressures, the operating environment would remain challenging for developers to reduce inventory and promote sales.

The Bank remains cautious on mortgages
The all-time low of 1.75% in the overnight policy rate (OPR) supported some demand in the housing sector. This translates to a 31.2% year-on-year increase in housing loan applications in 2021, reaching an all-time high of RM349.6 billion.
However, the approval rate remains low at 34.9% at end-December 2021 and stable over time, reflecting that commercial banks have remained cautious on mortgage lending.

Budget 2022: the biggest government aid in history
The government tabled several initiatives under the 2022 budget with an allocation of RM332.1 billion – the largest budget in Malaysia’s history.
As part of the 2022 budget, four main initiatives aim to revitalize the national real estate sector. This includes:
i) Allocation of RM1.5 billion for B40 housing projects
ii) Abolition of the Property Gains Tax (RPGT)
iii) RM2.0 billion for Housing Credit Guarantee Scheme (HCGC)
(iv) Optimal management of Malaysian reserve land.
Among the most discussed topics under the 2022 budget is the removal of the RPGT, where there will be no tax deductions on gains from the disposal of real estate by residents, permanent residents and other than corporations from the 6th year of ownership. According to iProperty, this campaign has been well received by real estate developers and should further strengthen the real estate market.
Another budget highlight is the introduction of HCGC. This program aims to help gig workers and small traders who do not have fixed income documentation. Through HCGC, these people can get better access to loan/mortgage financing facilities.

For 2022, the dynamic of continuous improvement remains possible, even if the operating environment remains difficult. The residential real estate market in Malaysia is expected to gradually improve, thanks to a firmer financial and labor market.
We also believe that demand for low-cost projects will gradually stabilize but will continue to weigh on overall inventory accumulation. However, the continued improvement in the unemployment rate will support this segment.
Notwithstanding the above, we note that any sudden reversal in economic direction due to Covid-19 related issues will pose a substantial risk to the sector outlook.
As a key takeaway, we encourage investors to remain selective in strategy of investment opportunities in the real estate bond market, based on the indicators discussed. We have put together a list of recommended bonds available under the Bond Express platform as below.
Disclosure: For specific disclosure, at the time of publication of this report, iFAST Financial Pte Ltd (through its related and associated entities) holds positions in ECOWMK 5.850% 24Mar2026 Corp (MYR) and LBSMK 6.800% Perpetual Corp (MYR).
The analyst who produced this report does not hold any positions in the above securities.a