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Maybank IB: Buying sentiment may cool ahead of the GE15 and rising interest rates

Publish date: Mon, 04 Jul 2022, 07:08 PM

Political uncertainties ahead of the 15th General Election (GE15) and the rising interest rate environment will have an impact on purchasing sentiment for big-ticket items such as property.

According to Maybank Investment Bank (Maybank IB), further interest rate hikes will hurt not only buyers' affordability but also highly-geared developers like UEM Sunrise Bhd.

Furthermore, Maybank IB said that there are growing risks such as slower sales due to rising interest rates, delays in new property launches, and rising raw material costs.

These sales/margin-depressing headwinds, such as labour and raw material shortages, political uncertainty, and interest rate hikes, are expected to persist into 2023, it said in a research note today. 

As such, Maybank IB is maintaining its neutral call on the local property sector.

"Further interest rate hikes will not only hit buyers' affordability but also highly-geared property developers. The fragile recovery in the property sector could be impacted by labour and raw material shortages, leading to sales and earnings risks (slower work progress, higher operating costs, and potential Liquidated Ascertained Damages [LAD] payment)," it said in a research note today.

Maybank IB believes that property developers may postpone some of their new launches for projects to be completed on time and to avoid potential LAD payments due to labour shortages.

According to economists, there is increasing pressure on Bank Negara Malaysia to raise interest rates sooner rather than later in the face of an aggressive US Federal Reserve (the Fed).

Jerome Powell, the Fed's chair, said that the US central bank would most likely raise interest rates by 50 to 75 basis points (bps) this month.

Following the Fed's move, economists believe Bank Negara will raise its overnight policy rate (OPR) as soon as next week.

Dr. Mohd Afzanizam Abdul Rashid, the chief economist at Bank Islam, expects Bank Negara to raise the OPR by 25 basis points next week and another 25 basis points in September.

Afzanizam believes that the central bank will make a decision based on the merits of the country, taking into account the current state of the Malaysian economy and how it may evolve in the future.

"The reopening of the economy has been extremely helpful to normalise the economic growth and therefore, the state of the monetary policy especially in respect to the level of policy accommodation, has to reflect appropriately. In other words, OPR would need to be higher as the economy gradually improves from the Covid-19 shocks.

"Also, Bank Negara would need to prepare themselves in terms of creating more policy space in the event of a possible slowdown or recession in the global economy. This will improve the central bank's credibility in steering the economy via the monetary policy," he said, according to the New Straits Times today.

Malaysia's OPR had been at 3.25 per cent since January 2018, before a 25 bps cut to 3 per cent in May 2019.

Only after four consecutive 125bps cuts between January and July 2020 did the OPR fall to a record low of 1.75 per cent.

Bank Negara's first rate hike since January 2018 came two days before a stronger-than-expected first quarter (Q1) 2022 GDP growth reading of 5.0 per cent year on year, allowing it to maintain its official GDP growth target of 5.3 per cent to 6.3 per cent this year.

If Bank Negara's eight-member MPC raises the OPR by 25bps at its next scheduled meeting on July 6, it will mark its first back-to-back increase since the middle of 2010.

Meanwhile, Maybank IB reported that without the Home Ownership Campaign (HOC), residential property sales fell 6 per cent quarter on quarter to RM23 billion in the first quarter of 2022 (Q1 2022).

"In our view, while the HOC managed to lift the buying sentiment for properties, strict control on housing supply such as housing approvals and plot ratio, as well as accurate and timely housing data for better housing planning and launches are equally important to solve the persistent overhang issue in the country.

"Complications may arise as land is also a state matter and the state government can legislate on land matters; hence, proper coordination between the federal government and state governments is much needed in order to solve the overhang issue," added Maybank IB.

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