Since 2015, Malaysia’s housing market has suffered a downturn. Many of the property development stocks have been affected with lower revenues, profits and higher inventories. Especially for those that focused on the development of mid-to-high end housing properties in Malaysia.

So what causes the housing market down? According to BNM and some property analyst as reported in New Straits Times, the slowdown in Malaysia’s housing market is due to several factors:

• 1. Steady rise in land bank prices;
  2. Stable economic growth;
  3. A rush of new projects to build condos at ever-increasing prices;
  4. A lower growth in income level; and
  5. Entries to the property market is also fairly easy.

While many strays away from property stocks due to the negative outlook, we as a contrarian should always look deeper (any signs of recovery) as there might be opportunity to gain from the negative outlook. So how negative is the outlook?

Here are the 4 key insights that you should know about the current housing market outlook in Malaysia before you dive right into a property stock:

#1: Imbalance of Supply & Demands of Housing Property

As mentioned, there may be many factors that causes the housing market down but the main reason really is on the issue of “Affordability”.

(Source: Housing Watch Website)

According to Housingwatch.my, a website setup by BNM, houses in Sabah, KL and Penang were the most unaffordable based on the income levels of households as at 2016.

(Source: BNM Quarterly Bulletin)

For the period from 2012 to 2016, the growth in median household income were only at compounded annual growth rate (“CAGR”) of 9.6% while the housing price is growing at CAGR of 15.6%. As a result, about 35% of total households in Malaysia could only afford houses that are priced at RM300K and below. However, over the period from 2016 to 1Q2017 only 21% of new housing launches are in this segment as reported in the BNM Quarterly Bulletin.

#2: Unsold Units on the Rise

The affordability issue have led to many unsold housing units. As at 1Q2017, total unsold housing properties stood at 130,690 units. According to BNM, it’s the highest since 2008.

(Source: BNM Quarterly Bulletin)

Johor has the largest share of unsold units (27% of total unsold properties in Malaysia) followed by Selangor (21%), KL (14%) and Penang (8%) as at 1Q 2017. To make matter worst, the total number of property transactions in Malaysia dipped by 4.3% in 9M2017 and this, according to DBS Group Research Report, is mainly due to residential and commercial properties (62% and 7% of total transactions respectively).

#3: Inventories were Building Up

Consequently, many of the Malaysian housing developers have been suffering from increasing inventory levels since 2014 and decreasing revenue since 2015. The Edge Malaysia reported that SP Setia has the highest inventory levels among its peers. Another company that have significant inventory levels are KSL Holdings Berhad, a Johor-based property developer. Its inventory level went up from approx. RM40.8 mil in 2011 to RM359.2 mil in 2016, that’s about CAGR of 54.5% over the past 6 years.

(Source: Company’s Annual Report)

As you would have guessed it, most of the property stocks are either being beaten down or stagnant. Only some companies like LBS Bina were able to sustain its share price as its focus is on “affordable” housing segment which is what the current demand wants, according to PublicInvest Research Report.

#4: Effect of MFRS 9 towards Malaysia’s Housing Market

MFRS 9 is an accounting standard related to financial instruments (i.e. equity and debt). The standard have just been implemented on 1 January 2018. For banks in Malaysia, the main concern on implementing MFRS 9 is the approach to impairment. It’s a three-stage impairment model that dictates how impairment losses at each reporting date should be measured depending of the credit risk of loans.

Under this accounting standard, loans that are performing and just originated (i.e. issued) will fall under “Stage 1” where provisions on the basis of projected losses over 12 month time is to be made. If there is a significant increase in credit risks on the loans, they will fall under “Stage 2” where banks will have to make a provision over the expected life of the loan instead of 12 month. Loans that are non-performing will fall under “Stage 3” and banks will have to make the same provision as “Stage 2”.

In other words, a minimum provision (i.e. 12 months) is required to recognize at all times regardless of the loans performance.

What this means to Banks? Generally, they would prefer a lower provision (i.e. minimum 12 months) as this would reflect in its income statement (lower provision, lower expenses and thus, higher net profit). In order to do that, a stringent credit assessment is required to ensure all loans issued are performing (hopefully, stays in “Stage 1”).

If a stringent credit assessment is introduced, this will definitely affect the already poor housing market in Malaysia. Maybe a lower loan approve rate in the future?

Any Signs of Recovery?

For the Malaysia’s housing market to recover, property prices will have to come down which is unlikely given the fact that most of the property developers adopting “wait-and-see” approach, delaying the launch of new development projects and introducing “rent-to-own” scheme to property buyers rather than reducing the housing price.

(Source: Housing Watch Website)

Interestingly, the growth in housing prices have been slowing down. According to Housingwatch.my, the Malaysian House Price Index increased by 5.6% as at 2Q 2017 which is slower as compared to 1Q 2017 that grows at 6.7% for both landed and high-rise property prices.

Aside from housing property prices to come down, the growth in Malaysia’s household income will have to catch up with the housing prices growth. The Malaysian Rating Corp Bhd reported that the average monthly household income rose at a CAGR of 6.2% per year over the past 3 years from 2014 to 2016. If the Malaysian House Price Index growth continues to slow down, I believe the household income will catch up sooner or later.

(Source: National Property Information Centre)

What about the future supply? DBS Group Research reported that there is a huge incoming supply of residential property supply in 2017 and 2018 which amounted to 980,448 units and an additional 708,505 units that has been planned to supply. According to the National Property Information Centre (“NAPIC”), the number of residential property transaction as at 3Q 2017 stood at only 47,500.

MY INSIGHTS

The overall housing market in Malaysia is in stagnation and it shows no signs of recovery. Worse still, there is a huge incoming supplies in 2018. Most of the demands are moving towards RM300K and below while the supply is more towards RM500K and above. I believe moving forward, the negativity will continue until the issue of “affordability” is resolve.

As a contrarian investor, most of the property stocks are currently down and some may be trading at cheap valuation but if you are going to invest in it, you’re in for a long-haul as currently there are no positive signs of recovery. Some of the things to keep a close eye on includes:

1. Residential property sales transaction;
2. Incoming supply of residential property;
3. Growth in housing prices against the growth in Malaysian household income; and
4. Potential OPR hike.

My next post will be on analyzing property companies. Stay tuned!

This article is taken from http://www.stocksinsights.com/. If you would like to receive more key insights article, do subscribe to this website. You can also check out some of my past articles on REITs or increase your investing knowledge by browsing through my articles on Investing 101.