RAM maintains negative outlook on property sector

KUALA LUMPUR (May 9): RAM Rating Services Bhd has maintained its negative outlook on the Malaysian residential property sector as well as the office and retail sub-segments in Kuala Lumpur and Selangor this year.

RAM expects the consumer and business sentiment to remain muted amid a slowing economy while lending conditions are likely to stay tight, thus presenting another challenging year for the property sector.

In a statement today, the rating agency noted that the Malaysian property sector was subdued last year, as demand waned on the back of a decelerating economy, softer consumer and business sentiment, and tight financing conditions.

"Accordingly, residential property transactions contracted 5% year-on-year (y-o-y) in 2015, with a steeper 21% decline for the primary market.

"The aggregate sales of eight leading developers tracked by RAM also fell 15% y-o-y due to the downbeat market and cautious sentiment. Meanwhile, transaction value retreated 10% y-o-y — the first drop since 2005," it said.

RAM said the Malaysian House Price Index, while still trending upwards, has also tapered to a low single-digit growth.

Moreover, residential property overhang has been creeping up in the last two quarters, it added.

Meanwhile, RAM said the commercial sub-sectors (office and retail property) in Kuala Lumpur and Selangor also weakened, with occupancy rates retreating 1–3 percentage points y-o-y in 4Q15 as supply continued outpacing demand.

Rental rates for offices were reportedly flat while prime malls managed to eke out a very modest rental increase, it said.

Going forward, the rating agency expects demand to stay muted as the economy slows and consumer and business sentiment remains subdued.

"Tight lending conditions are likely to continue given the lingering concerns about the nation's elevated household debt levels.

"Furthermore, the imbalance within the commercial sub-sectors will persist, particularly given the cautious sentiment within the finance and oil and gas sectors — traditionally the key take-out sources for office space in the Klang Valley," said RAM.

Nevertheless, it expects the credit metrics of RAM-rated property players to stay stable.

"The majority of our rated entities have raised debt financing guaranteed by financial institutions.

"On a stand-alone basis, the credit profiles of our rated developers are also stable, supported by robust locked-in sales, a focus on more affordably priced homes and the flexibility arising from a cheap land bank.

"Meanwhile, the stand-alone credit strength of our rated REITs (Real Estate Investment Trusts) and mall owners are largely stable, underpinned by long leases, assets of good quality and the sturdy market positions of their malls," it added. -- theedgemarkets.com

By Chen Shaua Fui, The Edge Property