News & Articles Malaysia's residential overhang shrinks as developers sell inventory to generate cash flow

Malaysia's residential overhang shrinks as developers sell inventory to generate cash flow

27 Sep 2023
Malaysia's residential overhang shrinks as developers sell inventory to generate cash flow
KUALA LUMPUR: Malaysia's residential overhang fell for the sixth consecutive quarter in the second quarter of fiscal year 2023 (2Q2023), reaching its lowest level since 2Q2018.

Overhang peaked at 36,863 units in 4Q2021 due to the Covid-19 pandemic and has started to decline since 1Q2022.

Residential overhang fell to 26,286 units in 2Q2023 from 26,872 units in 1Q2023, according to data released by the National Property Information Centre (NAPIC).

The residential overhang in 2Q2023 was below the three-year average of 31,000 units, and the decline was due to renewed buying interest in property after the reopening of Malaysia's international borders.

The residential overhang in 2Q2023 was lower than the three-year average of 31,000 units, owing to renewed buyer interest in property following the reopening of Malaysia's international borders.

"The declining residential overhang in Malaysia is in line with the lower inventory level of property companies, as they have been actively monetising inventories in the past few years. The inventory monetisation is to generate cash flows amid a challenging operating environment due to Covid-19 pandemic," according to MIDF Research.

MIDF said that, notably, inventories of Eco World Development Group Bhd fell significantly by 58 per cent in 2Q2023 since 2019.

Similarly, Mah Sing Group Bhd, SP Setia Bhd, and Glomac Bhd saw double-digit declines in inventory.

"We think that the declining inventory level of property companies would improve their financial position and give them better pricing power in terms of new launches going forward," it said in a recent note.

MIDF: Unchanged OPR a bone to the sector

Bank Negara Malaysia (BNM) kept the overnight policy rate (OPR) unchanged at 3.00 per cent in its July and September 2023 meetings.

MIDF said the unchanged OPR is positive for the sector as it will keep buying interest on property supported.

"Recall that the property market was hit by four consecutive OPR hikes in 2022, which dampened buying sentiment on properties. We estimate that every 25 basis points (bps) increase in interest rate will increase the monthly installment by RM60 to RM70 for a house loan of RM500,000.

"Looking ahead, our in-house economist forecasts that the OPR will remain unchanged for the rest of this year, which is positive for the property sector. We think that the unchanged OPR should bode well for recovery in demand for property for the rest of 2023 and 2024," it said.

MIDF has upgraded the property sector to positive from neutral (with positive bias) previously due to the improving outlook amid the downtrend in property overhang and inventory levels of property companies.

Besides, it said that the unchanged OPR is positive for property companies as it supports a recovery in demand for property.

In view of the improving outlook for property developers, MIDF is narrowing its RNAV discount and target prices for property companies under its coverage.

"Post-adjustment to valuation, our calls for property companies remained unchanged," it said.

MIDF's top picks for the sector are Mah Sing Group (buy, TP: RM1.01) and Matrix Concepts (buy, TP: RM1.86), as it remains bullish on property developers focusing on the mid-market and affordable segments in the face of resilient demand for affordable housing.

Top five states that showed a downtrend in residential overhang.

Among the top five states with the highest residential overhang in 2Q2023, Penang and Johor showed a downtrend in residential overhang.

Residential overhang in Selangor and Kuala Lumpur (KL) has improved marginally, while residential overhang has worsened in Perak.

Johor has the highest residential overhang of 4,717 units, followed by Selangor at 4,307 units, Perak at 3,333 units, KL at 3,173 units, and Penang at 2,901 units.

In terms of the price range of residential overhang, properties priced between RM200,000 and RM300,000 made up the highest residential overhang at 4,262 units, followed by properties priced above RM1 million at 4,045 units, and properties priced between RM300,000 and RM400,000 at 3,811 units.

In a nutshell, affordable properties priced below RM500,000 made up more than half of the residential overhang in 2Q2023, contributing to 52 per cent of the total residential overhang.

Residential overhang in Johor declined for the fourth consecutive quarter in 2Q2023 to 4,717 units from 4,759 units in 1Q2023 and 6,040 units in 2Q2022.

MIDF noted that residential overhang spiked to above 7,000 units in 4Q2020 due to Covid-19 pandemic, and that sparked concern about residential oversupply in Johor.

"Residential overhang in Johor is improving, as total overhang units of 4,717 units in 2Q2023 were well below the three-year average of 5,947 units. Johor Bahru contributed to the highest number of residential overhangs at 3,597 units, which were largely made up of condominiums and apartments," it said.

Residential overhang in Selangor showed patchy recovery in 1H2023 as residential overhang spiked to 4,995 units in 1Q2023 before tapering to 4,307 units in 2Q2023.

MIDF said residential overhang in Selangor remains elevated as it stays above 4,000 units and higher than residential overhang of 3,698 units in 4Q2022.

Nevertheless, residential overhang in 2Q2023 of 4,307 units was below the three-year average of 4,597 units, showing improving residential overhang in Selangor. Gombak had the highest residential overhang of 1,452 units, followed by Kuala Selangor at 902 units and Petaling at 757 units. Most of the residential overhangs in Selangor were condominiums and apartments.

Residential overhang in Perak worsened in 2Q203 as the residential overhang surged to 3,333 units in 2QCY23 from 2,074 units in 1QCY23. The figure was also higher than the 2,611 units of residential overhang in 2Q32022. Residential overhang spiked to the highest level since 2021 and above the three-year average of 3,297 units due to a jump in residential overhang in Manjung.

"Note that residential overhang in Manjung surged to 1,736 units in 2Q2023 from 467 units in 1Q2023," MIDF said.

KL, meanwhile, saw its residential overhang improve marginally to 3,173 units in 2Q2023 from 3,423 units in 1Q2023. The residential overhang in KL came off a peak of 3,908 units in 4Q2021 and subsequently hovered around 3,300 units in the past few quarters.

In short, residential overhang in KL was subdued in recent years as residential overhang stayed flat and climbed above 3,400 units in 4Q2022. Nevertheless, residential overhang improved marginally to below the three-year average of 3,231 units, which may indicate improving residential overhang in KL. Seksyens 1 to 100 in KL contributed to the highest residential overhang of 880 units, followed by Petaling at 8,14 units.

In Penang, residential overhang had improved, falling for the fifth consecutive quarter in 2Q2023. Residential overhang in Penang eased to 2,901 units in 2Q2023 from 3,138 units in 1Q2023. Residential overhang in Penang showed significant improvement in 4Q2022, as it dropped sharply to 3,593 units from 5,222 units in 3Q2022, amid the reopening of international borders.

"We see easing concern about residential overhang in Penang as it is well below the three-year average of 4,208 units. Timur Laut in Penang contributed the highest residential overhang, which was made up largely of condominiums and apartments," MIDF said.


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