Affordability and strict bank lending will continue to weigh on the property sector, with the outlook to remain bleak in the first half of the year.

UOBKayHian Research said in a report that demand remained an issue despite property prices in key areas – Penang, Johor and the Klang Valley – remaining relatively stable with house-price indices holding up.

“Demand continues to be sluggish post implementation of the goods and services tax (GST). We expect this trend to persist as affordability and stringent lending policies continue to dampen the sector outlook,” it said.

As such, the research house noted that a number of property developers had downsized their launches and sales targets in 2015, and were focusing on the affordable housing market.

“However, in spite of the persistent negative newsflow, we believe selected hotspots within the Klang Valley that offer affordable and landed developments would continue to be well sought after,” UOBKayHian Research said, adding that during the Budget 2016 announcement, the Government introduced a number of schemes to assist first-time buyers for new homes, including extending the loan supports scheme and a 50% stamp duty exemption for them.

Property stocks were trading below their long-term mean valuations in light of the slowdown in the sector.

“We opine that investors position for developers with decent dividend yields, which include Sunway and SP Setia, both of which are expected to deliver dividends of 4%-6%. Investors with stronger risk appetite should consider Sunsuria, which is expected to deliver a sharp upward earnings trajectory as we expect its maiden launch of the Sunsuria Serenia township to be well received,” it said.

For now, affordable housing continued to be in demand.

“We believe growth in 2016 would still be supported by demand for affordable homes, mainly fuelled by a rapidly-growing population between the prime age of 25-45, supported by an increasingly affluent middle class,” the research house said.

Also, the increase in the maximum threshold for civil servants’ mortgage loans to RM600,000 from RM450,000 would further support demand for affordable homes, particularly in the Klang Valley.

Property prices in the key states remained relatively stable year-on-year, led by the Klang Valley region.

“Surprisingly, Johor saw the highest positive quarter-on-quarter growth after three quarters of declines as government measures kicked in,” it said.

Statistics indicated that property prices in Malaysia and the key economic growth areas remained stable and on an uptrend, albeit at a slower pace.

The research house believed prices held up due to inflationary pressures, particularly with the implementation of the GST that resulted in higher construction costs which were passed on to buyers.

“Going forward, we believe landed properties would continue to see modest price appreciation, especially those in the affordable segment, given the strong growth in the urban population and modest income growth while high-rise projects in not highly popular areas may continue to remain under pressure,” UOBKayHian Research said.

Meanwhile, incoming supply in the Klang Valley was relatively stable wtith average supply to existing supply being 10.5%, below the 10-year average of 13.2%.

In Johor, incoming supply was at its all-time high, where residential supply growth was expected to hit 25% versus the 15-year average supply growth of 13.1%.

“We foresee prices in Johor City Centre particularly within the Danga Bay area to see some downward pressure as projects by Chinese developers in the area begin to flood the market from 2018,” it said.

Incoming supply in Penang, however, was on a rising trend, particularly was a number of developments launched in 2012-2013 were coming on stream, the research house said.

“However, new launches have also slowed down recently as developers are facing delays in obtaining advertising and developers licences,” it said.