What's Next for Malaysian Property Sector Following the Recent Pullback？

Since the beginning of the year, the Malaysian property sector has seen a cumulative increase of 22.9%, outperforming the KLCI index by 8.8 percentage points. At one point, the sector's yield peaked at approximately 35%.

However, since late July, there has been a decline of about 7.4%. This downturn is primarily attributed to the mixed results reported during the recent earnings season and profit-taking activities spurred by prior substantial gains, particularly among developers involved in data center construction amidst concerns over the AI frenzy.

Despite recent challenges in the stock market, the real estate sector in Malaysia has shown remarkablefundamentalperformance. According to the latest data from NAPIC, the property market reached a significant milestone in the first half of 2024, with the total transaction value soaring past RM105 billion across 198,906 transactions. This achievement represents the highest growth in both value and volume over the last five years, with an 8.0% increase in transaction volume and a 23.8% surge in value compared to the same period in 2023.

Deputy Finance Minister Lim Hui Ying attributed this robust growth to several key government measures. These include the provision of up to RM10 billion in guarantees under the Housing Credit Guarantee Scheme (SJKP), maintaining a stable overnight policy rate at 3.0%, and fiscal incentives such as the extended stamp duty exemption for first-time homebuyers on property transfer documents. These initiatives have significantly bolstered the property market, demonstrating a strong government commitment to supporting housing affordability and market stability.

Despite the recent underperformance in the sector, the market remains optimistic about the long-term development of the Malaysian real estate market. Key reasons include:

Data centers are pivotal to the industrial property development in Malaysia. In 2024, the growth of this sector is significantly accelerated by a marked increase in investments in data centers. This expansion is primarily fueled by the AI boom, as data centers provide essential infrastructure to support the extensive data processing, storage, and computational needs of AI technologies.

Malaysia holds a competitive edge in attracting foreign direct investments (FDIs) for data centers due to several factors including (1) stable and abundant power supply, (2) comparatively lower land costs than its neighbor, Singapore, (3) Malaysia's commitment to and continuous investment in renewable energy, which aligns with green data center initiatives, and (4) a low risk of natural disasters.

Government policies serve as an important force propelling the residential property forward. The Housing Credit Guarantee Scheme aims to encourage first-time homeownership, thereby enhancing growth in the residential real estate market during the latter half of the year.

Additionally, ongoing infrastructure projects, such as the "Mutiara Light Rail Transit (LRT) Line" in Penang, "LRT3", and the emergence of data centers are acting as catalysts to stimulate mixed-use developments. These projects are expected to increase property values and escalate demand for residential real estate.

Over the last few decades, economic growth was predominantly concentrated in the Klang Valley, leading to significant overdevelopment in the region. Recently, a shift has been observed as other states such as Johor, Penang, Sarawak, and Kedah have started to attract more industrialization and investments. With the implementation of policies by the Unity Government, there is an increasing trend of decentralization as economic activities and foreign investments are becoming more evenly spread across various states. For instance, Penang is emerging as a hub for electronics and electrical (E&E), while Sarawak is capitalizing on renewable energy.

Kenanga maintained its "underweight" rating on Malaysia's property sector in early July before the market's decline, highlighting persistent challenges such as oversupply, high household debt, elevated interest rates, and weakened consumer sentiment due to high inflation and rising living costs. The firm noted that the market has adequately factored in the immediate to short-term benefits from investments in data centers and the economic transformation in Johor.

BIMB Securities, on the other hand, predicts a resilient property market heading into 2025, following a strong performance expected this year. Last Tuesday, BIMB reiterated its "overweight" stance on the sector, attributing this optimism to robust earnings and enhanced affordability driven by government initiatives.