Conflicting evidence of a recovery in the number of property transactions amid more reported foreclosures lead us to meet with property-services company Savills Malaysia, and Hong Leong Bank to better appreciate on-the-ground dynamics in the residential property/mortgage market. We came away with renewed belief that our view on property remains appropriate given prolonged gestation. For banks, underwriting discipline has so far preserved mortgage health on the whole, while there appears room for growth through better risk assessment processes/strategy – and not necessarily competing via pricing.
Residential property: prolonged gestation
Savills reaffirmed our thesis (mounting unsold units offsetting recent greenshoots of recovery) on the property sector, and estimated that the ingestion of unsold units to be greater than five years in high-volume areas, such as Kuala Lumpur and Johor. As a result of its high-population area (c.1-1.2m), north KL (Sentul and Kepong) appears to be a melting pot of competition as the majority of recent launches were centred there. This represents further downward pressure on margins in addition to moderating prices. An interesting new development lies in senior housing, given we forecast Malaysia’s elderly population (older than 65) to quadruple by 2040. The comparable returns in office and senior-housing assets observed in Japan provide a precursor of its viability, though cultural differences may be a barrier.
Banks: keeping growth sustainable through better underwriting
Investors were keen on insights into Hong Leong’s strategy for taking market share (up by 9.4% YoY in March 2019), which was helped by sharpened origination focus on bankable property projects and more rigorous credit onboarding and underwriting. Attributable to its strong collection culture, Hong Leong has shown an improved residential mortgage GIL (gross impaired loans) ratio in recent quarters (to 0.5%), although the same cannot be said for all peers. We nevertheless believe that banks’ overall collection rigour has seen total at-risk loans decline, as past-due/delinquent loans have generally eased under MFRS (Malaysian Financial Reporting Standards) 9, reducing impairment needs. According to Bank Negara Malaysia, 70% of newly approved loans have debt-service ratios under 60%. As of 5M19, residential mortgage applications showed an increase of 12% YoY, signalling better demand.