This article first appeared in The Edge Financial Daily, on May 10, 2016.

KUALA LUMPUR: RAM Rating Services Bhd has maintained its negative outlook on the Malaysian residential property sector as well as the office and retail subsegments in Kuala Lumpur and Selangor this year.

RAM expects 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 yesterday, the rating agency noted 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 tapered to a low single-digit growth, while residential property overhang has been creeping up in the last two quarters.

The commercial sub-sectors of office and retail properties in Kuala Lumpur and Selangor have also weakened, with occupancy rates retreating one to three percentage points y-o-y in the last quarter of 2015 as supply continued to outpace demand.

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

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

It also expects the imbalance within the commercial sub-sectors to persist, “particularly given the cautious sentiment within the finance and oil-and-gas sectors — traditionally the key takeout sources for office space in the Klang Valley”.

Nevertheless, it said the stand-alone credit metrics of RAM-rated property players are stable and expected to remain so, supported by robust locked-in sales, a focus on more affordably priced homes and the flexibility arising from a cheap land bank.