(KUALA LUMPUR) The property sector is likely to be downgraded if Bank Negara Malaysia imposes a lower mortgage loan-to-value ratio (LVR), says Kenanga Research.

Bank Negara is reported to have written to financial institutions to secure feedback on the possibility of capping the LVR for mortgages at 80 per cent to avert the risk of a potential property bubble.

Currently, banks can usually lend up to 90 per cent of the house value, or up to 100 per cent in selected cases, which has been handy for developers promoting their newly launched homes under interest absorption schemes like 10/90 home loan schemes.

Kenanga said in a research note yesterday it would not be surprised if Bank Negara implements the 80 per cent cap on the mortgage LVR, or at least for properties costing more than RM500,000 (S$212,200), as the government is clamping down on investment-related property acquisitions.

‘If implemented, we are likely to downgrade our sector call, as we expect property transactions to fall since deposit requirements will double, or essentially double the investment risk, limiting the number of homes that an individual can buy. We expect buyers to become more discerning when it comes to property choices, meaning stronger market leaders with branding and quality will be winners, when it comes to grabbing market share of a smaller pie,’ Kenanga explained.

It is also maintaining a ‘trading buy’ call on the property sector for now.

Kenanga said, currently, the ‘buy call’ is largely premised on strong sales achieved for developers, who are well positioned with several projects or aggressive land banking.

‘We look to review our sector and company calls in the next couple of weeks, pending further light on the matter,’ it added.

Meanwhile, OSK Research said it is unlikely that Bank Negara will enforce a strict capping of the LVR at 80 per cent across all residential property classes, but rather impose a restriction only on higher-end properties.

‘We understand, however, most banks would have an internal risk control policy limiting the LVR to 85 per cent for higher-end residential properties of more than RM700,000,’ it said.

Residential properties currently contribute to 26.6 per cent and 49.8 per cent of total industry loans and household loans respectively. — Bernama

Source: Business Times, 31 Aug 2010