Brunei Darussalam’s property market set to ease

While 2015 brought growth in Brunei Darussalam’s real estate sector, a further cooling of the economy points to a slowdown in the Sultanate’s property market for the rest of this year.

In May the IMF lowered its 2016 economic forecast for the Sultanate to a contraction of 2%, which was down from an earlier estimate made in October of 3.2% growth, which, if realised, would mark a fourth consecutive year of negative growth.

Tightening takes its toll

The impact of lower energy prices on Brunei Darussalam’s economy and budget is expected to have a knock-on effect on the Sultanate’s property market, in part due to the high number of Bruneians employed by the state and state-related enterprises, estimated to be between 70% and 80%.

Nonetheless, lending for home buying remained strong in 2015, according to data issued by the Autoriti Monetari Brunei Darussalam (AMBD), the central bank, although financing for the purchase of land and construction fell.

Credit to the real estate market in 2016 rose 3.6% year-on-year (y-o-y), with financing increasing from BN$1.38bn ($1bn) in 2014 to BN$1.43bn ($1.1bn) in 2015, according to the AMBD. Underscoring the significance of the property market, residential lending accounted for 23.4% of household debt last year, according to the authority, the second-highest category after personal financing.

But while the uptick in financing was due primarily to an increase in housing purchases, which rose by 9.7% y-o-y in 2015 to reach BN$710m ($531m), lending for land purchases and construction fell by 9.5% from BN$310m ($231.9m) to BN$280m ($209.4m).

Weighing the risk

In its most recent Banking Industry Country Risk Assessment survey, ratings agency Standard and Poor’s (S&P) noted that while Brunei Darussalam’s banking sector was expected to remain stable, exposure to the real estate market and related sectors meant it could be vulnerable to a number of risks.

“Banks have sizeable exposure to personal loans, construction and real estate loans, and client concentration,” S&P said in its report. “This heightens credit risk in the economy, in our view.”

A modest increase in lending for real estate and other activities looked possible, the report noted, although any expansion would be limited due to borrowing restrictions implemented in mid-2015.

The lending cap, introduced by the AMBD in June 2015, set a total debt-service ratio on applicants for credit, with the upper repayment limit for those on a minimum monthly net salary of BN$1750 ($1309) set at 60% of earnings. The AMBD mandated that lenders exercise due diligence to ensure that creditors were able to service their debts.

However, despite indications of a slight dampening in real estate sales, S&P predicted that overall, the sector would witness a marginal increase in credit availability in the medium term, due to government support for wholesale credit growth.

The agency also noted that with property prices being driven by real demand, rather than speculative or investment-centric demand, any losses incurred by banks due to their exposure to real estate should remain low.

Market trends

Although the cooling economic climate is expected to impact real estate sales, key segments offer potential for growth, according to Nurul Akmar Jaafar, deputy head of retail banking at Bank Islam Brunei Darussalam, the Sultanate’s largest bank.

Jaafar told media that most of the financing for the housing market was being channelled towards young professionals, with the bank encouraging clients to consider investing in property soon after they enter the workforce.

“If someone starts working at 22 years old, we would encourage them to get a house after the first three years so by the time they’re 45 years old, they’re already debt free,” she said.

Brunei Darussalam has also seen a marked increase in the number of overseas property purchases, especially for the sole purpose of investment.

Overseas property is appealing due to stronger returns in a number of key markets, such as Melbourne, where many Bruneians invest in property, either as families settle full-time, primarily for their children’s education, or purchase a holiday home.

Bruneian property investors are also looking to invest offshore, with Michael Tan Yew Seng, associate director of SLP International Premier Homes Division, citing a strong Brunei dollar as a key advantage, as well as exchange rates nearly equal to the Australian dollar.

“We have strong confidence in the Brunei market and believe that there are still a good number of investors that have the capacity to invest overseas,” he told local media.

Property developers from Malaysia, Singapore, Australia and the UK are among those coming to Brunei Darussalam looking to tie-up with local property developers to market properties in a number of international markets.

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