PETALING JAYA: The commercial real estate (CRE) market has historically posed major risks to the balance sheet of financial institutions, playing an amplifying role in financial crises globally.

       “In Malaysia, post-pandemic structural trends are likely to add to pre-existing imbalances. Vacancy and rental rates have worsened since the onset of the pandemic and could take longer to improve given the structural shifts observed,” Bank Negara said in its financial stability review for the second half of 2021.

       In an article on the financial stability risks from the CRE sector following post-Covid-19 structural trends, it noted that the direct linkages between the sector and the financial system are limited, thus substantially mitigating risks to financial stability.

       “Relative to many countries, linkages between the CRE sector and the financial system are significantly lower in Malaysia, with credit exposure to the CRE sector comprising 7.8% of total banking system assets,” it said.

       It noted that the share of CRE to overall property exposures of financial institutions has declined in the past decade, reflecting the banks’ cautiousness towards the sector.

       The largest share of bank exposures to CRE is in the form of end-financing for the purchase of shophouses

       “The trends for shophouses typically follow developments in the housing market, making shophouses more resilient, relative to other CRE segments. The quality of the overall bank lending to the sector is also sound, with impairment ratios remaining low at 1.5%.

       “The share of stage two loans has risen to 12% (June 2021: 9.4%) in line with an expected deterioration in asset quality as a result of Covid-19 developments,” it pointed out.

       This increase, to some extent, reflects conservative loan staging and provisioning practices of banks during the pandemic.

       As for risks from broader contagion, they are contained by the relatively small CRE market in Malaysia. The limited presence of foreign investors in the local property sector (0.3% of total property transactions in 2020) reduces the likelihood of cross-border investments amplifying the contagion risks.