KUALA LUMPUR: Malaysia's property sector is expected to face rising pressure in the second half of 2026 as construction costs rise and project launches are delayed, even as developers hold on to full-year sales targets
Industry experts estimate construction costs for upcoming tenders could increase by 5.0-15 per cent. This will driven by higher input prices and lingering geopolitical uncertainties, alongside a shift in project launches to later in the year.
Economy Minister Akmal Nasrullah Mohd Nasir recently said higher diesel prices had lifted the average cost of construction materials by between 12 per cent and 13 per cent, citing data from the Malaysian Construction Industry Development Board.
CIMB Securities senior analyst Kenny Mak Hoy Ken said the broader impact has become more pronounced following the escalation of tensions in the Middle East.
"Our channel checks suggest that the knock-on impact has resulted in a 5.0 per cent-15 per cent increase in construction costs since the US-Iran war broke out at end-February 2026," he said, adding that the impact is unlikely to be uniform across the sector.
Mak said projects awarded under fixed-price contracts and trade works with high diesel consumption such as foundation, drainage and road infrastructure will bear the brunt of the impact.
He added that although the government has retained its fuel subsidy programmes, prolonged geopolitical tensions could keep oil prices elevated, increasing the cost of key construction materials, including ready-mixed concrete, steel, sand and bitumen, as oil- and gas-related supply chain disruptions persist.
As existing inventories of building materials are depleted, the cascading impact of higher energy costs on contractors' margins is likely to become more evident from the second half of 2026 onwards, he said.
Mak also warned that rising subsidy costs could eventually constrain public infrastructure spending.
"As the immediate focus is on protecting vulnerable groups, we posit that the rising national subsidy bill may prompt a shift in the government's infrastructure spending goals as it strives to meet the medium-term target of reducing the federal fiscal deficit to below 3.0 per cent by 2028," he said.
Losing Momentum
Malaysia's property market softened in the first quarter of 2026 (Q1 2026), with transaction volume falling 8.0 per cent year-on-year (YoY) to 89,966 units, while transaction value slipped 1.0 per cent to RM51.9 billion, reflecting a more cautious buying environment.
Developers also recorded weaker sales during the quarter, partly due to the transition to digitalised sale and purchase agreement processes and slower launch activity, Mak said in a separate property sector report.
"While the developers have indicated limited near-term margin impact, some acknowledged the growing need for cost-sharing or selective project deferments to support contractor cashflows," he said.
Despite the softer operating environment, most listed developers have maintained their FY2026 sales targets, although CIMB Securities expects execution risks to increase because of higher construction costs, launch delays and softer demand.
Previndran Singhe, group chief executive officer for Zerin Properties, said the 8.0 per cent YoY decline in transaction volume recorded in Q1 2026 needs to be viewed within the broader context of market normalisation rather than interpreted as a broad-based demand slowdown.
"What stands out is that while transaction volume declined to 89,966 units, transaction value saw only a marginal contraction of less than 1.0 per cent to RM51.9 billion.
"This divergence suggests that market activity remains fundamentally resilient, with capital increasingly concentrated towards higher value, better quality and more strategic assets, rather than indicating a broad deterioration in demand," he said.
Several factors are contributing to this temporary moderation, he said.
Firstly, ongoing global uncertainties, including geopolitical tensions in the Middle East, external economic volatility and persistently elevated interest rate environments globally, have naturally influenced consumer confidence and delayed discretionary purchasing decisions.
Secondly, the implementation of the mandatory digital sale and purchase agreement execution process beginning January 2026 has introduced transitional friction across the transaction ecosystem, as developers, legal firms, financiers and purchasers continue adapting to the new framework.
At the same time, developers themselves have adopted a more cautious approach towards project launches, he said.
Previndran said rising construction costs, tighter cost management and greater discipline in project execution have led many developers to phase launches more conservatively, which is reflected in the decline in new housing launches and construction starts during the quarter.
He said the anticipated 5.0 per cent to 15 per cent increase in construction costs is arguably one of the most significant near-term challenges facing the property sector today.
He added that the broad range itself reflects the level of uncertainty developers are currently navigating, particularly as material costs remain exposed to currency volatility, supply chain disruptions, rising energy costs, and continued labour cost pressures.
"From a financial perspective, this will inevitably place pressure on development margins, especially for projects where pricing assumptions were established under earlier cost conditions.
"The challenge is particularly pronounced within affordable and mid-market residential segments, where developers have limited flexibility to pass higher costs directly to purchasers without affecting demand.
"More importantly, the greater concern extends beyond margin compression to project execution risk.
"Contractors operating under tighter cashflow conditions may face increasing financial strain, which could potentially affect project timelines, tender pricing, and overall delivery certainty.
"This is why some developers are already exploring more collaborative approaches, including phased launches, cost-sharing arrangements, and more disciplined procurement strategies to better manage near-term risks," Previndran said.
Going forward, developers will need to be far more disciplined in how they structure and phase projects, he said, adding that in a market where costs are rising faster than selling prices, execution strategy becomes just as important as market demand itself.
He said Malaysia's property sector remains fundamentally resilient, supported by sound economic fundamentals, ongoing infrastructure investments, and sustained long-term demand for quality real estate.
"Residential properties continued to account for nearly 59 per cent of total market activity, while homes priced at RM300,000 and below remained the dominant segment with over 27,000 transactions, representing more than half of all residential transactions.
"The Malaysian House Price Index also recorded a positive annual growth of 1.7 per cent, indicating continued price stability across the market. In our view, this does not indicate a structural weakening of demand.
"Rather, it reflects a market undergoing recalibration, where both developers and purchasers are becoming more disciplined and increasingly focused on value," Previndran said.
Timing Is The Key Risk
Olive Tree Property Consultants co-founder and chief executive officer Samuel Tan said the market is facing multiple headwinds rather than a single issue.
He said the latest data represents a second consecutive year of declining transaction volumes, suggesting the slowdown is becoming more structural.
Tan also said the impact of higher construction costs will depend on the extent of the increase.
At the lower end of the projected 5.0 per cent rise, developers should be able to absorb the additional costs through value engineering, phased procurement and modest price adjustments, he said.
"It represents manageable margin compression rather than a structural re-rating of the sector," he told Business Times.
"At the high end of 15 per cent, this starts to bite into gross development value and margin assumptions meaningfully, particularly for projects with fixed-price presales already locked in where cost escalation cannot be passed through or projects with high steel/cement and skilled labour intensity (high-rise, branded residences and hotel-grade fit-outs).
"The growing use of cost-sharing or selective project deferment language from contractors is the more telling signal here. It suggests margin pressure is real enough to renegotiate risk allocation," he told Business Times.
On delayed project launches, Tan said the key issue is one of execution rather than demand.
"A launch slipping from 1H 2026 to 2H 2026 does not necessarily threaten the FY26 target numbers if developers retain pricing power and the underlying buyer pool is intact.
"It just compresses the sales cycle into a shorter window, raising execution risk, rather than necessarily lowering the achievable total," he said.
He said investors would need to watch out for several indicators, including earnings recognition lag, concentration risk in 2H 2026 and political backdrop as the swing factor.
Under Malaysia's progressive billing system, project launch delays postpone not only sales bookings but also revenue and profit recognition, meaning reported FY2026 earnings could appear weaker even if developers ultimately achieve their sales targets.
"If multiple developers are simultaneously pushing launches into 2H 2026, that is a crowded launch calendar competing for the same buyer pool and bank financing capacity," Tan said.
More broadly, Tan said the property market is being weighed down by multiple factors rather than a single catalyst.
He noted that transaction volumes have now declined on a year-on-year basis for a second consecutive year, pointing to a more persistent slowdown rather than a temporary correction.
At the same time, transaction values have remained relatively resilient, suggesting that while affordability pressures are dampening demand in the mass-market segment, higher-value and investment-grade properties continue to attract buyers.
"The market is seeing fewer transactions, but the average value of completed deals remains relatively firm," he said.
Tan noted that the National Property Information Centre continues to characterise the market as stable with moderate growth, with the Malaysian House Price Index rising 1.7 per cent year-on-year in the first quarter of 2026 to 235.2 points and the average house price increasing to RM507,533.
Most states also recorded house price growth of between 0.3 per cent and 7.2 per cent.
"This reflects a government view that emphasises resilience and price stability, which contrasts with more cautious interpretations focusing on volume weakness and execution risks," he said.
He added that rising overhang levels reinforce this view.
Unsold completed residential units increased 7.6 per cent to 32,801 units, while the completed serviced apartment overhang rose to 19,263 units worth RM16.52 billion from 18,752 units worth RM15.42 billion in the previous quarter.
"The increase in overhang, particularly in serviced apartments and selected price bands, alongside still-positive price growth, suggests the market is correcting more on absorption and volume rather than on overall pricing," he said.
