KUALA LUMPUR: After two years of strong gains, Malaysia's property sector experienced a healthy consolidation in 2025 and is expected to perform better in 2026.

Hong Leong Investment Bank Bhd (HLIB) said in a note that the Kuala Lumpur Property Index (KLPRP), which tracks local property stocks, fell 6.0 per cent in 2025 after strong gains of 34.5 per cent in 2023 and 31.5 per cent in 2024, while the KLCI rose 2.3 per cent last year.

"We view this year-long consolidation as healthy, providing room for sector earnings to catch up and laying the groundwork for a potential re-acceleration in 2026," it said.

HLIB said that underlying operating momentum remained robust, with strong sales, rising unbilled income, and higher launches in the first nine months of 2025.

The firm said while investor sentiment was weighed down by rising construction and compliance costs, recent policy adjustments have provided partial relief.

Looking ahead, HLIB said residential demand is expected to vary by region, while industrial activity remains a key growth driver, led by Johor and Malaysia Vision Valley 2.0.

It added that commercial segments will be supported by a structurally strengthening tourism sector and a recovering Klang Valley office market.

Overall, HLIB maintained its "Overweight" rating on the property sector, as it believes developers today have multiple growth avenues to capitalise on the real estate upcycle.

The firm said diversified developers with exposure across regions and across residential, industrial, and commercial segments are better positioned to capture opportunities, mitigate cyclical risks, and deliver more resilient earnings throughout the cycle.

HLIB's top picks for the sector include OSK Holdings Bhd, IOI Properties Group Bhd, Sunway Bhd, and Matrix Concepts Holdings Bhd.