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Tough journey to continue in property sector, says analyst

KUALA LUMPUR (Dec 17): Hong Leong Investment Bank (HLIB) Research expects property developers to continue facing a tough operating environment in 2021, with developers cautiously carrying out launches and offering discounts on their products.

The research house’s analyst Lim Ken Wern said in a note today that with the Home Ownership Campaign (HOC) ending on May 31 next year, developers will need to continue providing goodies in order to attract bookings.

“Our channel check revealed that listed developers are garnering a sales conversion rate of about 50% and that some buyers still struggle to obtain their desired financing from banks,” he said.

Nonetheless, given the low-base impact of 2020, he said 2021 may potentially see improved transaction volumes when the economy recovers from the ongoing Covid-19 pandemic.

However, Lim noted that residential transaction volumes in the third quarter of 2020 (3Q20) showed 55,845 units being transacted, of which 62.2% were for houses priced below RM300,000, which provided minimal margins for listed developers.

The number of overhang residential units stood at 30,926 units in 3Q20, according to the latest data available, up by 212% from 9,903 units back in 2015, of which 45.1% of the units were priced above RM500,000.

High-rise units accounted for 54.2% of total overhang units, while two- and three-storey terraced houses made up 27.8%, he said.

According to Lim, monthly residential property loan applications and loan approvals were down year-on-year (y-o-y) for the cumulative first nine-month period (9M20) by 5.5% and 25.9% respectively, showing a decrease in the approval rate of 21.6% largely due to the impact of the movement control order (MCO) earlier in the year.

Meanwhile, Lim said, in the latest results reported, three out of six property companies under his coverage came in within expectations, while IOI Properties Group Bhd and S P Setia Bhd came in above expectations, and UEM Sunrise Bhd disappointed.

“Better-than-expected sales and progressive billing recognitions contributed to the performance of IOIPG (IOI Properties Group) and S P Setia, while higher-than-expected operating cost resulted in the disappointment from UEM Sunrise,” he said.

Sales figures in the recent results release showed that on average, companies were on track for their respective full-year sales targets with the exception of UEM Sunrise, said Lim.

He, however, maintained his "neutral" stance on the property sector due to the ongoing weak property market environment.

“On the other hand, a potential economic recovery in 2021, coupled with undemanding valuations (coverage universe price-to-book value at 0.5 times or more than two standard deviations [2SD] below the five-year mean) should lend some support to the downside,” he said.

“We lower our revalued net asset value discounts by 5% on counters which we had aggressively placed discounts of over 80% (i.e. S P Setia and UEM Sunrise, with the 'hold' calls maintained) to reflect the positive sentiment on a recovery play,” he said.

For top picks, he continued to like Sunway Bhd ("buy"; target price [TP]: RM1.95) as an underappreciated property-construction conglomerate with mature investment properties, a growing trading and quarry division, and potential monetisation of its healthcare business.

He also likes Matrix Concept Holdings Bhd ("buy"; TP: RM2.11) as it rides on the affordable housing theme within its successful townships with cheap land cost and sustained property sales, coupled with future potential job flows from its Indonesian venture.

“Its dividend yield of over 6% remains one of the highest in the sector,” said Lim.

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