Accumulate property stocks

KUALA LUMPUR: Investors should continue to accumulate property stocks despite the heavy selldown since last week on news of the possibility of a change in housing loan calculations from gross to net pay, said CIMB Research.

The research house said share prices of property stocks have been on a downtrend since The Edge weekly carried a report on July 11 that Bank Negara Malaysia (BNM) had issued a white paper to obtain feedback on the possibility of basing the calculation of household loans (mortgage and hire purchase) on net instead of gross pay.

"Although we did expect the news to rattle investors, we are taken aback by the speed and severity of the selloff. The selldown is excessive as the jitters even spilled over Tuesday to construction companies with significant property development exposure.

"The report is yet to be confirmed and even if the measure is implemented, we believe it could be mild as the intention is to curb speculation, not hammer overall sentiment," the report said, adding Mah Sing Group Bhd led the fall in share prices .

CIMB Research remains bullish on residential property and maintains its "overweight" stance on the sector, with its top pick Mah Sing and S P Setia Bhd as its core holding. It has an "outperform" recommendation on all developers under its coverage, including Eastern & Oriental Bhd, United Malayan Land Bhd and UOA Development Bhd.

"The sell down has made property stocks even more attractive both on PER and discount to RNAV basis. On average, property developers are now trading at a 27% discount to RNAV and offer investors 43% upside to our target prices," it said, adding that sector bellwethers typically trade at 40% to 50% premium over RNAV (realiasable net asset value) during a market upcycle.

On Tuesday, July 19, Mah Sing's shares fell 13 sen to RM2.22, which CIMB noted had taken its CY12 price-earnings ratio (PER) to only 8.7 times.

on Wednesday, its shares rebounded strongly, up 29 sen or 13.1% to close at RM2.51, with 12.9 million shares traded.

S P Setia's share price, which was sold down last week, is currently trading at an 8% discount to its fully diluted RNAV. CIMB reiterated that BNM's proposal to change the calculation from gross to net pay is a negative surprise and would have negative impact on the property sector in the short term.

"But we are not surprised that the central bank is concerned about an overheating of the property market and excessive consumer debt. There has also been talk of the possibility of the proposal of a higher real property gains tax (RPGT) or a loans-to-value (LTV) cap for commercial property in the 2012 Budget.

"We view the change to net pay in the calculation of housing loan limit as merely another way to curb property speculation. Our views have not changed since last week.

"We think that any measures to curb domestic speculation are likely to have only a short-lived impact on physical property sales, as was the case when a flat 5% RPGT was levied in October 2009 and an LTV ratio of 70% was imposed on the third property purchase in November 2010," CIMB Research said, adding that in both cases buyers adopted a wait-and-see attitude for two to three months before rushing into the market again once they realised that house prices were firm and rising.

The report said assuming the worst-case scenario where a change in the calculation results in a 26% fall in affordability, which is in line with the maximum personal tax rate, the affordability ratio is still very healthy.

The research house also said the government would be careful when implementing measures that would result in a negative impact on the property sector. This is because the government wants to encourage home ownership, unlock the value of idle land in the Klang Valley and performance of the property sector will also affect other key sectors of the economy.

"We continue to hold the view that there is no widespread property bubble and that the strong appreciation of properties in certain locations is largely backed by fundamentals.

"The price upsurge in landed property in the Klang Valley over the past one to two years by and large reflects the scarcity of land. The growth in new residential property supply has been on a decline and last year's 2.2% growth rate was the slowest on record," the report said, adding that the proposed cooling measures could lead to fewer new launches and slower supply growth, which could result in even high property prices over the longer term.