CIMB: LVR cap a necessary evil

KUALA LUMPUR: Strong gains in the prices of selective residential properties are starting to raise fears of a bubble hence while a lowerl loan-to-value ratio (LVR) rate for banks would be negative for the property sector, CIMB Research viewed it as a “necessary evil”.

CIMB Research noted in a recent property sector research report that at the moment, the LVR can be as high as 90% to 100%, but this could be lowered, considering the price surge for selected properties in recent months and rising speculation.

“We are not overly worried as the impact is likely to be similar to the unexpected imposition of a 5% real property gains tax last October i.e. short-term cooling of demand. Also, we suspect that the cap, if any, would be for residential properties of a certain value as the surge in prices in the Klang Valley has mostly affected landed properties in Kuala Lumpur and Petaling Jaya,” CIMB noted.

The research house said the price increases for high-rise condominiums and apartments have been quite subdued due to oversupply and supply elasticity and that a cap on LVR would dampen speculation and would require property investors to put down a greater percentage of equity.

“This could dampen sales in the short term but would help prevent a bubble from forming and greater pain down the road when the bubble bursts,” it said, adding that those investing in high-end and more expensive properties should have little difficulty putting down more down payments and using less leverage.

CIMB Research noted that one of the major concerns for the sector this year has been the implementation of IFRIC 15 and its effect on earnings as the accounting policy only allows developers to recognise development profits on handover, instead of progressively on percentage completion, which would have resulted in very lumpy earnings and possibly quarterly losses.

“This is especially true for condominium developers and those with only a handful of projects. Township developers and those with landed properties whose launches can be staggered would have greater flexibility in timing construction completions and the recognition of profits,” it said.

Hence, the regulators' decision to postpone the implementation of IFRIC 15 to 2012 was a big relief for developers, giving them time to prepare for the change in policy. Also, it would give time to the market and investors to come to terms with valuing developers on an revised net asset value (RNAV) basis instead of a price-to-earnings ratio (P/E) and accepting greater earnings volatility.

However, the research house noted that the relief was short-lived as concern over a potential LVR cap by Bank Negara would lower housing affordability.

The research house said that sales have been extremely strong this year but property stocks have yet to be re-rated, and while an LVR cap may provoke a knee-jerk reaction, share prices is expected to recover given still-strong fundamentals.

The fundamental include the high affordability of residential properties in general, an earnings recovery for developers after a difficult 2009 and a boost in interest in property stocks from the privatisation of strategic parcels of government land.

“We, therefore, remain OVERWEIGHT on the sector and advice investors to buy on weakness should the LVR cap kick in. We have Outperform ratings for nearly all our property developers,” it said, adding that developers have enjoyed record sales this year with SP Setia selling RM1.2 billion in 1H FY10 while Mah Sing sold RM0.9 billion in 1H FY10.

CIMB also picked S P Setia as its top pick as the company “offers size and liquidity and is an excellent market proxy”.

It also noted KLCC Prop as its only Underperform stock as it is a property-investment company and its dividend yields are not particularly attractive compared with Malaysian REITs.
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