KUALA LUMPUR: CIMB Equities Research has upgraded the property sector to overweight as it believes concerns over the 5% real property gains tax (RPGT) are "overblown" and provide investors a window of opportunity to pick up property stocks on the cheap.

In a research note issued on Monday, Jan 4, it upgraded the sector from Trading Buy to Overweight and upgraded all developers to Outperform.

It said the sector’s fundamentals were improving significantly and it believed one of the reasons why the government saw a need to curb excessive speculation via the RPGT was the sector’s strong prospects.

CIMB Research said potential re-rating catalysts include a pick-up in sales and a rebound in earnings.

"We upgrade E&O, Hunza Prop, Mah Sing, SP Setia and UM Land from trading buy to Outperform. We have also raised the target prices for E&O, Mah Sing and SP Setia by 1-12%," it said.

It added the potential re-rating catalysts included a pick-up in launches and sales in 2010, and a rebound in earnings for most developers as many were weighed down by a combination of high costs and weak sales in 2009.

However, it continued to shun KLCC Prop as it has no exposure to property development and would benefit the least from the uptick in the residential property segment.

For investors seeking yield, it prefered Malaysian REITS in general and Axis REIT in particular.

E&O remained the research house's top pick as it continued to be the highest beta and most liquid property stock. SP Setia stayed as a core holding due to its size and status as the sector bellwether.

CIMB Research said the fundamentals were looking up as the economy was forecast to return to growth in 4Q09 after being mired in recession in 1Q-3Q09.

Another factor was the stock market’s spectacular 45% rebound in 2009 would help strengthen confidence and sentiment on properties.

It also said affordability of properties was near its all-time best and the low interest rate regime will encourage property purchases, especially with inflation preying on some consumers’ minds.

"We like all developers as they will benefit from a broad-based rebound in demand. We believe developers across the board will enjoy a recovery in sales and earnings in 2010," it said.