Developers’ growth to peak

KUALA LUMPUR: Earnings of property developers, though expected to still be intact this year backed by their respective unbilled sales, are however expected to slow down in the next two years, according to analysts.

In a research note yesterday, Affin Investment Bank Bhd said it believes the property market is heading for a cyclical slowdown, after a four-year bull cycle. It noted that while some long-term fundamentals such as demographics and economic growth remained positive, “others” have started to deteriorate.

Affin cited slowdown factors such as higher competition due to incoming housing supply which is at an all-time high now and the influx of Singapore and China developers, cautious bank lending, tough property market cooling measures, lower affordability as a result of property prices outpacing inflation, and increment in wages.

“Broadly we expect developers to achieve lower take-up rates and weaker profit margins,” said Isaac Chow, an analyst with Affin IB Research.

Chow added that while government-led property projects could offer opportunities to the eventual project winners, it also poses substantial competition and a threat to others, especially when some projects are packaged with special incentives.

“While property prices may hold up [or even increase slightly] due to higher costs, the number of new property sales and the take-up rate are likely to be weaker,” said Chow.

With this, Chow forecasts the six developers under Affin’s coverage to taper off to 5% next year, from 15% earnings growth expected this year.

Analysts are in consensus that developers’ earnings will start to see a slowdown come the second half of next year, with the demand for properties to slow down further after the implementation of the Goods and Services Tax (GST) in April 2015.

“Our extrapolation of unbilled sales suggests that revenue recognition for most developers will peak in 2015, the exception being S P Setia due to projected strong revenue growth in FY16 or FY17 from the handover of Battersea Phase 1,” said HSR Research.

HSR Research added that in the three to four year horizon, this year could possibly be the best year in terms of profitability for most property developers.

However, HSR Research noted it is likely to see a decline in [property developers’] net profits next year, assuming GST takes effect in April next year, and assuming developers absorb the input tax for the majority of construction materials and labour costs.

Vincent Khoo, head of research at UOB KayHian, said while he expects key property players to secure better sales this year, he notes that any slowdown in sales will not be reflected in the companies’ earnings this year, for earnings is a reflection of previous locked in sales.

That said developers have notably taken measures to switch their product offering to manage this “slowdown”.

Affin highlighted that developers have fine-tuned their product line-up by launching projects across multiple regions to diversify geographical risk, increasing the offerings of landed properties where demand is greater, and stepping up their marketing campaigns to attract foreign buyers.

The research house maintains a neutral call on the sector.

“While we are cautious on the property market’s outlook this year, we believe that the downside risk to share prices is limited,” Chow said, stating that developers’ share prices have retracted 9% to 28% from their peak last year, and now trade at a fair 0.4-0.6x price/relative net asset value, broadly within the historical trading range. HSR Research is of the view that the KL Property Index is still relatively resilient, and that there is room for the index to move downwards in the second half of this year if property tightening measures stay.

“Currently, the index is 13% from the peak (May 2013 at 1,519). We foresee smaller property developers facing a tough environment and the hope for them is a policy reversal or easing,” said HSR Research.

This article first appeared in The Edge Financial Daily, on March 25, 2014.


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