Market continues to be bearish on property

KUALA LUMPUR: Property stocks have been among the hardest hit from the recent sell-off in equities, reflecting a waning optimism in the sector.

The KL Stock Exchange Property Index, which serves as a benchmark for the sector, fell to its lowest point since July 2010 last Friday. It closed at 833.8 points, a stunning week-on-week loss of 13%.

Property mammoths Mah Sing Bhd and S P Setia Bhd saw their stocks decline to more than a year's low last Friday, and shares of IJM Land Bhd fell to their lowest point since August 2009.

A possible early indication that the market veered from the sector, may have been the exit of private entrepreneurs.

Tan Sri Wan Azmi Wan Hamzah and Datuk Terry Tham Ka Hon were part of a group of investors in Eastern & Oriental Bhd (E&O) who parted with their stake in the company, representing a collective 30% that was acquired by Sime Darby Bhd.

Sime Darby paid RM2.30 per share for E&O, a 58% premium to its last transacted price before the deal was announced.

Shares in E&O have since lost nearly 8% which last closed at RM1.48.

Shares in Sime Darby dipped to an 11-month low last week, closing at RM7.70 last Monday after shedding RM1 during intraday trade. It has since recovered to end at RM8.10 last Friday, still a grim figure as the stock previously traded above a threshold of RM8.33 in the twelve months leading up to the acquisition.

Another company, Glomac Bhd, also saw its stock hit a 52-week low last Friday. It closed four sen lower at RM1.42, charting a year-to-date loss of 14.5%.

In a report last Friday, RHB Research said Glomac recently forecast RM500 million in property sales for its current financial year that was 40% below the previous estimate of RM900 million prior to the global equity market sell-down.

As at 1QFY12 ended July 31, it achieved RM100 million in sales with RM550 million in unbilled sales.

Glomac's last closing price of RM1.42 was above RHB's fair value of RM1.35, but well below the company's book value of RM2.13.

The company's CEO last week said the property sector had come under pressure from various external factors.

"There have been more measures required by the banks in terms of lower loan to value ratio (LVR) and other aspects, where they are now calculating the eligibility for loans based on net income instead of the gross domestic household income of potential purchasers. So coupled with these, the US high unemployment rate and the financial meltdown in Europe, there would definitely be a slight slowdown," said group managing director and CEO Datuk FD Iskandar Mansor.

Though the sale of 30% stake in E&O to Sime Darby and the discouraging performance of property stocks in the past week may have reflected market sentiment, they may not be the most telling signs.

"The E&O deal may have been in the making for a long period of time and while a lot of property stocks took a beating last week, the fundamentals remain the same — there is a growing concern that property prices are approaching their peak and that the market may be heading towards an oversupply," said an analyst.

Deputy Finance Minister Datuk Donald Lim Siang Chai said earlier this year that property prices may rise 10% to 20% in 2011 due to increasing inflation and a stronger demand for local properties from foreign buyers.

This followed an extended boom in local property prices that began in 2009, prior to which it experienced sluggish growth for a decade.

"As a result, the growth in the next few years may prove to be flattish," said one industry observer.

On the other hand, demand from local buyers may be constrained as consumers face tighter liquidity.

In the last annual report, Bank Negara Malaysia (BNM) said the country's household debt amounted to RM581 billion or 76% of its GDP as end-2010.

CIMB Research said household debt rose at an average annual rate of 11.1% between 2004 and 2009, when it climbed to 76% from 66.7% in 2004.

BNM claimed the latest household debt-to-GDP ratio was manageable, next to income growth, a high level of savings and favourable prospects for employment.

As mortgages and other forms of borrowings already pose a significant expenditure to households, the amount of new investments in properties may be limited.

There has also been a strong focus on attracting more foreign buyers into buying local properties, though the upside from this may be fairly limited considering the number of expatriates in Malaysia relative to countries such as Hong Kong or Singapore.

However, there may still be room for the supply of property to grow, according to Datuk Eddy Chen, group managing director of MKH Bhd and chairman of Real Estate and Housing Developers' Association (Rehda) Institute.

Chen recently said the market is capable of absorbing between 170,000 and 180,000 new units annually, though only 150,000 are being built currently.