MIDF Research update on Johor residential property

Reaffirm NEUTRAL

Johor remains one of the key property regions in Malaysia, apart from the Klang Valley (Central) and Penang (Northern). Although it is a manufacturing and transportation  hub,  Johor’s residential property market is perceived to be still suffering from an overhang of units unsold. Our visit to several key developers in Johor found that, while this is true, it masks the strength of the underlying demand. Property development in Johor requires special manoeuvring skills, and will be rewarded handsomely if executed well. Below are highlights from our site visits:-

Plenty of unsold units, but these are in the secondary market and in the low-cost segment: The unsold property units in Johor comprised mainly units from the secondary market and abandoned development. There is also a high incidence of unsold low-cost units, as a result of the glut in low-cost developments. Based on Napic’s (latest) 3Q09 data, low-cost development comprise 17% of the total overhang units. In the case of low-cost units, property developers in Johor are required to build up to 30% of units that fall in that category for any single development. However, the requirement for such units differs from state to state.

Demand drivers. The general demand for property in the primary market in Johor continued to stay healthy on the back of low financing rates and lucrative  promotional  packages offered by property developers. According to the developers that we met, sales have also been driven by the following:

* ‘Up-graders’. A large portion of present purchasers  comprise of  those migrating  from older areas of Johor Baru (JB) eg: Skudai. Most residential properties in Johor are >30 years old, with some located between industrial parks. Purchasers are becoming more affluent with changing lifestyle and quality living.

*  Strong branding coupled with proven track record. Purchasers (and repeated purchasers) are attracted to reputable developers as the probability of the property prices appreciating is higher.

* New  housing  concepts. Apart from strategic location and amenities, developers are  enticing potential purchasers by introducing new housing concepts. For instance, Mah Sing were the first to introduced gated community lifestyle in Sri Pulai while SP Setia is the present leader in promoting new lifestyle living with concepts such as garage homes, garden living, reflection ponds, electric mounted gates fences and etc. This reflects the rising affluence of potential buyers.

*  Demand for landed property by Singaporeans and Malaysians working in Singapore. We understand that foreign home sales were supported by 2 main groups namely (i)  Singaporeans purchasing Johor properties either as holiday homes or for investment purposes and (ii) Malaysians commuting to Singapore for work but residing in JB. In general, total sales for a Johor development usually comprises of 10% to 15% of foreigners (mainly Singaporeans), 25%-35% of Malaysian purchasers working in Singapore, with the balance of 50-65% being local purchasers.

Signs of sustainable demand. We believe that residential property demand in Johor will continue to stay healthy in the immediate term. The downside risks would be a steeper-than-expected rise in interest rate and a hiccup in the recovery of the Malaysian and Singaporean economies. Nevertheless, there are various catalysts to support future demand:

* On-going infrastructure development. Presently, 2 major highways are being built; namely the Coastal Highway (estimated to complete by 2011) and the East-West Highway. In addition, the Senai Airport is undergoing transformation works to become an  airport  city, while the ports of Tangjung Langsat, Tanjung Pengerang and PTP are vital to support the state’s growth. Development of transportation infrastructure is vital

to narrow geographical gaps and spur population migration to less-urbanized areas.

* Bankers lending their support. Our sources indicated that banks are still liquid with lending activities. As-todate, average Home Loan financing rates are offered up to BLR2.10%. While property value above >RM500k may fetch lucrative rates as low as BLR-2.30%.

* Ample landbank. Johor has the most potential for the garden living development, given  the state’s ample landbank in comparison to Penang and Klang Valley.

* Affluent purchasers. Present home purchasers are willing to pay for premium services. Some of the well-received premium concepts are gated community, garden living, club houses, neighbourhood shopping within the township, state of the art security features such as ‘Panic button’ and electric fencing around the township perimeters. This lifestyle is partly attributable to the neighbouring Singapore, and Johor is latching on the trend.

Earnings  outlook  for  property  developers  in  FY10. Johor remains a key earnings contributor  for  many  listed property developers given the state’s ample land banks, its proximity to Singapore’s Integrated Resort in Sentosa, and easier access to foreign investors (mainly Singaporeans). We note that most key developers continue to have strong market presence in the state with GDV ranging between RM400 million-RM5,000 million. The issue of overhang units is less relevant by the fact these units are predominantly from the secondary markets. The launch of Nusajaya will help improve the perception of Johor’s security woes. However, the older parts of Johor (Skudai, Senai  and etc) are expected to be less vibrant as the state has a traditional township mix between industrials and residential notably in the older sites of Johor. Such township mix is not in line with a change in lifestyle.

We remain NEUTRAL on the property sector as we are cautious with the inevitable uptrend in interest rates and the. We continue to favour counters with exposure in the “mid to high-end” residential market and industrial developments. We foresee both types of properties benefiting from the economic recovery as (i) consumer purchasing power increases, (ii) SME business gaining traction and (iii) residential property remaining a favourite for hedging purposes. We maintain our BUY call on both Mah  Sing (BUY;  TP:RM2.24) given its exposure to both segments, healthy balance sheet with strong earnings visibility through 2013.