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Non-core property players holding back

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UNDERGARMENT maker Caely Holdings Bhd, tracking solutions provider Grand-Flo Bhd and electrical appliances distributor Fiamma Holdings Bhd have one thing in common — they were previously not involved in property development but have diversified into the sector.

Last year, non-property players Sanichi Technology Bhd, Minetech Resources Bhd and Leweko Resources Bhd jumped on the property bandwagon.

The past few years also saw Furniweb Industrial Products Bhd, Asdion Bhd, Digistar Corp Bhd, Weida (M) Bhd, Kobay Technology Bhd and Ideal United Bintang Bhd make their foray into the sector.

However, industry experts say the trend of diversifying into property development may grind to a halt as the implementation of the Goods and Services Tax (GST) and the central bank’s tighter lending policy are expected to further dampen the softening property market this year.

Interestingly, Grand-Flo (fundamental: 1.4; valuation: 1.2) and Fiamma (fundamental: 3; valuation: 3) have decided to put their expansion plans on hold due to the slowdown in the sector.

Grand-Flo president and managing director Derrick Tan Bak Hong tells The Edge that given the current market condition, the group will not proceed with its third joint-venture (JV) property development project in Batu Kawan, Penang.

“It’s not favourable for us to go ahead. We have decided to put it on hold and I’m sure we are not the only one. Developers are worried about the impact of GST, while the economic outlook and job stability are fear factors,” he says.

In August last year, Tan reportedly said that Grand-Flo planned to expand its total gross development value (GDV) to at least RM500 million by early 2015, up from RM283 million.

But considering the weak market sentiment, he says the group has no choice but to push back its target to 2016.

“Now is not a good time for new property ventures, unless you have a lot of cash to buy land and wait until the market recovers. Land is expensive, consumer sentiment is low and banks are strict,” Tan explains.

To recap, Grand-Flo, together with its JV partner, had in 2013 kickstarted its maiden property project The Glades, a residential project with a GDV of RM63 million in Alma, Bukit Mertajam. Subsequently, in 2014, the group undertook a mixed-use development, dubbed Vortex Business Park, with a GDV of RM220 million in Batu Kawan.

In a recent interview with The Edge, Fiamma CEO Jimmy Lim Choo Hong said, in view of the soft property market, the company is mulling over a delay in launching its high-end development, which has a GDV of RM600 million, near Jalan Yap Kwan Seng in Kuala Lumpur.

Sanichi Technology (fundamental: 1.95; valuation: 1.2) managing director Datuk Dr Jacky Pang Chow Huat, however, remains confident that the precision plastic injection mould maker’s maiden mixed-use development in Klebang, Melaka — dubbed Marina Point — will attract foreign buyers mainly due to the lower foreign property ownership barriers in the state and weaker ringgit.

“The timing of property ventures is still subject to location. If you ask me, now is not a good time to venture into Johor because you have to fight with the Chinese property giants. But for us, I’m very confident of Melaka. Sanichi is a cash-rich company with zero gearing and a healthy balance sheet,” he says.

He adds that Marina Point, which has a GDV of RM170 million, will be launched in March this year and is expected to see a 100% take-up rate within four to six months.

Meanwhile, ECG Affirm Properties Sdn Bhd property negotiator Jason Lii highlights that due to the increasing land acquisition costs nowadays, developers have no choice but to sell the properties at a high price. But due to the central bank’s move to curb household debt, which led to falling loan applications and approvals, property sales have been affected. Hence, it may not be the time for property ventures now.

“If these companies had started venturing into property development some two to three years ago, they would be fine. But if you want to venture into the sector now, the land cost is not cheap,” says Lii, who is also a team leader of a real estate agency.

He acknowledges that most house buyers tend to have more confidence in pure property players with stronger financial resources, experience and reputation as quality developers. He says homebuyers are smarter now and will do background checks on the property developers before they buy a property.

Meanwhile, a property analyst in a local investment bank concurs that the credibility and track record of a property developer are important.

“It is a big no-no for property ventures now. GST is coming while loan approvals and applications have fallen,” she says.

She warns that when big property players adopt a cautious stance, new players should also be worried.

So far, none of the new property players have been hit badly or have suffered losses due to the slower property market.

Having said that, while these companies have started to recognise profit and generate revenue from their property ventures, investors should be mindful that contribution from this segment could be affected as the market softens.

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Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on February 2 - 8 , 2015.

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