OPTIMISM ABOUND Property weekly review (Dec 7 to 13, 2009)

* Lacklustre market with some interest in mid-caps

The KLSE Property Index ended the week flat with marginal loss of 0.1%.

Interest returned for mid-cap property stocks such as Sunway City (+4.5%) and Sunrise (+5.3%) which continued to be undemanding, valuation wise. On notable major shareholders’ filings, Employees Provident Fund (EPF) added 1.2 million shares in S P Setia but Capital Income Builder Inc disposed of 3.6 million shares. We also noted EPF selling 600,000 shares in Sunrise.

Meanwhile, Tan Sri Dr Cheah Fook Ling bought 4.6 million shares in Sunway City.

* Increasing optimism

We have upgraded the property sector from neutral to overweight last week as we believe property sales momentum to remain strong going into

2010 despite recent setbacks of re-introduction of real property gain tax as well as rising mortgage rates. We have seen property buyers disregarding these setbacks in recent launches of landed residential properties with most launches enjoying good take-up rates. S P Setia’s record sales of RM1.65 billion for FY2009 also lend support to our optimism. We have accordingly upgraded S P Setia from sell to buy last week.

* Notable property news

Last week, S P Setia announced plans to launch its massive RM6 billion KL Eco City integrated commercial project in 2010 while news report highlighted that an iconic 100-storey building may be built on three possible sites in Kuala Lumpur. On the corporate front, Khazanah Nasional was reportedly looking to pare down its interest in property and construction companies.

Among notable property companies under its stable include UEM Land, STLR, Iskandar Investment and Putrajaya Holdings.

On acquisitions, Sunway Holdings has formalised its 3rd joint venture property project in Singapore, Ireka Corp has acquired a one-acre site in KLCC at RM2,000 psf for the development of high-end residences via a joint venture with Aseana Properties, Magna Prima has acquired a land in Bukit Jalil for RM10.7 million for the relocation of Lai Meng Chinese School, and Hektar REIT is reportedly looking for acquisitions mainly in Peninsular Malaysia.

 

* Maintain OVERWEIGHT

The convergence of sustained property demand and recent price correction affecting property stocks have led us to believe that the property sector will be an outperformer going into 2010.

We believe developers with residential properties catering to middle to upper middle class such as Sunway City to benefit from strong demand and hence, reaffirm it as our top pick for the sector.

Besides, its property investment earnings will also ensure sustained earnings visibility. We also like S P Setia. Among non-rated developers, we like IJM Land and Mah Sing.

KLSE Property Index ended the week flat with marginal loss of 0.1%. Interest returned for mid-cap property stocks such as Sunway City (+4.5%) and Sunrise (+5.3%), which continued to be undemanding, valuation wise. On notable major shareholders’ filings, Employee Provident Fund (EPF) added 1.2 million shares in S P Setia but Capital Income Builder Inc disposed of 3.6 millon shares. We also noted EPF selling 600,000 shares in Sunrise. Meanwhile, Tan Sri Dato' Seri Dr Cheah Fook Ling bought 4.6 million shares in Sunway City.

Increasing optimism

We have upgraded the property sector from neutral to overweight last week as we believe property sales momentum to remain strong going into 2010 despite recent setbacks of reintroduction of real property gain tax as well as rising mortgage rates. We have seen property buyers disregarding these setbacks in recent launches of landed residential properties with most launches enjoying good take-up rates. Most launches have in fact been a sell out within the same weekend of launch, although in smaller numbers per launch. Case in point was the latest launch of 174 units of terraced houses in Alam Impian by Island & Peninsula on Nov 21, which were fully sold. Recent launches by S P Setia have also been a sell out with all semi-detached and terraced houses launched in Setia Alam over the Dec 5 &

6 weekend fully booked.

S P Setia’s record sales of RM1.65 billion for FY2009 also lend support to our optimism. We have accordingly upgraded S P Setia from sell to buy last week. The company, which pioneered the 5/95 financing scheme in January 2009, has since October introduced another promotion scheme known as “the best for the best”. This scheme includes features from the earlier 5/95 scheme whereby interest during construction period, legal fees and stamp duty will be borne by S P Setia. We also noted commercial banks continue to support new launches by reputable developers. In S P Setia’s case, we noted a major local bank continue to offer very competitive housing loan at base lending rate (BLR) minus 2.3% despite the fact that we have previously mentioned banks were seen raising the negative spread by about 40 bps to BLR minus 1.8% since early November. We believe the cautious stance by banks in raising rates mainly apply to secondary property transactions. Similar to the earlier 5/95 financing scheme, we believe other developers will continue to follow suit in offering very affordable financing scheme to property buyers. Therefore, we expect property sales momentum will continue to be sustainable going into 2010.

Notable property news

* S P Setia will be looking to launch the massive RM6 billion KL Eco City integrated commercial project in 2010. The project sits on a 24 acre site in Abdullah Hukum procured via a privatisation deal with the Kuala Lumpur City Hall. It is located opposite the successful Mid Valley City project launched by IGB. Due to the sheer size of the project, the company is currently working on a financing structure to ease its financial commitment. Details will be revealed in a few months. While the commercial project will expand the earnings base of SP Setia exponentially from just being a township developer, we do not expect meaningful contribution to come in until FY2012.

According to a local media citing sources, an iconic 100-storey building may be built on three possible sites in Kuala Lumpur. The sites are Dataran Perdana in Jalan Davis, the area surrounding Stadium Merdeka and the vicinity of the Matrade Centre in Jalan Duta. Two of the pieces of land belong to government-linked companies – Pelaburan Hartanah Bumiputera Bhd and Permodalan Nasional Bhd (PNB) – while the Naza group owns 25ha in the vicinity of the Matrade Centre.

* According to online news portal The Malaysian Insider, Khazanah Nasional Bhd could be divesting its stakes in property and construction companies to raise revenue and encourage the private sector to drive the economy. Under its portfolio of property companies, Khazanah owns 77.1% in UEM Land, 100% of STLR Sdn Bhd, 75% of Iskandar Investment Bhd, and 15.6% in Putrajaya Holdings.

* Sunway Holdings has formalised its partnership with Hoi Hup for the development of a 4.8 acre land in Singapore into a private housing project. Sunway Holdings will subscribe for 300,000 shares or 30% stake in a JV company for S$300,000 (RM700,00). The project with GDV of S$480 million will be Sunway Holdings’s third JV project in Singapore with Hoi Hup.

* Ireka Corp has acquired a 43,559 sq ft site along Jalan Kia Peng in the vicinity of KLCC on which Top Hat Restaurant once stood. The land was acquired for RM87.1 million or RM2,000 psf. The price seems reasonable as compared with the RM2,200 psf paid by Dijaya for the Bok House land along Jalan Ampang recently which is more prime or the RM1,700 psf paid by Guocoland for two pieces of land in Changkat Kia Peng almost two years ago. Ireka will be developing the land into a high-end residences with gross development value of RM272 million. It will undertake the project with Aseana Properties via a JV in which it will have 30% interest. Both parties have signed a Memorandum of Understading concurrently with the land acquisition.

* Magna Prima has acquired a 22,280 sq m parcel of land in Bukit Jalil for RM10.7 million cash. The acquisition is part of Magna Prima group’s plan to acquire the prime 10,587.5 sq m plot of land in Kuala Lumpur where Lai Meng Chinese School is currently situated. The Bukit Jalil plot will be the new site for the relocation of Lai Meng Primary School and Lai Meng Kindergarten.

* Hektar REIT is reportedly in talks to buy new assets and plans to sell more units to fund future purchases. According to Hektar Asset Management Sdn Bhd Chairman and CEO Datuk Jaafar Abdul Hamid, most of the potential buys are in Peninsular Malaysia and Hektar was in talks with township developers and other asset managers.