Property sector not all bad, but ...

Property sector
Maintain neutral: Property prices and transactions, which have surged since 2009, have led to fears of an inflationary asset bubble. This has prompted the introduction of cooling measures, via the withdrawal of developer interest bearing schemes (DIBS), the real property gains tax (RPGT) hike and the setting of minimum property prices for foreign buyers.

Since the implementation of such measures, growth in residential property prices has increased by a slower 8.1% in the fourth quarter of 2013 (4Q13) against a 12% jump in early 2013, as prospective buyers adopted a wait and see approach. Our preliminary checks with property agents reveal that property prices so far in 2014 have declined by 5% to 10%.

Housing transactions were also seen lower over the past quarters subsequent to the cooling measures. This was exacerbated by more stringent loan approvals, which saw a loan rejection rate of 49% as at February this year from above 50% for the best part of 2013.

Although housing transactions were slower in 2013, the overall housing supply (comprising the incoming and planned supply) has been on a record high last year at 1.3 million units translating into a 6.5% year-on-year (y-o-y) growth as at December 2013.

Supply growth was seen higher, mostly concentrated within urban locations such as those in Johor, Kuala Lumpur, Selangor and Penang, which accounted for 57% of the total housing supply in Malaysia. Johor recorded the highest y-o-y growth at 12.2%, while Terengganu was the lowest at -2.6%.

Based on the average annual income per capita of RM32,144 and the average house price of RM292,661 (according to the National Property Information Centre), the affordability ratio is still below that of the 1990s, which is around 50% of monthly income against 28% in 2013. However, we believe the average affordability ratio is not reflective of the overall property market in Malaysia as the surge in property prices is centred on certain hot spots. For instance, the affordability ratio is one of the lowest in Kuala Lumpur and Penang, at 40% of gross monthly household income.

While most housing is centred on the main locations, we reckon demand still exceeds supply as demand is well supported by strong demographics, in which about 36% of the population are in the 20 to 40 years old age bracket, representing the group that is most likely to buy/upgrade a house in the near future. There will be another 40% of the population in the age bracket of 0 to 19 years to support the long-term demand.

Besides, urbanisation also plays a role in the housing demand due to higher economic opportunities which will continue to attract migration of the rural population. The urbanisation rate is expected to increase by 2.49% per year going forward from 2010 to 2015.

Against the above backdrop, we prefer the residential players which target the middle income groups such as Tambun Indah Land Bhd, Matrix Concepts Holdings Bhd, Hua Yang Bhd and IJM Land Bhd. This is consistent with our view that demographics are still favourable as we see more demand coming from the young and growing population. We reckon these companies have bigger potential in terms of earnings given their relatively lower earnings base and their reputable branding in their respective locations.

In conclusion, we expect the growth momentum (transactions and prices) to remain muted as investors adopt a wait-and-see approach given the overall unexciting macro fundamentals as well as the mismatch of demand/supply and affordability issue. This is exacerbated by the government capping the sector via price restrictive measures. Hence, we see the consolidation to continue in the near term and prefer selected developers only in the residential segment which targets the middle income groups — Tambun Indah, Matrix Concepts, Hua Yang and IJM Land. Tactically and fundamentally, we are rating the overall sector a “neutral”. — BIMB Securities Research, June 6


This article first appeared in The Edge Financial Daily, on June 9, 2014.