Real estate sector
Maintain neutral: On July 5, we downgraded the real estate sector to “neutral” from “overweight”. Since then right up to August, the Kuala Lumpur property index had fallen 9% versus the FBM KLCI’s 3% drop over the same period.
Despite the correction, the sector will likely see an overhang in the immediate term until Budget 2014 is presented on Oct 25.
While the reversal of liquidity flows and rising bond yields have eased somewhat, the property sector still faces other challenges, including: (i) rising cost pressure as a result of the fuel price hike and the nationwide crackdown on illegal immigrants; (ii) weaker consumer sentiment due to the imminent rising inflationary pressure from the fuel price hike; and (iii) potential tightening of policies that could discourage local and foreign buyers from investing in the property market.
We also expect mortgage rates to gradually increase, in line with overseas markets, on the back of higher bond yields and the resulting interest rate risk. These factors have, together, given rise to the current consolidation in the property market.
Fears of regulatory tightening typically heighten one to two months before the announcement of the annual budget. While there has been media speculation on the introduction of drastic measures, including a big increase in the real property gain tax (RPGT) and stamp duty, we expect the government to adopt milder measures, such as a gradual increase in RPGT to ensure healthy growth of the industry.
In addition, given the tepid GDP growth at below 4.5% in the first half of 2013 (1H13), drastic measures that constrict the sector would be unreasonable, in our opinion.
Property stocks are vulnerable to a selldown as we expect sporadic rumours of policy tightening in the coming weeks. Hence, we maintain our “neutral” rating for now. We like developers with solid fundamentals with minimal exposure to foreign purchasers. Our top picks are IJM Land Bhd and Tambun Indah Land Bhd. — RHB Research, Oct 7
This article first appeared in The Edge Financial Daily, on October 8, 2013.