Rocky road ahead for property sector

Property sector
We expect property sales this year to decline by 5% to 10%, dragged down by slower volume, although prices will likely hold up due to cost push (as seen in the past during periods of sharp spikes in inflation).

House price growth may moderate to 3% per year (first nine months of 2013: +12.5%) as rising new supply meets weaker demand. Sentiments should remain subdued (at least in  the first half of 2014) given recent tightening measures and inflationary pressures.

A potential interest rate hike could dampen disposable income further (every 50 basis point rise pushes  affordability down by 1.6 percentage points).

While developers may hold back launches and offer more incentives, which will eat into margins, earnings visibility should be intact given current large unbilled sales.

Watch out for pressure points as rising building material costs and tight foreign labour supply could heighten execution risk and dampen developers’ margins (challenging to pass on to buyers amid softer demand).

There is no property bubble for now, but we fear an oversupply of Kuala Lumpur office space, hybrid high-rise units and Iskandar Malaysia high-end condos. Government projects with high import content and low multiplier impact may also be delayed (but MRT lines 2 & 3 should proceed as planned).

We prefer township developers, which should benefit from resilient demand for landed and affordable housing. Conglomerates and investment asset owners should also see earnings holding up.

We view IOI Properties Group Bhd as the new sector bellwether given the dearth of large cap entrepreneurial-driven developers. Sector price-to-revised net asset value (RNAV) is trading below the historical mean, which may have partly priced in potential headwinds, but it still lacks re-rating catalysts in the short term.

We cut target prices across the board (based on 40% to 55% discount to RNAV) to factor in weaker sector outlook.

MKH Bhd is one of our top picks given its large exposure to affordable housing and landed residential property in the Kajang-Semenyih growth corridor in Selangor (beneficiary of the upcoming MRT) along with strong earnings growth potential from rising plantation contribution.

Our other top picks are Eastern & Oriental Bhd (potential strong re-rating from STP2 approval and Medini launch) and Wing Tai (M) Bhd on resilient earnings from retail and Penang mass residential.

We’ve downgraded S P Setia to “fully valued” (from “hold” due to heightened execution risk) and YTL Land & Development Bhd to “hold” (from “buy”) due to high exposure to high-end condos around KLCC. — Hwang DBS Vickers Research, Feb 13

This article first appeared in The Edge Financial Daily, on February 14, 2014.



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