Upside priced in for most property developers

KUALA LUMPUR: Two research houses have turned cautious on the local property sector which has enjoyed a good run-up for almost two years.

RHB Research Institute and Kenanga Investment Bank have cut the sector to "neutral" from "overweight" in the past week, reminding clients that history show a property upcycle normally lasts for only two years.

"We believe now is appropriate to be watchful on property stocks as well as the sector outlook as we are now almost two years into the upcycle," RHB wrote in a note on Monday, July 4. "If what we project is true — that the property upcycle will gradually come off in 2012, though the physical market is likely to remain strong until year-end — current valuations appear to be on the high side, as property stocks typically price in six to nine months ahead."

The anticipated softening next year, RHB said, could be triggered by concerns over higher risk profile due to liquidity-driven massive credit growth; further monetary and regulatory tightening measures; rising inflation; and negative sentiment from regional property sector downgrades.

In a note dated June 30, Kenanga said that smaller developers under its coverage like Hunza Properties and Eastern & Oriental Bhd have showed a decline in sales year-to-date, though the bigger boys — S P Setia, IJM Land and Mah Sing Group — are still targeting strong sales growth of between 15% and 35% this year.

"We wonder if we will see new highs post-2011," Kenanga said.

RHB also has reservations on developers embarking on aggressive landbank expansion. "Land prices are getting more expensive now, and the window to launch and rapidly sell property products is getting shorter. The resulting impact will be slower landbank turnaround time and higher holding costs," RHB said.

Moreover, expectations of higher interest rates and more stringent policies for the sector would likely dampen demand and limit developers' ability to raise selling prices.

That, in turn, could result in a price war as players undercut each other to unload their inventory, RHB said.

"In a worse case scenario, take-up rate could take longer to achieve a satisfactory level," it said, cutting target prices for most property counters under its coverage. S P Setia's fair value was reduced to RM4.67 from RM4.88 previously, while Mah Sing is now deemed fairly valued at RM2.90, down from RM3.15 before. RHB has also slashed its target price for YNH Property Bhd to RM2.14 from RM2.31 and for Paramount Corp Bhd to RM2.23 from RM2.41. For the sector, RHB only retained an "outperform" for IJM Land and KSL, valuing them at RM3.28 and RM2.40 respectively.

Kenanga, on the other hand, told clients it will maintain an "outperform" on S P Setia and Mah Sing "for one more quarter" on expectations of significant news flow. Its target prices, however, had been lowered to RM4.68 (from RM4.93) for S P Setia and to RM2.87 (from RM3.13) for Mah Sing.

It also reckon there's limited upside for the Kuala Lumpur Property Index as the gauge was trading at a price-to-book value of about 0.86 times, higher than the five year average of 0.77 times.