We downgrade the property sector to NEUTRAL. Our stock picks are Sunway, IJM Land and Matrix Concepts. We expect 2015 property transaction volume to fall by 3-5% on the back of slower economic growth and high loan rejection rate, while property prices to stay flat, as developers will likely have difficulties in passing on incremental costs. We estimate new sales to drop by 10-20% from -25% in 2014.
Expect 1H15 transaction volume to fall by 5-10%. We expect overall residential and commercial property transaction volume to fall by 5-10% in 1H15 (vs +2.8% HoH in 1H14) and 3-5% for 2015. The decline should be more severe in 2Q15 immediately after the implementation of GST from 1 Apr 2015. Based on Singapore’s experience, after the GST rate was raised to 7% from 5% in July 2007, residential property transaction volume contracted by 41% HoH in 2H07. We expect the Malaysian market to experience a similar trend but with a milder fall.
Sentiment hit. RHB economics team has cut its 2015 GDP growth forecast to 5.0% from 5.3% (vs 5.8% in 2014). The slower economic growth and the recent sharp drop in equity prices are hitting market sentiment. We expect this to dampen the demand for property next year.
Average new sales to drop by 10-20%. We believe both buyers and developers will adopt a wait-and-see attitude, and hence launches and take ups will likely be slow. As we expect property prices to be flat or up slightly by 3-4%, given lower volume, we estimate new property sales to fall by an average 10-20% in 2015 from -25% in 2014 and +41% in 2013.
Less exciting earnings growth ahead. To reflect our expectations of the property market, developers’ earnings growth in FY16 should be negative, or flattish at best. The Penang property market, however, could fare slightly better as the weakening MYR should benefit both exports and tourism, which are the key economic activities of the state.
Downgrade to NEUTRAL. The sector is now trading at a 33% discount to RNAV, and we expect the discount to widen towards the mean level of about 40%. Overall, we raise our discount to RNAV by 5-15%. We prefer stocks with ongoing corporate exercise, such as Sunway and IJM Land,as the upside is more promising, and both also offer an exposure to the construction sector, where we have an OVERWEIGHT rating. Affordable housing players should also fare better, due to the resilient demand. Our Top Picks are Sunway, IJM Land and Matrix Concepts.
Lack Of Catalysts In Sight
Property sector outperformed the market YTD
In line with our previous sector rating (OVERWEIGHT), the property sector has outperformed the market this year. YTD, the KL Property Index (KLPRP) has appreciated by 4% vs FBMKLCI’s -6%. Relative to the performance of other sectors, property is the best-performing sector after telecom & tech and mining (O&G). However, we expect the operating environment to be more challenging going into 2015 especially as GST kicks in. Current valuations for the sector have yet to price in the sharper decline in property sales next year. We downgrade the sector to NEUTRAL.
Expect 1H15 transaction volume to fall
We expect overall residential and commercial property transaction volume to fall by 5-10% in 1H15 (vs +2.8% HoH in 1H14) and 3-5% for 2015. While loan rejection rate should remain high (currently at 40-50% quoted by some media reports) as banks continue to tighten mortgage lending, the impact of GST will also kick in from 1 Apr 2015. The fall should be more severe in 2Q15, immediately after the implementation of GST. Based on the empirical evidence in Singapore, regardless of whether the impact is direct or indirect, the property transaction volume typically spikes before the GST rate goes up, followed by an immediate increase in prices and a drop in volume post rate hikes. In 2H07 after the GST rate in Singapore was raised to 7% from 5%, residential property transaction volume contracted by 41% HoH. We expect the Malaysian market to experience a similar trend but with a milder fall next year.
The implementation of GST will likely affect consumer sentiment and raise inflationary pressure, which in turn will not help in encouraging the propensity to buy properties. Although property prices may be held up slightly due to the tax impact, we believe a large increase in prices is unlikely given that the demand is expected to be weak, and developers could face difficulties to even mark up prices and to pass on the incremental costs. Coupled with the expected fall in transaction volume, this would, therefore, translate into lower property sales for developers going forward. We believe buyers will be cautious in making their buying/investment decisions and developers will be careful with their launches, and hence they will likely adopt a wait and-see attitude. New launches and take ups will then slow down. As a result, for the stocks under our coverage, we estimate new property sales to fall by an average 10-20% in 2015 from -25% in 2014 and +41% in 2013.
Slower GDP growth and a sharp drop in equity prices hit sentiment
Apart from the GST impact, we also expect the slower GDP growth to drag down property transaction volume next year, as the macroeconomic environment typically has the largest impact on property market. The RHB economics team has cut its 2015 GDP growth forecast to 5.0% from 5.3%, a weaker growth compared with 5.8% estimated for 2014. The downward revision is primarily due to the “stall-speed” recovery in some major world economies such as the Eurozone, Japan and China and uneven growth for the US and UK, which could affect the strength of Malaysia’s export growth. On the domestic front, falling oil & gas (O&G) investments on the back of plunging oil prices and slower property investments will likely exacerbate the slowdown in economic growth next year. In addition, there could also be downside risks of businesses and consumers over-reacting to the implementation of the GST. Meanwhile, the recent sharp drop in equity prices (6% in less than two months since November) should affect investors’ buying sentiment and the fall in CPO and rubber prices should affect the rural households’ incomes and their purchasing power.
At the same time, the Malaysian Institute of Economic Research’s (MIER) consumer sentiment index has dropped to below the threshold of 100, ie by 2.1 ppts to 98.0% in 3Q14, while its business conditions index also plunged by 17.0 ppts to 95.9 in 3Q, well below the threshold of 100 points.
All these, together with softening commodity prices and expectations of a slower economic growth in the period ahead will mean property transactions could likely continue to come in below expectations going forward.
Cooling measures and inflationary pressure neutralise “last-minute” buying
While new sales have started to recover in 2Q, the momentum for 3Q new sales appeared to have tapered off (SP Setia has yet to release its quarterly results). The “last-minute” buying of big-ticket items ahead of the GST implementation is not as evident as expected, as the impact of cooling measures continues to work its way through coupled with rising inflationary pressure. To recall, the Government announced a 14.9% electricity tariff hike effective from 1 Jan 2014 and raised the retail prices of RON95 petrol and diesel by 20 sen each to MYR2.30/litre and MYR2.20/litre respectively, or 9.5% – 10.0% effective 2 October. Although the prices have recently been adjusted downwards in tandem with falling crude oil prices, the decline is only <2 p="">
Tightening policies unlikely to be loosened up
The tightening measures imposed by Bank Negara (such as lowering the loan -tovalue cap to 70% for third home mortgage onwards, and computation of household debt based on net income) since late 2010, combined with the slew of cooling measures announced in Budget 2014 by the Government have successfully slowed property sales, in line with the desired results of the policy makers. Although the developers have been lobbying to loosen up some policies, we think this is unlikely to happen as household debt to GDP ratio remains relatively unchanged at 86.7% as at end-June 2014 vs 86.8% in end 2013. Affordability is still an issue as property prices have yet to have meaningful adjustments, although their growth has gradually tapered off.
Lower transaction volume will hurt earnings growth
Given our expectations of the property market, we believe earnings growth for property developers will be rather flattish, especially in FY16. In our forecast, we have factored in the impact of slower sales and hence flat or negative earnings growth in FY16. Thematic angles and news flow for Iskandar and Penang as well as the Klang Valley seem to be lethargic. Disappointingly, the announcement of MRT Line 2 in end-October also did not generate any excitement on property stocks. Apart from the upcoming Penang transport master plan and high-speed rail projects, we do not foresee any major news flow going forward. The Penang property market could be more favourable as the weakening MYR should benefit exports and tourism, which are the key economic activities of the state. Both manufacturing and services sectors account for more than 90% of Penang’s economy. Hence, affordable housing players such as Tambun Indah should still fare better.
Meanwhile, the Iskandar market will remain challenging over the medium term as oversupply of housing, exacerbated by the incoming units to be built by foreign developers, will take years to be absorbed. According to CBRE, as at 1Q14, the existing supply of high-rise residential units in Iskandar stands at 31,082 units, while 28,874 units are under construction. This means that the existing supply will almost double in the next 3-4 years. Among the high-rise residential projects that will be completed over the next 3-4 years include Setia Sky 88, Tropex Residences, Paragon Residences, Sky Suites @ Meldrum and The Peak (One Temenggong).
Key risk to our call
Stronger-than-expected GDP growth may derail our investment thesis. However, given the outlook of the economy, we think this is unlikely to happen.
Valuations
We downgrade our sector rating to NEUTRAL. The sector (for big caps only) is currently trading at 33% discount to RNAV, and we expect the discount to widen towards the mean of about 40% as the market de-rates the sector. Overall, we raise our discount to RNAV by 5-15% to reflect the bleak outlook for the property sector. We maintain our BUY rating for stocks with ongoing corporate exercises, such as IJM Land and Sunway as the upside for these stocks is more promising. Both stocks also provide an exposure to the construction sector, on which we have an OVERWEIGHT rating. We keep SP Setia as a BUY, as the stock has a potential M&A angle. We continue to like affordable housing players such as Tambun Indah, Matrix Concepts and Hua Yang as the demand for the mid-range housing segment should be more resilient. Our Top Picks are Sunway, IJM Land and Matrix Concepts.
Source: RHB
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