On 24 Feb 2010, representatives from Jones Lang Wootton (JLW) presented its outlook on the Malaysian real estate market to some of our institutional clients. The 1.5-hour presentation covered office and retail space, and condominiums in the Klang Valley, as well as Penang’s retail and condominium market. This report summarises some of the main points and topics discussed at the event. Most of the points presented in fact largely echoed what we highlighted in our 26 Aug ’09 report, “Looking Into 2010 Valuations”. In line with JLW’s view on the real sector and our belief that property stock prices now fully reflect the expected brief upcycle in 2011, we maintain our NEUTRAL call on the sector.
We are also taking this opportunity to downgrade BRDB (TP: RM1.83) and SP Setia (TP: RM3.59) to Take Profit and upgrade YNH Property (TP: RM1.84) to a Trading Buy. We also believe that the demand sentiment will be largely unaffected by Bank Negara’s recent move to raise its OPR by 25bps but will marginally affect certain developers’ earnings margin once the banks follow suit by raising lending rates.
Most buyers will be undeterred. Bank Negara Malaysia’s move to raise its overnight policy rate by 25bps on 4 March 2010, which will likely be followed by a hike in banks’ lending rates soon, will only have a marginal impact on demand sentiment in residential properties, all else being equal. This is because the recent improvement in property sales has been primarily supported by the attractive financing schemes offered by most major developers which, most importantly, included interest-absorption-schemes whereby developers bore all financing costs on behalf of buyers up to vacant possession. As some developers even offered an additional 2 years’ zero interest after vacant possession, this implies that buyers who bought such properties would not be deterred by interest rate volatility for the next 2 to 5 years, all else being equal.
Most developers offering special schemes will be marginally affected. On the other hand, developers who offered such schemes would have to absorb any increase in financing cost on behalf of the buyers for the next 2 to 5 years, will therefore have their earnings margin marginally affected during the period. Such developers are aplenty, particularly among the big players, but for those under our coverage, they are SP Setia (Take Profit; TP: RM3.59) and Sunrise (Neutral; TP: RM2.33). Other developers who are not under our coverage include Mah Sing, IJM Land, E&O and DNP Holdings.
