Key Takeaways

• We attended “The Malaysian Property Market – Where Are We Heading Post-GE14?” seminar hosted by Rahim & Co to get an update on the property sector. Key highlights include short- to medium-term outlook for retail, industrial and residential properties; affordable housing; and discussion on Budget 2019.

• The speakers are of the view that the outlook for retail properties, mainly shopping malls, will remain resilient in the short to medium term. This is consistent with REITs under our coverage, namely Pavilion REIT (HOLD, FV: RM1.60) and Sunway REIT (HOLD, FV: RM1.68) whereby both have a high occupancy rate in their shopping malls. The Malaysian Institute of Economic Research’s (MIER) Consumer Sentiment Index (CSI) retreated to 107.5 points in 3QCY2018 after a spike to a 21-year high of 132.9 points in 2QCY2018. The trend implies that consumers are still optimistic but remain cautious and selective in spending plans.

• Demand for industrial properties will be driven by the logistics and warehousing segments which are largely supported by the emergence of e-commerce. The preference of logistic warehouses will likely continue to be within the Klang Valley, largely in Shah Alam, where there is a large concentration of manufacturing activities and distribution centres. Meanwhile the outlook for the office sector will be negative in the medium term due to oversupply as 20mil sq ft of additional office space in Greater KL (presently 123mil sq. ft.) are targeted for completion in the next four years while market absorption remained lagged. KL City will experience the greatest impact, with 9.7mil sq. ft. scheduled for completion in the next 3-4 years. Yields are under pressure as a result of higher construction costs and weaker rents.

• As for residential properties, the speakers expect the market will begin to turn positive in 2019 driven by: (1) the feelgood factor after GE14; (2) the implementation of new policies in Budget 2019; and (3) a stable economic outlook with the support of domestic consumption and investment.

• Affordable housing remains one of the key priorities of the government. The extension of step-up financing for the lower income group will improve investor sentiment on the sector, especially for developers with more exposure to the affordable housing segment.

• The outlook of the property sector has been uncertain since GE14 as developers deferred their new launches while buyers held back their purchases. Now with a clearer political landscape accompanied with the government’s initiative to address the challenges in the property market as proposed in Budget 2019, we believe the situation will improve in the long term.

• To recap, property market transactions were lower in 1H2018 both in terms of transaction volume (-2.4% YoY to 149,889) and value (-0.1% YoY to RM67.7bil) in general. Residential properties account for 62.8% of the total volume and 46.7% of total value of transactions compared with non-residential ones. For the same period, residential properties experienced contractions of 0.8% and 3.6% in volume and value respectively. Unit launches declined by 7.1% YoY to 37,723 in 1H2018. The overhang of residential properties has almost tripled to 29,227 units since 2015, with the majority of unsold units being in the RM500K–RM1mil price category (25.7% of total overhang units). Johor saw the highest number of unsold houses @ 5,988 units followed by Selangor @ 4,694 units, Penang @ 3,958 units and KL @ 2,350 units.

• We maintain our NEUTRAL view on the sector as we do not expect to see surprises in the earnings for the next 12 months. Our top picks for the sector are: (1) Sunway Bhd (BUY, FV: RM1.65) given that its local property launches have been generally well received due to good locations; (2) E&O (BUY, FV: RM2.01) for its prime landbank, including reclamation rights on the Penang Island, strong take-up for new property launches and the ability to clear unsold units; and (3) Titijaya (BUY, FV: RM0.48) due to its strength in the affordable segment, coupled with strong earnings visibility backed by RM320mil unbilled sales and some RM826mil new launches planned over the immediate term.

Source: AmInvest Research - 14 Nov 2018