• The Housing and Local Government Ministry (KPKT) is formulating a tax that could be imposed on developers who fail to sell their properties as early as 2021 in an effort to reduce the overhang of residential units in the country. Minister Zuraida Kamaruddin said the introduction of the tax could also induce developers to be more sensible and responsible in the projection of their projects, particularly high-rise developments. She added that the government will provide lead time of about 6 to 9 months for houses to be filled when they are completed.
• While such measure may be able to curb the property overhang situation in Malaysia, in short term, we believe our developers will be negatively impacted by the additional tax or offering larger discounts to clear their unsold inventories.
• Based on the latest financial statements, the average inventory turnover (development projects in Malaysia) of developers under our coverage is about 6.5 months. With the government offering a threshold of 6 to 9 months on unsold completed units, most of the developers may not need to pay or pay very little vacancy tax. However, we are cautious on IOIPG and MRCB with their average inventory turnover of more than 9 months.
• We have done a sensitivity test on the impact to net earnings, by assuming: (i) the current level of unsold units remained the same by the end of FY21; and (ii) tax rates of 1%, 2% and 5% over the unsold inventories. The illustration in Exhibit 2 suggests that a 1% vacancy tax rate will reduce the developers’ FY21 net profits by 1.1% to 7.1% based on their carrying value. Earnings will be reduced by 2.3% to 14.2% if the tax rate is set at 2% and a staggering 5.7% to 35.6% at a rate of 5%.
• With the introduction of the vacancy tax, we believe developers will be more rational and careful in planning their future launches. Moreover, we reckon that developers are already doing their best to sell all their units.
• We make no changes to our numbers at this juncture as the ministry has not revealed the details of the guidelines on this measure. We maintain our NEUTRAL view on the property sector as we do not anticipate huge changes in property sales and earnings in the short to medium term.

Source: AmInvest Research - 21 Aug 2020