Investment Highlights

• Transaction volume of properties rebounded in 2021 following a contraction in 2020. Based on the National Property Information Centre’s (NAPIC) Annual Property Market Report 2021 this month, property transaction volume increased modestly by 1.5% YoY to 300,497 units in 2021, driven by higher number of transactions in residential, commercial and industrial properties (Exhibit 2). This was 91% of the pre-pandemic level in 2019. Although this represented a moderate annual increase in transaction volume, the property transaction value in Malaysia rose to RM144.9bil in 2021, the highest level since 2017 (Exhibit 3). The stronger growth in transaction value was contributed by higher percentage of transactions in residential and industrial properties priced over RM1mil.
  By state, Selangor is largest contributor to the total property market transaction volume at 20%, followed by Perak and Johor with 12% each.

• Lowest residential new launches since 2007. In 2021, Malaysia’s property market saw the lowest number of new residential unit launches at circa 44,000 units since 2007 (Exhibit 5). Developers pulled back on new launches due to a softening property market and higher unsold inventories, resulting in a 6.7% decrease in new launches compared to 2020. On a positive note, the sales performance of new launches improved to 39% in 2021 from 29% in 2020. We expect the conservative trend of property launches to continue in FY22F as most of developers (except Mah Sing Group and Lagenda Properties) have guided prudent sales targets for FY22F which were lower than FY21 actual sales. 
  Selangor had the highest number of new launches in the country, followed by Johor and Perak (Exhibits 6 & 7).
• New residential launches dominated by terraced houses. In terms of types of property, terraced houses (60.1%) dominated new residential launches. This was led by single-storey houses (10,667 units), followed by 2-to-3-storey terraced houses (15,705 units) and the launch of high-rise properties, mainly condominiums/apartments (12,018 units). The latter made up a share of 27.4%.
• Rising residential overhang contributed largely by high-rise properties. YoY, residential overhang rose to 24.7% to 36,863 in units and RM22.8bil (+20.5%) in value as at December 2021 (Exhibit 8). Selangor still has the largest residential overhang. This was followed by Johor, Penang and Kuala Lumpur (Exhibit 10).
  In terms of the overhang by type of properties, condominium/apartment units were the highest at 20,505 (55.6% of the total) followed by terraced houses at 7,839 (21.3%).

• Selected developers fared well in the affordable segment. The affordable housing projects of Mah Sing Group (Mah Sing) and Lagenda Properties (Lagenda) have achieved good take-up rates for their recent projects due to the fact that the projects are at strategic, established and underserved locations.

• Luxury high-rise property remains a concern. The overhang status in residential properties priced between RM500K and RM1mil is concerning, accounting for a significant share of the nation’s total residential overhang in units (30%) and value (33%) (Exhibit 9), with the bulk of them in high-rise residential properties. Meanwhile, serviced apartments accounted for 73.2% of the commercial property overhang in Malaysia.

• Diversified portfolios to mitigate the impact of residential overhang which is largely made up of high-rise units. The majority of developers under our coverage (except Mah Sing and Lagenda) have more than half of their properties priced above RM500K in their portfolios. However, with a diversified portfolio and stronger focus on landed properties with prices below RM1mil, these developers are seen as able to mitigate the impact of the residential overhang which comprised largely high-rise units.
• Lower impact on landed projects in Johor from stricter Malaysia My Second Home (MMSH) programme. Generally, foreign buyers tend to purchase apartments and rarely opt for landed properties in Johor. Hence, we believe the stricter criteria for the MMSH programme and the oversupply of high-rise residential units in Johor have lower impact on Johorbased developers such as UEM Sunrise (UEMS) as the company focuses more on landed property development. UEMS’ recently launched landed properties projects in Johor (Serimbun, Aspira ParkHomes, Aspira Gardens, Senadi Hills) have been well received with take-up rates ranging between 73% and 100%.
• Marginal increase in house prices. In 2021, the Malaysian House Price Index (MHPI) rose slightly by 0.6% YoY to 201.5 points (Exhibit 11). Continuous demand for terraced houses supported the stable growth in the Terraced House Price Index of 2%, while there a slight decline in the price indices for High-Rise (-0.2%), Semi-Detached (-0.1%) and Detached (-3.3%) Houses. In 2022, we expect property prices for new projects to increase at a higher rate as some of the developers (whom we have recently met through virtual meetings) plan to pass on a portion of the cost increase of building materials to buyers in order to preserve their margins.

• We reiterate our NEUTRAL stance on the property sector. In 2023, we expect a gradual recovery in property transaction volume with improved market sentiment post-lockdowns and higher property demand following the reopening of international borders. However, we expect property developers’ operating margins to be compressed in 2022 as a result of a prolonged supply chain disruption which has led to heightened building material costs. We are also concerned on the pre-existing affordability issue in the housing market, which has intensified since the Covid outbreak as consumers’ disposable income has been impacted.

• Our top BUY is Sunway (fair value RM2.27) given the strong brand recognition established by its highly successful landmark developments and expanding healthcare business, supported by substantive unbilled sales and outstanding order book. We like Lagenda (FV RM1.90) due to its focus on underserved landed affordable housing development in second-tier states with a large population of B40 and M40 income groups. We also like Mah Sing (FV RM0.93) for its focus on affordable housing developments at strategic locations as well as its savvy execution and quick turnaround business model.

Source: AmInvest Research - 22 Apr 2022