Investment Highlights

• Rebound in Kuala Lumpur Property Index driven by positive news flow in Johor. Malaysian property stocks have experienced depressed valuation in the past 3 years due to negative headwinds, including increased building material costs, labour shortages and rising interest rates. However, interest in property stocks, especially those with exposure in Johor, have been stirred by recent positive news flow, including: (i) the completion of the Singapore-Johor Bahru Rapid Transit System (RTS Link) in CY26; (ii) potential revival of Kuala Lumpur-Singapore high-speed rail (HSR); (iii) the establishment of special economic and financial zones in Iskandar Malaysia; and (iv) potential relaxation of the conditions for Malaysia My Second Home (MM2H) program.

• Normalising valuation of property stocks. The recent surge in Kuala Lumpur Property Index (KLPRP) appears to be a normalisation of property stock valuations. This comes after a period of depressed valuations in the property sector. KLPRP is currently still trading at an attractive price-to-book value ratio of 0.5x, 1 standard deviation below its 10-year median of 0.7x.

• 3 property hotspots in Johor. Given the ongoing developments in Johor, we have identified several property hotspots, including (1) Johor Bahru city centre (RTS Link), (2) Forest City (special financial zone); and (3) Iskandar Puteri (special economic zone and HSR). Moving forward, we see more potential catalysts that may drive population growth in Iskandar Malaysia and boost demand for properties in Johor.

• RTS to boost economic activities and property demand in Johor Bahru. The introduction of RTS is set to invigorate economic activity and stimulate property demand in Johor Bahru. This city's economic vibrancy primarily hinges on the robust purchasing power of both Singaporean and Johorean commuters working in Singapore. With the forthcoming completion of RTS, we anticipate a substantial uptick in commercial and retail activities within Johor Bahru.
  
  Furthermore, the allure of lower rental rates may prompt businesses to consider relocating offices from Singapore to Johor Bahru. Notably, the average selling prices for high-rise residential properties in Johor Bahru, especially those in proximity to the upcoming RTS station in Bukit Chagar, currently range between RM700 psf to RM1,300 psf. These price levels now stand on par with property values in Mont Kiara and Jalan Ampang in the Klang Valley.

• Iskandar Puteri is expected to take time to fully develop. Presently, demand for premium residential properties is largely driven by Malaysians working in Singapore, which supports high take-up rates in many residential projects in Iskandar Puteri. Even so, during our recent visit, we observed a limited population and minimal activity in the area. To foster growth in Iskandar Puteri, the development of its industrial sector, particularly in high-value industries with relatively higher wages for Malaysians, is essential. This industrial growth, supported by the recently unveiled New Industrial Master Plan (NIMP) 2030, is expected to attract talent not only from Singapore but also from other states, which will eventually lead to increased population and business activity in Iskandar Puteri.

• We retain our OVERWEIGHT stance on property sector. Moving forward, we expect a gradual recovery in property transaction volumes on improved market sentiments and stronger demand, aided by our economist’s estimated 2024F GDP growth of 4.5% and job recoveries. Transaction activities for residential property are expected to see further improvement, in line with the government’s effort to increase more affordable houses as outlined under the 12MP MTR and the MADANI Neighbourhood scheme. In addition, the implementation of NIMP, designed to raise investments into the country, is anticipated to bolster demand for industrial properties.

• Our top BUY is Sunway (FV: RM2.40) given its strong brand recognition established by highly successful landmark developments and expanding healthcare business, supported by substantive unbilled sales and outstanding order book. We also favour Lagenda (FV: RM1.79) for its focus on the underserved and affordable landed housing development in second-tier states which have a large population of B40 and M40 income groups. We also like Mah Sing (FV: RM0.98) for its strength in affordable housing developments at strategic locations as well as savvy execution and quick-turnaround business model.

Source: AmInvest Research - 7 Nov 2023