Investment Highlights

• Remain OVERWEIGHT on property sector. Moving forward, we expect a gradual recovery in property transaction volumes and brighter sentiments on the sector aided by our economist’s estimated 2024F gross domestic product (GDP) growth of 4.5%, job recoveries, revivals of mega infrastructural projects and government initiatives to develop Johor. For 2024F, we anticipate an average earnings growth of 27% YoY, driven by accelerated progress billings due to the easing of labour shortages. Additionally, we expect increased revenue contributions from recently launched projects following aggressive launches by developers in 2023 (Exhibit 3).

• Improving outlook in property sector following stabilisation of construction cost, easing of labour shortages and pause in interest rate hikes in Malaysia. Malaysian property stocks have experienced depressed valuations over the past 3 years due to negative headwinds, including increased building material costs, labour shortages and rising interest rates. However, recent developments, including stabilisation of building material costs and more availability of foreign labour on construction sites, have alleviated these issues. These supported an accelerated pace of construction works for ongoing projects, enhancing developers' ability to recognise progress billings in 2023-2024. The average unbilled sales for developers under our coverage is considered comfortable at 1.4x, a level comparable to the pre-pandemic period. Notably, developers with higher unbilled sales, including Sunway, UEM Sunrise (UEMS), Paramount and S P Setia are poised to benefit the most from the acceleration of site progress works (Exhibit 4). Concurrently, our in-house economist's earlier 2023F projection of a 3% overnight policy rate (OPR) has already materialised, suggesting a potential conclusion to the rate hike cycle in Malaysia. This is expected to foster more positive buying sentiments in the property market and alleviate the financial burden on developers.

• The volume of unsold residential properties has been on a downward trend since reaching its peak in 4Q2021 (Exhibit 10). We see a gradual easing of oversupply conditions in the Malaysian property market and improvement of investor sentiments. Owing to developers' proactive strategies on inventory monetisation, the volume of unsold properties has been on a declining trend over the past 3 years (Exhibit 6). The diminishing inventory levels have helped improve cashflows, enabling developers to accelerate new property launches as evidenced in Exhibit 2.

• The prevailing trend in the housing market remains focused on affordable housing, with the potential for a shift upon a significant longer-term improvement in the income levels of Malaysians and a strong return of foreign buyers. Housing affordability remains a key concern among Malaysians, driven by a disparity between supply and demand, particularly in residential properties priced below RM500k alongside sluggish income growth. This aligns with the decelerated growth in the Malaysian House Price Index following the earlier property boom in 2008-2013 (Exhibit 13). The challenge is exacerbated by lower household savings and difficulty in securing high margin of financing to purchase high-end housing. With interest rates normalised, potential buyers will be more discerning in purchasing decisions. Additionally, property investors holding 3 or more housing loans are still subject to a lower loan-to-value limit of 70%. These factors are anticipated to contribute to a moderation in house price growth and a cap on prices of higher-end residential properties in the near term. The potential for a more robust growth in high-priced residential properties hinges on factors such as increased income level and creation of high-value job opportunities under NIMP.

• Moving forward, we anticipate a gradual improvement in sentiments on the Malaysian property market, driven by favorable developments such as Johor-Singapore Special Economic Zone (JSSEZ), Kuala Lumpur-Singapore High-Speed Rail (HSR) and Malaysia My Second Home (MM2H). These include: (1) the formalisation of Memorandum of Understanding (MoU) between Malaysia and Singapore to jointly establish the JSSEZ; (2) the revival and launch of mega-scale infrastructural projects, and (3) the unveiling of further details on the relaxation of conditions for MM2H program.

• On 11 January 2024, Malaysia and Singapore are expected to formalise their collaboration by signing a MoU to jointly establish JSSEZ. The focus of JSSEZ is expected to support industries for Singapore's industrial sector, with a particular emphasis on renewable energy. This development could lead to the creation of more job opportunities through investments from Singapore, consequently spurring demand for residential, commercial and industrial properties in Iskandar Puteri. Developers with significant land exposure in Iskandar Puteri, including UEMS and Sunway, are expected to benefit from this positive development.

Source: AmInvest Research - 26 Dec 2023