Yes, demand by common consent may be slower after recent cooling measures, with potential home buyers scared off by the uncertainty created from the increase of Real Property Gain Tax (RPGT) and banning of Developer's Interest Bearing Scheme (DIBS) in Budget 2014, among other cooling measures introduced. While there is a real threat of short-term consolidation, these cooling measueres albeit 'distractive', are not destructive in our view. Further, we reckon the Government will be cautious as putting more untoward pressure on demand might affect the country's economic growth (property consitutes c.10% of GDP growth from 140 industries across the value chain) and c.36% of total outsatnding loans. We are of the view that as long the Government is light-handed in controlling speculative buying , demand should normalize in time. That said, punitive measure such as increase of Stamp Duty, lower loan-to-value, etc could be the trigger for us to change our stance for the sector.

Demand however, will continue to be underpinned by secular positives such as our young population, high savings rate, urbanization, proposed infrastructure spending such as MRT/SG-KL high speed train to improve connectivity and ETP projects such as KLIFD in our view. We expect demand to normalize, driven by household formations (i.e marraige registered) which is averaging about 200,000 p.a. (outstrpping supply). In addition, we have c.47m units of completed residential stocks as at 3Q13, or c. 6.3 persons per household (vis-à-vis 3-4 persons/household in the developed countries).

Supply, albeit increased in recent years, is still at healthy level in our view. Total supply has actually decrease in recent years. Total completed units over the last 3 years is averaging about 79,000 units (versus average of 137,000 over the last 12 years) and YTD, units completed are totaling 59,000 in 3Q13 only. Hence, we believe the supply-demand imbalance could be a factor behind recent property price strength. Savve for certain areas, there is no oversupply in our view. In addition, high rise developments have longer completion date i.e. 4 years from 3 years previously which would help stagger incoming supply over the longer period. Inventory level is also on the downtrend for most states.

Maintain Overweight and favour developers with value but strategic landbank, strong balance sheet and high unbilled sales. We are Overweight on SP Setia, UEM Sunrise, E&O, IGB and MK Land. The main source of investor consternation is policy risks but we believe sentiment recovery in the coming  months will probably throw up evidence that demand is still robust.

Source: PublicInvest Research - 13 Jan 2014