• We have a NEUTRAL stance on the property sector in 2018. The local property sector has been languishing over the last 4-5 years, since hitting a peak in mid-2013. We believe the most encouraging signs we have seen in 2017 are: (1) developers adjusting to the reality that mass-market affordable housing is where the demand is; and (2) the willingness of certain developers to cut prices (to the tune of 10-15% or more) in order to clear unsold stocks. We expect these trends to prevail in 2018, bringing some life back to the sector.

• We do not expect a full-fledged recovery of the sector within the next 12 months, as various key challenges remain, including: (1) the generally still elevated home prices; (2) the low loan-to-value (LTV) or financing margin offered by banks; and (3) house buyers' inability to qualify for a home mortgage due to their already high debt service ratios (DSR). The DSR is calculated by dividing one's debt service obligations by his or her income (most banks observe a cap of 60% for the low-income group, and up to 80% for the high-income group). Potential house buyers may have little room left to take on a home mortgage due to their existing debt service commitments (arising from outstanding study, car or personal loans), while their incomes have not kept pace with the commitments.

• In addition, the still subdued consumer sentiment against a backdrop of rising cost of living, weak job security (on the back of industry consolidations, particularly, the financial and oil & gas sectors) and elevated household debts, is holding consumers back from committing themselves to the purchase of big-ticket items including a house. Not helping either, is the potential hikes in the overnight policy rate in 2018, given the recent shift in Bank Negara Malaysia's policy stance towards slightly more hawkish than before.

• We believe these issues could be partially addressed with the offering of affordable housing, coupled with more flexible financing plans to the low-income group such as a "step-up" scheme initiated by Perbadanan PR1MA (where borrowers only service interest but not the principal in the first five years) as well as a "rent-to-own" scheme introduced by a local bank recently.

• We are mindful that affordable housing typically commands low margins. The margins could be crimped further given rising competition as the segment gets more crowded by the day. We believe the investment case for an affordable housing developer only holds water if the developer is able to sell affordable houses in large quantities, has access to highly cost-effective and speedy construction methods, and most importantly, has the ability to secure strategic landbank with a high plot ratio at cheap prices. Otherwise, we are more inclined to see selling affordable housing as a means for developers in general to tide themselves over while waiting for the property market to turn around.

• We see a bright spot in developers with overseas projects. We have already seen green shoots of recovery in property markets in the UK, Australia, Singapore and Vietnam since 2017. These markets are ahead of Malaysia in terms of their recent boom-bust cycles. They have been through the consolidation phase and are now on a recovery path.

• REITs tend to underperform in a rising interest rate environment. Retail REITs may be hurt further by the rise of ecommerce. We advocate stock picking in the REIT sector.

• We may upgrade our NEUTRAL stance for the property sector to OVERWEIGHT if: (1) the banks are to ease lending policies on properties; or (2) consumer sentiment is to improve significantly.

• We may downgrade our NEUTRAL stance for the property sector to UNDERWEIGHT if: (1) the banks are to tighten further their lending policies on properties; or (2) consumer sentiment is to deteriorate further.

• Our top picks for the property sector are Sunway (BUY, FV: RM1.99) and Titijaya (BUY, FV: RM1.91). We like Sunway given that its local properties launches are generally well received due to good locations, coupled with strong contributions from its overseas property ventures and its construction arm. Meanwhile, we like Titijaya as its focus and strength is right in the affordable segment. Its earnings visibility is strongly backed by RM409mil unbilled sales and some RM1.75bil planned launches in FY18.

• Our top pick for the REIT sector is YTL REIT (BUY, FV: RM1.38) as it offers proxy to the vibrant hospitality industry in Australia (under the Marriott brand name) and an attractive yield of >6% (stable with >50% NPI backed by master leases).

Source: AmInvest Research - 7 Dec 2017