Key Takeaways

• We recently attended the Star Property Forum 2018 with the theme The Real Estate Market Post GE14. The speakers featured and their respective topics were as follows:

o Chan Ai Cheng, secretary-general (membership) of International Liaison Malaysian Institute of Estate Agents (MIEA) – “State of health for the residential real estate market. Boom, Bust or Breather?”;

o Ho Chin Soon, founder and chairman of Ho Chin Soon Research – “KL Property Hotspots in the Light of Cancellation of High Speed Rail and MRT Circle Line”; and

o Shan Saeed, chief economist of IQI Global – “Malaysian Economic Outlook and Real Estate Market Post GE14”.

• Unsold residential properties in Malaysia rose to their highest in a decade in 2017 at 146,497 units. According to a survey by the Malaysian Institute of Estate Agents (MIEA), more than 50% of respondents have rated “Poor” on the market outlook for the retail property sector and high-end serviced apartments, condominiums and SOHOs. Meanwhile, affordable residential properties and mid-range landed residential properties are expected to remain stable, according to the survey. The MIEA also noted that the rent-to-own scheme is positive for home buyers as it provides an alternative for the low-income group to own homes despite financial challenges.

• The cancellation of the MRT 3 Circle Line will affect certain locations in Kuala Lumpur as they will become less popular without an MRT station. The MRT 3 line, which was planned to run along the boundary of the Kuala Lumpur city centre, would have included Ampang Jaya, Kuala Lumpur City Centre, Jalan Bukit Bintang, the Tun Razak Exchange, Bandar Malaysia, KL Eco City, Pusat Bandar Damansara, Mont’ Kiara and Sentul. The cancellation of the MRT 3 will hit developers who acquired and planned developments along the line. Nonetheless, these areas are mostly matured townships and the impact will not be too significant.

• The government's decision to scrap the high-speed rail (HSR) will have a negative impact to developers who have invested on projects that were supposed to be close to the stations such as Bandar Malaysia, Putrajaya, Melaka, and Iskandar Puteri. This also means that Melaka would not benefit from the Greater KL extension as the development of Greater KL southwards would not be as be as quick as planned initially.

• The change in the government has created some short-term uncertainties, hence developers are deferring new launches while buyers are holding back their purchases. Changes of key personnel in government departments may slow down the approval process for new projects. Nonetheless, we believe the current uncertainty is only temporary and will settle down once the political landscape is clearer.

• The abolishment of GST will have some positive impact on the property sector as it will improve buyers' sentiment in the current property market down-cycle. The implementation of zero GST will provide some relief on developers’ margins where savings on cheaper building materials will be passed back to buyers. Nonetheless, we do not see this as the turnaround for the sector because the market is still flooded by oversupply and affordability issues, and we believe buyers will remain cautious amid the short-to-medium-term uncertainties. Moreover, we do not expect significant reduction in selling prices on existing inventories as raw materials purchased by developers are already charged GST.
• We maintain NEUTRAL on the property sector as various headwinds remain including: (1) the generally still elevated home prices; (2) the low loan-to-value (LTV) or financing margin offered by banks; (3) rising interest rates (with OPR expected to rise to 3.5% in 2019 from 3.25% currently); (4) the weak job security in selected industries such as finance, media and oil & gas; and (5) house buyers' inability to qualify for a home mortgage due to their already high debt service ratios (DSR).
• Our top picks for the sector are: (1) Sunway Bhd (BUY, FV: RM1.99) given that its local property launches have been generally well received due to good locations, coupled with strong overseas contributions; and (2) Titijaya (BUY, FV: RM0.73) due to its strength in the affordable segment, coupled with strong earnings visibility backed by RM368mil unbilled sales and some RM873mil new launches planned over the immediate term.

Source: AmInvest Research - 11 Jun 2018